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Troops overpay by thousands in student loans

Oct. 26, 2012 - 01:58PM   |   Last Updated: Oct. 26, 2012 - 01:58PM  |  

Service members with student loan debt could be paying tens of thousands of dollars more than they should because of a complex and poorly understood system of benefits — as well as possibly unscrupulous lenders, officials said Oct. 18 at a Pentagon news briefing.

The Consumer Financial Protection Bureau announced that it will work with the Defense Department to combat the problems through better training of the military officials who advise troops on loan and benefit issues. The bureau has also set up information on its website to advise service members, and officials plan to press lenders to follow the law and do right by troops.

"The report that is being issued today warns of student loan companies that not only may confuse service members but even violate the law in the approach that they take," said Defense Secretary Leon Panetta.

Pace Bradshaw, vice president for congressional affairs with the Consumer Bankers Association, said he was happy to see the CFPB working to inform service members about their student loan options.

"There are going to be bad actors in a marketplace at all times. … We think it's important that folks go after those bad actors," Bradshaw said in a phone interview. "Our members do think it's extremely important to take care of the military."

Bradshaw also noted that the federal government holds the vast majority of student loan debt, not private lenders.

Panetta said 41 percent of service members reported in a recent survey that they were paying an education-related loan.

"Many service members are entering the armed forces with, and sometimes because of, substantial student loan debt, and unfortunately, they are not always getting the information they need about programs and policies that could help them reduce that debt significantly while they're on active duty," said Holly Petraeus, assistant director of the CFPB's Office of Servicemember Affairs.

The report released by the bureau Oct. 18 indicated that most service members said they "relied heavily" on lenders for information about the student loan options available to them, including benefits available only to members of the military.

But the information they received was not always correct or clear. In particular, the document highlighted service members who were steered into loan deferments or forbearances, which temporarily postpone payments on student loan debt.

Only years later did they realize that interest on their loans — if they were private loans or unsubsidized federal loans — continued to accumulate, adding tens of thousands of dollars of debt.

Service members also should think very carefully before consolidating student loan debt, the report cautioned.

The Servicemembers' Civil Relief Act allows troops to reduce their student loan interest rates to 6 percent for debts entered into prior to active-duty service. But consolidating loans after joining the military erases a loan's pre-active-duty status, thus negating the 6 percent rate guarantee.

The report was based on complaints filed with the CFPB, which has been compiling such complaints since March, as well as comments made by service members at forums held across the country.

The CFPB has posted tools and information on its http://www.consumerfinance.gov/">website for troops with student loan debt.

"If they still have no luck, we want them to complain to us, so we can then approach the [loan] servicer, as well," Petraeus said.

The Government Accountability Office recently reported at least 15,000 instances of financial institutions not reducing the mortgage rates of active-duty members as they should have, as well as more than 300 improper foreclosures.

"I think 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 a mortgage," Petraeus said.

By creating problems with service members' finances, student loan debt can also jeopardize their career opportunities.

"The No. 1 reason people in the service lose their security clearance is because of financial problems," Panetta said.

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