The Consumer Financial Protection Bureau (CFPB), which issued the report, found that a combination of regulatory hiccups and insufficient awareness of the loan relief programs available to veterans can cost service members “tens of thousands of dollars over the lifetime of their loans.” Additionally, several recent federal policy updates intended to help borrowers save money repaying their loans can instead force service members to forfeit some of their military benefits.
The CFPB report notes that too often veterans place their loans in forbearance or deferment, which can dramatically increase the total amount borrowers owe because of the interest that accrues. Though the military and Department of Education offer nearly a dozen programs that help cap the amount borrowers have to repay, veterans complained their loan servicing companies did not inform them of those options.
In one hypothetical example provided by the CFBP, a servicemember who took out $81,000 in college loans and defers her payments while in the military could see the total amount owed swell to $165,000 during the course of repaying the debt. Government programs like Income Based Repayment—which allow borrowers to pay a smaller portion of their loans based on their income—and the Servicemembers Civil Relief Act—a recent benefit that keeps interest rates at six percent on private and federal loans—can bring down the long-term price tag of that college loan by up to $55,000. The consumer agency recommends loan servicers inform borrowers of the full panoply of debt reduction programs. Recently, the IBR program has come under fire for not driving down enough the payments low-income borrowers have to repay.
Other problems outlined in the report fall squarely on the loan servicers who handle servicemembers’ accounts. The CFBP heard from borrowers who said they had difficulty confirming their interest rate reductions were applied retroactively, as required by law. Other times, the financial institutions did not explain that some repayment benefit programs apply to certain loans but not others. For example, a type of loan consolidation that for most borrowers would bring down the interest owed would preclude servicemembers from being eligible for the Servicemembers Civil Relief Act—potentially leaving them at a financial disadvantage. Many of these problems are compounded by the strain soldiers face while on duty, minimizing the time that could be used to manage their college finances more productively.
The report lays out several conclusions, advocating for better information distribution to servicemembers with college debt on the options available to them and more encouragement for servicers to better understand the complexity of loan rules servicemembers face.
Previous publications released by the consumer agency have scrutinized loan servicing companies. In July, it released a study that compared the private college loan market to mortgage handlers just before the economic collapse. Earlier in the week, a report chronicled the confusion borrowers with private loans deal with, particularly in negotiating smaller loan payments and sudden changes to loan rules.
Photo credit: Flickr/ USACEpublicaffairs