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Tuesday, November 13, 2012

Student Loan Hurdles for Members of Military

U.S. soldiers near Kabul, Afghanistan, earlier this year.Associated PressAmerican soldiers near Kabul, Afghanistan, earlier this year.

You would think that military members who are actively serving their country shouldn't have to spend time arguing with their student loan servicing company, right?

Apparently, that's not the case.

A recent report from the Consumer Financial Protection Bureau finds that service members often have a tough time getting access to loan benefits available to those serving on active duty, like interest-rate reductions and loan forgiveness programs.

The average cumulative amount of student loan debt for active-duty service members graduating from college in 2008 was $25,566, according to the N ational Center for Education Statistics. There are a number of special benefits and protections available to help service members manage this debt, but the programs were enacted through a patchwork of laws, and the benefits vary depending on the type of loan in question. Sometimes, details of how the programs work can be confusing - and loan servicing companies don't always help clarify things.

“Unfortunately, the complexities of these provisions, together with problems in loan servicing, have created difficulties for many military families when attempting to manage their debt,” the agency reports.

Many service members, for instance, simply defer their loans or obtain a forbearance, which lets them skip monthly payments while on active duty. But they may not always understand that on some types of loans, interest may still accrue, often resulting in ballooning loan balances. And they may not be told about possible alternatives tha t can lower their monthly payments to more affordable levels.

One parent of a service member told the bureau that his son's three loans totaled just over $61,000 when his son graduated. But the servicer now says the total is almost $85,000, because of a five-month deferral of payments during military service.

One borrower told the bureau that his loan servicer automatically put his loans into forbearance without his permission. “I did not ask for my account to be placed in forbearance and as a result of this action, it is currently accumulating interest,” he wrote.

Programs like “income-based repayment” may allow service members with federal loans to reduce their monthly payments while on active duty. Then, if they remain in the service for 10 years and make 120 on-time payments, they can take advantage of the “public service loan forgiveness” program, which forgives the remaining balance.

Borrowers with both private and federal loans may be eligible for the Servicemembers Civil Relief Act, which reduces the interest rate on loans to 6 percent.

The potential cumulative benefits of these programs are shown in this example in the report: “A service member who takes out $81,000 in loans for school will ultimately owe up to $101,000 after his in-school deferment. If he elects to continue to defer his payments while serving on active duty, he will owe more than $165,000 over the life of the loan.”

But if he enrolls in income-based repayment, qualifies for public service loan forgiveness and receives the benefit of the interest-rate cap under the civil relief act while on active duty, he'll instead pay about $110,000, saving almost $55,000 over the life of the loan.

The agency has received complaints, however, that service members are made to jump unnecessary hurdles to qualify for the programs, like the interest-rate cap. Some borrowers have said they were told by their loan servicers that th e interest-rate cap would expire annually, and that they would have to resubmit additional orders to retain the benefit. It seems unfair and unrealistic, at a minimum, to expect someone who is perhaps dodging bullets to take time out to refile paperwork with a loan servicer.

That's not how the program is supposed to work, according to the agency. Once a service member requests the interest-rate cap, “the servicer should apply the benefit for the duration of active-duty status.” No repeat filing is necessary.

Have you had trouble getting information about loan benefits for military members?