Loan Servicing Lacking for Military Borrowers: Report

Student loan servicers continue to use poor practices in handling loans for military service members, the Consumer Financial Protection Bureau said Tuesday.

The report by the CFPB, which is based on more than 1,300 consumer complaints submitted to the agency, highlighted cases where servicers provided unclear or false information to service members about student loan policies.

"Overseas & Underserved: Student Loan Servicing and the Cost to Our Men and Women in Uniform," details shortcomings the bureau has found - including denial of legal benefits, negative credit reporting and insufficient follow-through on legal protections for military families.

The report found that service members continue to report difficulties in getting interest rates for their loans capped at 6%, as the Servicemember Civil Relief Act (SCRA) requires. It further describes how servicers fail to grant active-duty members of the military allowed deferments on loan payments, which can lead to surprise delinquencies, defaults and debt collection efforts.

Some other specifics from the report:

• Active-duty service members’ loans sent to collections because of servicer errors: Military deferment is an option afforded to some active-duty service members that allows for a postponement of monthly student loan payments. The report documents how student loan servicers’ failures to adequately inform service members and process completed requests can lead to surprise delinquencies, defaults and debt collection efforts. The bureau has received complaints from service members who believed they had successfully enrolled in a deferment plan, only to return home to discover that their servicer had failed to defer the loan, which was instead put in default and sent to collections.

• Disabled veterans and families of deceased service members encounter frustrations: There are protections available for some disabled veterans, whose service-related wounds are so severe that they qualify for a discharge of their remaining federal student loan debts. Military borrowers have submitted complaints documenting problems obtaining loan discharges on the basis of severe disability. In some cases when a loan discharge was processed, service members saw their credit scores plummet as a result of servicers improperly reporting the loan as defaulted instead of discharged. Parents of deceased borrowers also report disgust and dismay with servicers of private student loans, after unsuccessful attempts to discharge debts they co-signed for their child.  

In 2012 the CFPB released an initial report on the issue. Since then, the bureau said, it has handled 1,300 complaints from military borrowers. That report emphasized complaints from military borrowers, including those in combat zones, who were wrongly denied interest-rate protections they were entitled to under the law. 

"We continue to receive complaints from military student loan borrowers detailing a range of breakdowns and roadblocks," said CFPB Director Richard Cordray. "Our deployed service members should be able to focus on their military mission and spend precious free time talking with loved ones, not wrangling over problems with student loan servicers."

Congress enacted laws and instituted programs to grant additional protections to service members with student loan debt. For example, the SCRA includes an interest rate cap for men and women in uniform who acquired student loan debt before they went on active duty. Among other protections, there are special loan deferment programs, Department of Defense Student Loan Repayment Programs and loan forgiveness on certain federal loans for public service. Some private student lenders advertise that they offer loan discharge, military deferment and other protections for military families.