Student Loan Servicing for Military Still Has Flaws, CFPB Says

WASHINGTON — Student loan servicers continue to use "shoddy" practices in handling loans for military service members, the Consumer Financial Protection Bureau said Tuesday.

The report by the CFPB, which is based on more than 1,300 consumer complaints submitted to the agency, highlighted cases where servicers provided unclear or false information to service members about student loan policies.

The report echoes similar concerns the CFPB raised about student loan servicing for military borrowers in 2012. On a conference call with reporters, officials said deficient servicing practices have persisted despite repeated agency warnings and a recent enforcement action against a large servicer.

"We remain deeply troubled by these continuing issues as documented in these consumer complaints submitted by military borrowers and their families," said Holly Petraeus, the CFPB's assistant director for Servicemember Affairs. "Today's report details how student loan servicing problems, including breakdowns related to customer service and the allocation of certain benefits, pose unique and particular troublesome issues for service members and their families."

The latest report, titled "Overseas & Underserved: Student Loan Servicing and the Cost to Our Men and Women in Uniform," specifically said some servicers mishandled service members' loans in cases where a borrower should have been able to defer payments because of active duty. In other cases, loans should have been discharged when a service member had become severely disabled or died, but instead a co-signer was left with the loan balance.

Other complaints involved borrowers getting students loans that exceeded an interest rate cap for service members. Under the Servicemembers Civil Relief Act, student loan interest for members of the military cannot exceed 6% if they took out a loan before being on active duty.

"Today's report documents detours and dead ends for military borrowers when they try to use a loan repayment assistance provided by the Department of Defense, military deferment, disability discharge or an interest rate cap authorized by the Servicemembers Civil Relief Act," Petraeus said. "It's not enough for servicers to simply say that they support their military customers. While sentiment is nice, what their military customers need is not lip service but correct information and adequate servicing of their loans so that they receive the benefits to which they are entitled."

CFPB officials said the consumer complaints have led to action. Some of the complaints referred by the agency assisted in an investigation led by the Department of Justice that resulted in a multiagency settlement last year with the servicer Sallie Mae, now known as Navient Solutions. Authorities alleged that the company serviced loans that exceeded the 6% cap. In May 2014, Navient agreed to pay $60 million in compensation to borrowers in order to settle the claims.

In May, the CFPB announced a "public inquiry" into student loan servicing practices, which includes a request for public comment on possible steps for regulating the industry.

Yet student lending is still a tricky area for the CFPB. Although the bureau only has direct oversight of the private student loan market — not federal student loans, which make up the majority of the market — this report and others have tended to include complaints about both private and federal loans.

During the call, reporters repeatedly asked the officials why the bureau did not break down complaints related to private loans and those related to federal loans separately. The industry has long argued that mixing the two paints everybody with too broad a brush.

Petraeus said separating the two categories would be challenging since in many cases single borrowers will have both a federal loan and private loan.

"The truth is, for many borrowers, they are mixed in their portfolio," she said. "I think the servicing issues are blended ones."