Education Department Profiting Off Troops Duped Into Making Unnecessary Loan Payments

Troops sent to combat zones were supposed to be exempt from interest on their student loans -- yet they've paid at least $100 million.

The U.S. Department of Education is profiting off the backs of service members.

Hundreds of thousands of U.S. service members have been forced to make a total of at least $100 million in student loan interest payments that they were actually exempt from, the Consumer Financial Protection Bureau said Tuesday.

The issue threatens to further shame an Education Department that is battling accusations that it coddles its loan contractors to the detriment of struggling borrowers. The department is under White House orders to clean up its oversight of the federal student aid program.

The CFPB’s findings suggest that loan servicers are failing to make service members aware of a benefit under the Higher Education Opportunity Act of 2008. At a time when U.S. troops were fighting wars in Afghanistan and Iraq, the law waived all interest charges on Direct Loans carried by active-duty troops serving in so-called areas of hostilities. The measure applied for up to five years on loans originated after September 2008.

The benefit was intended to ease the financial strain of military duty. For example, new soldiers in the Army typically receive less than $30,000 in annual pay, according to an Army recruiting website.

But only 633 military borrowers had benefited from the provision as of last year, according to Seth Frotman, the top student loan official at the Consumer Financial Protection Bureau. By comparison, the bureau estimates that hundreds of thousands of military personnel who were eligible for the waiver have unnecessarily paid the interest on their federal student loans.

When service members get in touch with their student loan servicers, officials have said, they have typically been told they can temporarily defer their payments. Recently, loan servicers have been more proactive in telling service members they could have their rates capped at 6 percent under a separate federal law. But for the most part, troops aren't being informed that they're eligible to have the interest waived entirely. The CFPB's findings suggest that shoddy loan servicing practices by Education Department contractors are to blame.

“We know that these borrowers contacted their student loan servicers and asked for help enrolling in a military benefit,” Frotman told a Virginia audience of military lawyers Tuesday. “And yet, very few of these borrowers received the zero interest rate to which many of them were likely entitled.”

Instead, troops have padded the coffers of the Education Department, which the Congressional Budget Office projects will generate tens of billions of dollars in profit off federal student loan borrowers over the next decade. The department profits thanks to the difference between what it charges borrowers and what it costs to finance student loans, as well as its extraordinary collection powers.

The CFPB's estimate, which the bureau described as conservative, is likely to fuel an ongoing debate over whether the Education Department is failing to police its loan contractors and whether it favors them over student borrowers, especially those in the military.

For example, in a separate report on Tuesday, the CFPB said it had found evidence that some department loan contractors had deceived borrowers about the possibility of late fees on their loans. The Education Department tells its contracted loan servicers not to charge late fees, yet bureau examiners found instances in which servicers had acted against the department's wishes.

In May, the department cleared one of its preferred contractors, Navient Corp., of wrongdoing after federal banking regulators and the Justice Department alleged that the company overcharged nearly 78,000 active-duty troops in violation of the Servicemembers Civil Relief Act.

Last year, Navient agreed to settle the allegations by refunding the service members a total of $60 million. However, the company neither admitted nor denied wrongdoing in the settlement.

Education Secretary Arne Duncan said at the time that ensuring service members receive the benefits they are entitled to is "the least we can do for people who have sacrificed so much for us," adding that it was “troubling” that service members had been overcharged.

Yet Duncan’s department took no action against Navient, even though federal prosecutors found that 19,000 borrowers with Education Department-owned loans had been overcharged. A group of Senate Democrats alleged in August 2015 that the department may have misled the public by declaring that Navient and other loan contractors did not mistreat service members.

The department recently revamped its contracts with its loan servicers to ensure they receive higher pay when handling military borrowers' accounts.

Dorie Nolt, an Education Department spokeswoman, blamed the Pentagon for the CFPB's findings.

"Due to concerns about compromising the security of service members serving in combat zones," she said, "the Defense Department hasn’t released the information, so borrowers must request the reduced interest rate in writing. We hope to find a better solution to this issue so that our men and women in uniform get the benefits they deserve.”

Nolt said the Education Department is working with the Defense Department to identify service members eligible for the loan interest benefit. 

Matthew Allen, a Defense Department spokesman, said Pentagon officials "strive to ensure our service members who are serving in combat zones around the world are able to exercise benefits and rights extended to them." The Defense Department did not immediately respond to a request to comment specifically on Nolt's claims. 

Winfield Crigler, executive director of the Student Loan Servicing Alliance, did not respond to a request for comment. The members of Crigler's group together collect payments on more than 90 percent of all outstanding student loans.

Service members who made extra interest payments can request a refund, federal officials said. However, it's unclear how they’d go about making such a request and how the Education Department would process it. The department didn’t make any officials available to discuss the matter.