Student Loans:

Oversight of Servicemembers' Interest Rate Cap Could Be Strengthened

GAO-17-4: Published: Nov 15, 2016. Publicly Released: Nov 18, 2016.

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What GAO Found

The Servicemembers Civil Relief Act (SCRA) provides servicemembers with an interest rate cap of 6 percent on student loans while they are on active duty. The number of servicemembers with federal student loans who received this rate cap increased as a result of the Department of Education (Education) requiring federal loan servicers to regularly use the Department of Defense's (DOD) SCRA website to identify eligible servicemembers and automatically apply the rate cap without requiring servicemembers to provide written notice of active duty (see figure). Using the automated process, some federal loan servicers identified borrowers who had been eligible for the rate cap as far back as 2008, when the SCRA rate cap first applied to federal loans, and retroactively applied the cap.

Number of Servicemembers with Federal Student Loans Who Received the Servicemembers Civil Relief Act (SCRA) Interest Rate Cap, October 2008 to December 2015

Number of Servicemembers with Federal Student Loans Who Received the Servicemembers Civil Relief Act (SCRA) Interest Rate Cap, October 2008 to December 2015

Note: In December 2014 the Department of Education issued the final in a series of updates to its contracts with the 10 federal student loan servicers directing them to use the SCRA website on a monthly basis.

Servicemembers can face challenges obtaining the SCRA rate cap due to their failure to receive accurate information. Federal internal control standards state that agencies should externally communicate the information necessary to achieve their objectives. However, some servicemembers eligible for the cap may not receive it because information used by DOD to inform them about the cap is inaccurate: for example, some DOD information states that the rate cap does not apply to student loans. In addition, because the automated process to identify eligible servicemembers is not required for private student loans, servicemembers with private loans may be particularly at risk of not receiving the accurate information needed to obtain the cap themselves.

While Education monitors the application of the SCRA cap for federally owned or guaranteed student loans, there is a gap in oversight for private student loans. The Consumer Financial Protection Bureau (CFPB), four federal financial regulators of banks, and the Department of Justice (DOJ) each oversees aspects of private student loans or SCRA, but none has the authority to routinely oversee SCRA compliance at nonbank entities that handle private student loans. These nonbank entities include institutions of higher education and private companies. The resulting gap in oversight of SCRA compliance for these nonbank entities that make or service private student loans increases the risk that servicemembers will not receive a benefit for which they are eligible.

Why GAO Did This Study

SCRA helps servicemembers financially by capping interest rates on student loans during active duty. As of May 2016, about 1.3 million servicemembers were on active duty. The number of active duty servicemembers with student loans is unknown, as is the number eligible for the rate cap who may not have received it. GAO was asked to review implementation of the rate cap for servicemembers' student loans.

This report examines: (1) the number of servicemembers who received the cap for student loans (2) challenges that servicemembers face in doing so, and (3) the extent to which federal agencies oversee implementation of the cap. GAO analyzed data from 2008 through 2015 from the 10 federal student loan servicers; reviewed relevant federal laws, regulations, policies, and training materials; and interviewed representatives of the servicers and servicemember advocacy groups, and officials from DOD, Education, the CFPB and DOJ.

What GAO Recommends

GAO is making four recommendations, including that DOD improve the accuracy of SCRA information on student loans, and that CFPB and DOJ collaborate to ensure routine oversight of nonbank lenders and servicers, and seek additional authority, if needed. DOD disagreed and said it already provides accurate information. DOJ agreed and CFPB did not specifically agree, but said that all eligible servicemembers should receive the cap. GAO maintains that DOD's outreach materials are not always accurate and that routine oversight is necessary for nonbank lenders and servicers.

For more information, contact Melissa Emrey-Arras at (617) 788-0534 or emreyarrasm@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: The Department of Defense (DOD) disagreed with this recommendation believing it to be unnecessary because it is already providing accurate information and their current practice is far better at protecting servicemembers than our proposed change. Specifically, DOD noted that the information provided in several documents GAO reviewed is accurately based on statute whereas Education's updated requirement to automatically apply the cap is based on policy that could change in the future. Moreover, the automated process applies only to federal and commercial FFEL student loans in contrast to other types of debt. DOD said that providing information based on statute rather than policy would cause less confusion and was a better approach than what we recommend. With regard to Education's automated process, we note that Education formalized this approach through federal regulations that became effective as of July 2016, which currently legally requires servicers to use this process for all federal and commercial FFEL loans. In addition, DOD said it was unable to verify whether DOD's Military OneSource website still inaccurately states that the SCRA rate cap does not apply to commercial FFEL loans. However, searches of the website turned up this inaccuracy. DOD said it would look into a means of verifying website information, but in the meantime, it is satisfied that its training provides correct information. Given that Military OneSource is a key source of information for servicemembers and that, some documents DOD provided state that the SCRA rate cap does not apply to student loans, we continue to believe that servicemembers are not always receiving accurate and up-to-date information about how the SCRA rate cap applies to student loans.

