WASHINGTON — Student loan servicers may be violating legal protections for military borrowers on a greater scale than was found in mortgage servicing, federal officials said Thursday.
That startling finding was part of a joint announcement Thursday by the Consumer Financial Protection Bureau and Defense Department about efforts to identify challenges faced by student loan borrowers in the military and make them more aware of their debt repayment options.
Mortgage servicers have paid millions of dollars over the past year to settle claims that they wrongfully foreclosed on service members and denied them interest rate caps provided under the Servicemembers Civil Relief Act.
But Holly Petraeus, the assistant director of the CFPB's Office of Servicemember Affairs, said at a joint press conference at the Pentagon that the bureau has found similar and potentially worse problems in the student loan market.
"The problem may be greater with student loans than it was with mortgages because I believe many more young service members enter active duty with student loans than with mortgages," said Petraeus, who is married to Gen. David Petraeus.
Under a joint initiative, CFPB staff plan to visit the Judge Advocate General's Legal Center in Charlottesville, Va., to train legal assistance attorneys from all branches of the military about how to improve their support for military student borrowers. The bureau will also work with education service officers and personal financial counselors at military bases to make sure they know about repayment options for members of the military.
"We are concerned that our men and women in uniform are not being given the opportunities they have earned under federal law," CFPB Director Richard Corday said in a press release. "For all the service our military members give us, the least we can do is protect them from this kind of disservice."
The bureau also released a report showing that service members seeking to pay off student loan debt often receive incomplete information on their repayment options and have trouble taking advantage of benefits. The agency also unveiled a new online guide, meant specifically for service members with student loan debt.
Defense Secretary Leon Panetta, who appeared at the press conference with Petraeus Thursday, said the financial health of the armed forces is critical to the country's overall military readiness. He also noted that the number one reason service members lose their security clearance — a prerequisite for many military jobs — is because of financial problems.
"Because of their sacrifice, it should be easier, not tougher, for service members to be able to pay off their college debt," Panetta said.
The CFPB report cited complaints filed with the bureau and from town hall forums around the country indicating members of the military often received inaccurate information from servicers about military deferment and forbearance options.
"We have to apply pressure to the industry as well to say, 'You need to be giving the right answers,'" Petraeus said.
The SCRA provides an interest rate deduction for members of the military who took out the loan before they went on active duty. Other federal programs will reduce or defer loan payments for military borrowers, lower principal for those serving in hostile areas, and forgive certain loans for public service.
But service members said it is difficult to determine which student loans are eligible for benefits. Some laws and rules apply only to federal loans, for example, while others have specific conditions and eligibility requirements. Service members also said they face roadblocks from servicers when applying for benefits.
Some members of the military, including those in combat zones, reported being denied interest-rate protections because they failed to submit the necessary paperwork, CFPB said.
Petraeus said she met one young service member who was told he was ineligible for the interest rate cap because he was not serving in a combat zone. But she said the service member was given incorrect information.
"We need to hold [servicers] accountable when they're doing that and get them to fix it," Petraeus said.
Service members who graduated from college in 2008 have a cumulative average of $26,000 in student loan debt, the bureau said.
The findings on service member student loans follow a previous report the CFPB issued this week on the private student loan market, in which borrowers said they were often caught off guard by loan terms and conditions, had trouble resolving issues with their servicers and were unable to modify repayment terms.