Government Watchdog Finds that Servicemembers’ Interest Rate Cap Could Be Strengthened

By Rachel Fenton

Under the Servicemembers Civil Relief Act (SCRA), the interest rate and fees on federal and private student loans are capped at six percent for active duty servicemembers.  In November, the U.S. Government Accountability Office (GAO) released its report on this interest rate cap and federal oversight of the SCRA.

Highlights and recommendations from the report are below.

  • Historically, servicemembers had to provide written notice to their student loan servicer and proof of their active-duty start date in order to receive the interest rate cap protections under the SCRA.
  • Starting in 2014, the U.S. Department of Education required federal student loan servicers to identify eligible servicemembers every month by using a Department of Defense (DOD) website to obtain automatic SCRA interest rate cap eligibility information.
    • The loan servicers identified servicemembers with active military service dates as early as 2008, when the SCRA cap first applied to federal student loans. These servicemembers were retroactively able to receive the rate cap.
    • Data show that the number of servicemembers who received the rate cap on the federal student loans was substantially higher once the automatic eligibility was started. For example, in October 2008, 49 servicemembers received the SCRA cap by providing written notice, while 58 servicemembers were found retroactively eligible by loan servicers checking the DOD website.  In December 2015, 17,011 servicemembers received the SCRA cap by providing written notice, while 91,699 received eligibility by loan servicers checking the DOD website.
  • This automatic SCRA eligibility check is not required for private student loans, but has been voluntarily implemented by six lenders representing 65% of the private student loan market.
    • Data from the six lenders show that the number of servicemembers who received the SCRA cap more than doubled from 14,970 in September 2014 to 33,309 in March 2016 once the automatic SCRA eligibility check was initiated.
  • Even with the automatic SCRA eligibility check, GAO noted that servicemembers face some challenges in obtaining the SCRA interest rate cap. For example, GAO found that DOD documents contained significant inaccuracies, with some documents falsely stating that the SCRA cap does not apply to student loans.
    • Also, eligible servicemembers with private student loans may not be receiving the SCRA cap. Information is not available for about $36 billion (or 35%) of the private student loan market and whether those lenders automatically check for SCRA eligibility.
  • GAO found that the Department of Education has several mechanisms to oversee whether federal student loan servicers are properly applying the SCRA rate cap, but that the Department does not track borrower SCRA complaints systematically.
  • GAO found that oversight of SCRA compliance is scattered across several federal agencies, each with limitations on its authority. For example, while the Consumer Financial Protection Bureau (CFPB) oversees student loan lending and servicing, it does not have the authority to routinely oversee SCRA compliance by student loan lenders and servicers.
  • GAO provided four recommendations: 1) The Secretary of Defense should take action to ensure that SCRA interest rate cap information provided to servicemembers is accurate; 2) The Department of Justice should require the use of automatic SCRA eligibility checks for private student loans; 3) The Department of Education should identify ways to use the complaint data it collects to identify and analyze complaints related to the SCRA interest rate cap; and 4) The Department of Justice and CFPB should determine the best way to ensure routine oversight of SCRA compliance for all nonbank private student loan lenders and servicers.