Despite the existence of generous programs designed to mitigate or eliminate higher education costs for service members, the Defense Department says it’s stepping up its financial education efforts amid worries that military members are prone to out-of-control student debt.

While college debts certainly aren’t a problem that’s unique to the military, DoD has special reasons to be concerned about the issue. Defense Secretary Leon Panetta said Thursday the individual financial health of service members is a vital component of military readiness.

“And the problem here is that the number one reason people in the services lose their security clearances is because of financial problems,” he said. “That’s something we absolutely have to address.”

The student debt issue is highlighted in a new report by the Consumer Financial Protection Bureau.

CFPB says its research on student loans in the military still is a new endeavor, but it’s worried that college debt is the next wave of financial difficulties to hit service members, akin to the tough times many faced during the housing crisis when many military personnel were given orders to move to new duty stations while their homes were worth less than their mortgages.

“I think we all saw what happened to military homeowners when mortgage lenders consistently failed to give them the protections they’d earned under the Servicemembers Civil Relief Act,” said Holly Petraeus, the director of CFPB’s Office of Servicemember Affairs. “According to GAO, there have been at least 15,000 instances of financial institutions failing to reduce service members mortgage interest rates under the SCRA. It’s taken class action suits and government intervention to fix those problems. There are real concerns of a similar problem over student loan servicing. In fact, I think it may be more of a problem, because many more young service members enter active duty with student loans than with a mortgage.”

Interest rates should be capped

The Servicemembers Civil Relief Act requires loan organizations, including college lenders, to cap interest rates at 6 percent while the borrower is serving on active duty. Petraeus said CFPB received numerous complaints from service members whose lenders refused to grant that interest rate reduction.

“They were told that only applied if they were going to a combat zone. Completely wrong. We need to hold them accountable when they’re doing that, get them to fix it, and also educate the service member so they realize they’re getting the wrong information,” she said. “If they still have no luck, we want them to complain to us so we can approach the loan servicer as well.

Petraeus said her young agency has only been accepting student loan complaints since March, so it lacks detailed data about the full burden of student loans on members of the military. But a review of complaints the agency has received thus far revealed some patterns, including the fact that the loan companies themselves turned out to be the main source of information for service members about how the system works, including military-specific benefits like loan forgiveness, interest-rate caps and alternative sources of college financing.

To give military college attendees a better understanding of their responsibilities and benefits, DoD and CFPB said Thursday they would partner to improve the financial education service members get from their own military services.

“We’ll be teaming up with DoD to train JAGs, personal financial managers and education service offers so they know about these benefits and protections,” Petraeus said. “We want them to know that even if they didn’t know about or ask for their student loan repayment benefits when they entered the military, it’s not too late to do it now.”

Repayment alternatives unclear to some

Panetta said a recent DoD survey of military members found 41 percent are using their military salaries to pay off college debt, and a 2008 study by the National Center for Education Statistics found the average service member graduating from college had more than $25,000 in student debt.

Petraeus said part of those figures are accounted for by the fact that some members of the military came into the service as a way to pay off student loans in the first place. But CFPB also thinks military members aren’t making the best choices about how to repay their loans.

“They don’t know about their repayment alternatives, and they’re confused by eligibility requirements for benefits that are so complicated that they can’t figure out what they’re entitled to, or they don’t realize that taking one benefit might exclude them from being eligible for another more helpful one,” she said.

While much of the overall student debt borne by military members predates their time in uniform, a significant proportion also is racked up by military members who are currently serving. That’s despite educational benefits like military tuition assistance and the Post-9/11 GI Bill, which covers the entire cost of tuition at the most expensive public university in a service member’s home state.

“The GI Bill and tuition assistance are very generous benefits, but there are schools that definitely cost more than that, and some service members choose to go to those,” Petraeus said. “If they do, certainly we want to encourage them to look at federal loans as their first source, and to look only as a last resort at private student loans where they have a lot less protections. I also would encourage them to think about whether this school really offers something so valuable that they’re going to pay out of pocket above and beyond their benefits to go there. There are an awful lot of schools where you don’t have to do that. It’s another education issue, and it’s one we’re talking about for sure.”

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