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Agency: Banks Keep Overcharging Service Members on Student Loans

Air Force photo

Active-duty service members continue to be burned by student loan companies a year after the Justice Department reached a $60 million settlement against some of the worst offenders, according to a new report from the Consumer Financial Credit Bureau.

The bureau first reported on the problem in 2012, leading to a Justice Department investigation that found some 78,000 service members with student loans had been charged excess interest.

"Today's report makes it clear that service members continue to struggle to obtain the rights, protections, and programs afforded by their military service," said Holly Petraeus, the bureau's assistant director for Servicemembers Affairs.

Most of the affected service members came into the military with student loans. But under the law, lenders -- including private lenders -- must cap their loan interest rate at 6 percent while they remain on duty.

Petraeus said a review of some 1,300 complaints they've received since 2012 indicate the lenders are slow to process such requests and troops sometimes are unaware they have not been given the cap.

Borrowers also include service members who took out education loans while on active duty, she said.

Some service members also ran into problems believing they had successfully enrolled in special programs to defer loan repayments while on active duty, only to learn otherwise after leaving the military. In such cases, they found their loan in default, handed off to a collection and their credit rating damaged.

In other cases, disabled veterans who qualified to have their loans discharged subsequently found their credit ratings hurt because the lender improperly reported the loan as in default, not discharged.

"It's not enough for [loan] servicers to say they support their military customers," Petraeus said. "While the sentiment is nice, what the military customer needs is not lip service but correct information and adequate servicing of their loans."

Some protections -- such as the lawful discharge of loan debt for individuals with 100 percent service connected disability -- are automatic with federally subsidized loans. Loans secured from private companies do not have to grant the discharge, she said, although some companies advertise this service.

According to the bureau, service members faced some of the same kinds of predatory lending programs that ensnarled and damaged homebuyers back in 2008.

This includes borrowers whose education loans were packaged as securities and sold to investors. The bureau said this group of service members could face additional problems when dealing with loan servicers.

In May 2014, the Justice Department announced a $60 million settlement with three companies providing student loans through the federal Sallie Mae program. This past May it announced that the money would start being distributed to about 78,000 individuals in June, with the average payment about $771.

-- Bryant Jordan can be reached at bryant.jordan@military.com