SCRA as Solution to Problem of Student Loan Debt for Service Members—Not so Fast
By Captain Samuel F. Wright, JAGC, USN (Ret.)
4.1—SCRA Right to Interest Rate Reduction upon Mobilization
On October 18, 2012, the news service Reuters reported: “The military voiced concern on Thursday over mounting student loan debt owed by American troops, saying loan companies appeared to be taking advantage of U.S. forces—guiding them away from special protections they earned through service. … But troops, unlike the general population, should benefit from laws meant to help them manage their student debt, including the Servicemembers Civil Relief Act (SCRA), which cuts interest rates to 6 percent during active duty service on debt incurred prior to service.” I am concerned that this Reuters report oversimplifies the situation and overstates the helpfulness of the SCRA in this scenario.
Congress enacted the SCRA in 2003, as a long-overdue rewrite of the Soldiers’ and Sailors’ Civil Relief Act, which was originally enacted in 1917, shortly after the United States entered World War I. The SCRA is codified in title 50 Appendix, United States Code, at sections 501-597b (50 U.S.C. App. 501-597b).
The pertinent section is section 207 (50 U.S.C. App. 527).
Until August 14, 2008, student loan debts were exempted, by federal statute, from the SCRA requirement to reduce interest rates to 6%, on pre-service obligations, for persons entering active duty in the armed forces.
On August 14, 2008, President Bush signed into law Public Law 110-315. Among other changes made by that Public Law, it amended 20 U.S.C. 1078(d) to read: “No provision of any law of the United States (other than this chapter and section 527 of the Appendix to title 50) … which limits the rate or amount of interest payable on loans shall apply to a [federally guaranteed student] loan.” (Emphasis supplied.)
The purpose and effect of this 2008 amendment was to make the SCRA 6% interest rate cap applicable to student loans, just as it applies to credit cards, automobile loans, and other financial obligations. This is a very important change. For many junior officers and enlisted personnel in the armed forces, including the National Guard and Reserve, the student loan debt will be the most significant financial obligation for which the member will need relief upon call to active duty.
It is true that section 207 of the SCRA provides for reducing interest rates to 6% for debts incurred before entering active duty, but I invite the reader’s attention to section 207(c) of the SCRA: “A court may grant a creditor relief from the limitations of this section if, in the opinion of the court, the ability of the servicemember to pay interest upon the obligation or liability at a rate in excess of 6 percent per year is not materially affected by reason of the servicemember’s military service.” 50 U.S.C. App. 527(c).
To understand how this provision might work in practice, let us take a hypothetical but realistic situation. Joe Smith used federally guaranteed student loans to finance his college education, attending a state university from September 2007 to May 2011, when he received a Bachelor of Arts degree. He ran up $30,000 in student loan debt. After he graduated, he sought employment for several months, without success. Finally, in December 2011 he enlisted in the United States Army. He attended Officer Candidate School (OCS) and was commissioned a Second Lieutenant in August 2012.
Joe cannot show that his December 2011 entry on active duty has materially (i.e., adversely) affected his ability to meet his financial obligations. As an officer candidate, and now as a Second Lieutenant on active duty, he is making more money than he was making during his four years of college education or during the seven months, after he graduated, when he was unsuccessfully seeking civilian employment. If the bank servicing Joe’s student loans chooses to contest his right to the reduction of interest rates to 6%, the bank will likely prevail.