GAO: Poor oversight of student loan benefit may be hurting military borrowers
By DANIELLE DOUGLAS-GABRIEL | The Washington Post | Published: November 21, 2016
Inaccurate information and poor coordination between federal agencies is putting members of the military at risk of paying more on their student loans than necessary, the Government Accountability Office said in a new report.
By law, military personnel are not supposed to be charged more than 6 percent interest on any loan while they are on active duty. Yet researchers at the GAO found that documents and a website the Department of Defense uses to keep servicemembers informed of their rights fail to explain the full extent of the interest rate cap on all student loans.
A part of the problem is the inconsistent way the benefit is applied, the report said. The Department of Education requires all of its student loan servicers, the middlemen who collect payments, to match their portfolios of federal student loans against the Department of Defense's database of active-duty troops to automatically grant the benefit. But banks, credit unions and other private education lenders are under no obligation to follow suit, even though some have voluntarily adopted the practice, according to the GAO.
As a result, active-duty borrowers with private student loans have the burden of supplying proof of their military status to receive the interest-rate cap. And some may be unaware of their eligibility because of inaccurate information provided by the Department of Defense, a charge the agency officials disputed in their response to the GAO report.
Researchers at the GAO say federal agencies can clear up these problems by directing all education lenders to automatically apply the benefit, which would require changes to the Servicemembers Civil Relief Act (SCRA).
The Department of Justice, which along with four banking regulators and the Consumer Financial Protection Bureau oversee private lenders' compliance with the relief act, has asked Congress to simplify the process. A year ago, the department proposed eliminating the requirement that military personnel provide private loan servicers a copy of their orders, but the GAO recommends officials take it a step further. Justice officials, in a response to the GAO report, said they would consider the recommendation.
Until recently, men and women in uniform had to provide proof of active-duty status to receive the interest rate cap on all student loans. That all changed after the government fined Sallie Mae and its former subsidiary Navient Solutions $97 million in 2014 for unlawfully charging active-duty service members high interest rates on student loans. To prevent future violations, education officials insisted all contractors servicing federal student loans adopt the automatic match.
Because those contractors applied the benefit retroactively the number of servicemembers who received the interest-rate cap on their federal student loans skyrocketed. Reviewing the records of 10 federal servicers, the GAO found an increase from 107 in October 2008 to 108,710 in December 2015. Researchers also found the number of military personnel who benefited from the cap on at least one of their private student loans more than doubled from 14,970 to 33,309 between September 2014 and March 2016 because of lenders voluntarily matching their files.