    Recommendation: To help ensure quality information is conveyed to servicemembers about how the Servicemembers Civil Relief Act (SCRA) interest rate cap applies to student loans, the Secretary of Defense should direct the secretaries of each service branch, and work with other secretaries as appropriate, to ensure that all information about the SCRA interest rate cap for student loans is accurate when provided to servicemembers and to those who work with servicemembers to help them obtain SCRA benefits, including information contained in outreach materials.

    Agency Affected: Department of Defense

  2. Status: Open

    Comments: The Department of Justice (DOJ) stated that its current package of proposed legislative changes provides benefits to servicemembers with all kinds of loans, including private student loans. Rather than requiring servicemembers to submit written notice and a copy of military orders, they need only give oral or written notice of eligibility for the cap to their creditors. Creditors would have to search the Department of Defense's records to verify the servicemembers' military service and apply the 6% interest rate cap, when applicable. DOJ believes that these changes would significantly benefit all servicemembers with loans while providing a uniform standard for all types of creditors. The agency said that they will consider these changes to the SCRA in future legislative proposals and plans to obtain feedback from stakeholders on how the agency can propose to improve the SCRA's protections for servicemembers. However, as stated in our report, servicemembers with private student loans would still need to be aware of the rate cap in order to give notice, whether written or oral. Therefore, we encourage DOJ to consider updating its current proposal to require use of the automatic eligibility check by all student loan lenders and servicers. Not only would this ensure that servicemembers with private student loans receive a benefit for which they are eligible, but also that the interest rate cap is applied consistently across all types of student loans.

    Recommendation: To ensure that all eligible servicemembers with student loans receive the SCRA interest rate cap, the Attorney General should direct the Department of Justice to consider modifying its proposed changes to SCRA to require use of the automatic eligibility check for private student loans.

    Agency Affected: Department of Justice: Office of the Attorney General

  3. Status: Open

    Comments: The Department of Education said it is committed to accurately tracking the types of complaints it receives and will create a complainant subcategory for SCRA under the "Military and Veterans Benefit" category. In addition, they will continue to run periodic key word searches to identify other complaints that may have been miscategorized by the complainant, related to the requirements of the SCRA and ensure that they are considered appropriately. GAO will consider closing this requirement when the agency has provided evidence that they have completed these efforts.

    Recommendation: To enhance customer service, the Secretary of Education should direct the Office of Federal Student Aid to identify ways to modify the data collected in its unified borrower complaint system to allow the agency to more precisely identify and analyze complaints specifically about the SCRA interest rate cap.

    Agency Affected: Department of Education

  4. Status: Open

    Comments: The Bureau stated that it is committed to working with DOJ and federal financial regulators, when possible, to facilitate oversight of SCRA compliance. The Bureau will support all relevant federal agencies in using their respective authorities to identify and address SCRA violations as efficiently and effectively as possible. GAO will consider closing this recommendation when the agency has provided evidence of actions it has taken to facilitate this effort.

    Recommendation: To better ensure that servicemembers with private student loans benefit from the SCRA interest rate cap, the Director of the Consumer Financial Protection Bureau and the Attorney General of the Department of Justice should coordinate with each other, and with the four federal financial regulators, as appropriate, to determine the best way to ensure routine oversight of SCRA compliance for all nonbank private student loan lenders and servicers. If CFPB and DOJ determine that additional statutory authority is needed to facilitate such oversight, CFPB and DOJ should develop a legislative proposal for Congress.

    Agency Affected: Consumer Financial Protection Bureau

  5. Status: Open

    Comments: The Department of Justice (DOJ) believes that it is in full compliance with this recommendation and that the four federal financial regulators do not have statutory authority to examine nonbank private student loan lenders and servicers unaffiliated with a depository institution. DOJ reported that it already coordinates extensively with CFPB and the financial regulators concerning SCRA compliance, through such mechanisms as referrals from CFPB for any SCRA-related violations and access to its consumer complaint database, and regular meetings with CFPB, and that it will continue to be build upon them. While these mechanisms are commendable, GAO believes they do not constitute exercising routine oversight of nonbank private student loan lenders and servicers who are not affiliated with a depository institution. We believe that additional interagency coordination, including working with CFPB to seek additional statutory authority, as needed, is necessary to ensure routine SCRA compliance.

    Recommendation: To better ensure that servicemembers with private student loans benefit from the SCRA interest rate cap, the Director of the Consumer Financial Protection Bureau and the Attorney General of the Department of Justice should coordinate with each other, and with the four federal financial regulators, as appropriate, to determine the best way to ensure routine oversight of SCRA compliance for all nonbank private student loan lenders and servicers. If CFPB and DOJ determine that additional statutory authority is needed to facilitate such oversight, CFPB and DOJ should develop a legislative proposal for Congress.

    Agency Affected: Department of Justice: Office of the Attorney General

 

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