Growing Problem of Student Loan Debt in Military

The Pentagon teamed up Thursday with federal  consumer watchdogs on a series of steps to aid servicemembers in navigating the maze of student loan programs on the market to avoid ripoffs that have saddled troops with mounting debt.

Defense Secretary Leon Panetta warned that the troops often fall victim to "unscrupulous financial practices" in seeking to repay student loans, and "the problem here is that the number one reason people in the service lose their security clearance is financial problems."

"It should be easier, not tougher, for servicemembers to pay off their student debts," Panetta said at a Pentagon briefing with Holly Petraeus, assistant director for the Office of Servicemember Affairs at the federal Consumer Financial Protection Bureau (CFPB).

Petraeus said there were no overall figures on the number of servicemembers who have fallen behind on student loan repayments but "I think the problem may be greater with student loans" than it was with the servicing of home mortgages for the military.

Petraeus, the wife of CIA Director and retired Gen. David Petraeus, cited the case of a sailor who joined the Navy carrying more than $100,000 in student loan debts who still had not earned a degree.

"Most of his Navy paycheck is going to that loan, " Petraeus said, and the sailor's debt burden could have been lowered had he been more aware of his options on repayment plans.

"We are concerned that our men and women in uniform are not being given the opportunities they have earned under federal law," said Richard Cordray, director of the CFPB.

"For all the service our military members give us, the least we can do is protect them from this kind of disservice," Cordray said in releasing a bureau report: "The Next Front? Student Loan Servicing and the Cost to Our Men and Women in Uniform."

In town halls and in direct complaints, servicemembers have increasingly noted that they either were unaware of their rights and benefits under repayment plans, or ran into red-tape roadblocks when they tried to assert them, the report said.

To address the problem, the CFPB and Defense Department announced a partnership to train Judge Advocate Generals, Education Service Officers, and personal financial counselors on military bases on guiding troops through repayment plans and making them aware of their options and rights.

The CPFP also promoted a guide for servicemembers with student loans with information on the various student loan repayment options, and also prepared a list of frequently asked questions posed by military student loan borrowers.

Thousands of troops have entered the military carrying student loan debt, including federal and private student loans, and thousands more have acquired student loan debt while on active duty.

The average cumulative amount of student loan debt for active-duty servicemembers graduating from college in 2008 was about $26,000, according to the National Center for Education Statistics.

Under the Servicemembers Civil Relief Act (SCRA) passed by Congress, interest rate reductions are available to servicemembers who acquired student loan debt before they went on active duty.

The bill allows for reduced monthly payments based on income and family size, and there are also special loan deferral programs, principal reduction options on certain loans for service in hostile areas, and loan forgiveness on certain federal loans for public service.

But the main complaint from servicemembers is that they lack adequate information and preparation to deal with the programs and repayment plans, and "may be setting themselves up for tens of thousands of dollars in excess debt over the life of the loan," the CFPB report said.

Federal law allows for special loan deferral programs for servicemembers, principal reduction options on certain loans for service in hostile areas, and loan forgiveness on certain federal loans for public service, the report said.

But the troops often face red-tape barriers to gaining access to their benefits.

"Even if they navigate the maze of options, servicemembers report that they are often met with loan servicer roadblocks," the report said. "For example, the CFPB has heard from military borrowers, including those in combat zones, who have been denied interest-rate protections because they failed to resubmit unnecessary paperwork."

The student loan problem in the military did not involve the GI Bill of education benefits, Petraeus said. She added that the loans only come into play when servicemembers choose to attend a school that costs more than the GI bill will provide. In such instances, Petraeus recommended a federal loan over a private loan.

Petraeus said a "variety of factors" were at work in servicemembers not being informed of their rights.

"It could be poor training of customer service representatives" by the loan servicers, or a deliberate ripoff. "There's really no way of telling what they're thinking," Petraeus said.