[Senate Hearing 110-917]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-917
 
        PAYING FOR COLLEGE: THE ROLE OF PRIVATE STUDENT LENDING 

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

ISSUES RELATED TO THE GROWTH AND DEVELOPMENT OF THE PRIVATE EDUCATIONAL 
   LOAN MARKET AND ITS IMPACT ON STUDENT BORROWERS AND THEIR FAMILIES


                               __________

                        WEDNESDAY, JUNE 6, 2007

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania        ELIZABETH DOLE, North Carolina
JON TESTER, Montana                  MEL MARTINEZ, Florida

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
               Roger M. Hollingsworth, Professional Staff
                       Aaron D. Klein, Economist
                       Lynsey Graham Rea, Counsel
                   Jonathon Gould, Republican Counsel
                    Jim Johnson, Republican Counsel
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                         George Whittle, Editor



















                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, JUNE 6, 2007

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     4
    Senator Tester...............................................     4
    Senator Allard...............................................     5
    Senator Casey................................................     6
        Prepared statement.......................................    52
    Senator Schumer..............................................     7

                               WITNESSES

Andrew M. Cuomo, Attorney General, State of New York.............     9
    Prepared statement...........................................    53
Jonathan Avidan, Consumer........................................    26
    Prepared statement...........................................    62
Jennifer Pae, President, United States Student Association.......    28
    Prepared statement...........................................    66
Peter B. Tarr, General Counsel, First Marblehead Corporation.....    30
    Prepared statement...........................................    73
Tracy Grooms, Senior Vice President, Bank of America.............    32
    Prepared statement...........................................    78
Barry W. Goulding, Senior Vice President, Sallie Mae.............    33
    Prepared statement...........................................    85
Sevester Bell, Director of Student Financial Aid, Howard 
  University.....................................................    35
    Prepared statement...........................................   104
Luke Swarthout, Higher Education Advocate, United States Public 
  Interest Research Group........................................    36
    Prepared statement...........................................   110


        PAYING FOR COLLEGE: THE ROLE OF PRIVATE STUDENT LENDING

                              ----------                              


                        WEDNESDAY, JUNE 6, 2007

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:08 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order.
    This morning the Committee examines the role of private 
student lending and keeping college affordable and accessible. 
I want to thank the Attorney General of New York, Andrew Cuomo, 
and our other witnesses for their appearance here this morning. 
I can think of no more important topic that this Committee can 
address at this particular time. Our Nation, our world, is 
growing more complex and interconnected day by day. Never has 
higher education been more crucial to the success of our people 
and our country. If our children are to achieve the highest 
aspirations and if our Nation's economic backbone is to 
continue to grow strong, then we must ensure that the financial 
doors of higher education remain open for all who have the 
desire and the ability to walk through them.
    Today, 60 percent of the new jobs being created by our 
economy require at least postsecondary education. Compare to 
half a century ago when only 15 percent of new jobs required 
some amount of college. Yet, at a time when higher education 
has never been more important, in a very real sense it has 
never been more difficult for many families to afford.
    Over the past two decades or so, the cost of attaining a 
college degree has risen at approximately twice the rate of 
inflation. That is a staggering fact that has imposed a 
staggering burden on lower- and middle-income families in our 
nation. Today, the average cost of attending a public 
university is $13,000 a year. The average cost of attending a 
private university is more than double that, at $30,000 per 
year, with some schools, of course, costing as much as $50,000 
a year.
    As the father of two young daughters, I am not making any 
plans to retire in the near future here. I was hoping Jack Reed 
was here to see any advice he might have on this issue with a 
child only several months old.
    During the same period of time, the Federal Government's 
commitment to student financial aid has waned in relation to 
the rising cost of a college diploma. Federal aid in the forms 
of grants and Federal loans has failed miserably to keep up 
with rising costs. By some estimates, the national gap between 
the cost of tuition and available aid is approximately $120 
billion and growing. This college affordability gap leaves many 
would-be students with very few options: to give up their dream 
of pursuing a higher education degree or to rely on their 
parents for financing their education expenses or to seek out 
alternative sources of financing of their higher education, 
primarily through the forms of private education and direct-to-
consumer loans.
    Unlike the Federal student loans, private loans are not 
guaranteed by the Federal Government, and while guaranteed 
student loans carry a rate of no more than 6.8 percent, there 
are no limits on the interest rates and fees private lenders 
can charge. Some have variable rates of up to 20 percent. 
Generally, the underwriting for private education loans is 
similar to that used for other forms of consumer credit. That 
means that the student borrowers, who usually have little to no 
credit history, poor credit scores, or no parental co-signer or 
whose parents have a poor credit history, will typically pay 
higher rates than those with good credit histories or those 
with a parental co-signer with a good history. In some regards, 
this model runs counter to the longstanding Federal purpose of 
student aid: targeting low-cost financial assistance to 
students with the greatest needs and those from the humblest of 
backgrounds.
    Now, that said, there is no doubt that private loans play a 
very critical and needed role, I would add, in providing 
students with the ability to finance college. But while 
beneficial, little is known about the private student loan 
market. We look forward this morning to hearing more about this 
at today's hearing, which will focus on an array of issues 
related to the growth of the private loan market, its 
oversight, and the role that private lending plays as part of 
the broader financial aid landscape. I also look forward to 
hearing more about how private lending practices, products, and 
services impact student borrowers and their families and 
hearing from our witnesses about potential areas of concern 
within the private loan market.
    Since the beginning of the year, there has been a 
consistent purpose to many of this Committee's hearings, 
specifically how to better ensure that Federal tools, like 
subprime mortgage lending and credit cards, be utilized by 
working Americans to build rather than diminish their wealth. 
Today's hearing is in keeping with that vital purpose.
    The private student loan program is growing at an 
astronomical rate, by 1,200 percent over the past decade, and 
private student loans are projected to overtake Federal 
education loans as the largest percentage of student lending 
within the next decade. These two charts, by the way, will 
indicate that first point I made here, give you some idea from 
1995 through 2005 of the increase. We do not have the chart 
here that I should show, by the way, just the increase as well, 
I mentioned double the rate of inflation of the cost of higher 
education, which obviously is driving a lot of this. But again 
here, the blue and red lines indicate--the red being the 
private education loans, the blue being the Federal loans, and 
you see where down the road here those two will cross here, 
again, relating, of course, to the rise in cost of education. 
We will leave these around for people to take a look at.
    I believe we have an obligation in this Committee to ensure 
that this market is functioning effectively and efficiently for 
lenders and borrowers alike. We must act, including 
legislatively if need be, to ensure that young people in this 
country and their families have an opportunity to rise as high 
as their talents will take them without limiting them based on 
the wealth of their parents or themselves. And we must not let 
allow young, unsophisticated borrowers and their families to be 
subjected to practices that would deny them the ability to 
obtain credit on fair, transparent, and reasonable terms. 
Otherwise, countless students will suffer serious and 
irreversible harm to their financial futures, and our Nation's 
economic and social future will suffer, I would point out, as 
well.
    One of the greatest contributions made by our Government to 
its people has been our support of higher education. Laws like 
the GI Bill and the National Defense Education Act and the 
Higher Education Act of 1965 stand as some of the great 
bipartisan achievements of the past century in terms of opening 
the doors of higher education to hard-working Americans and 
their children.
    The results of this commitment have been unmistakable and 
remarkable. In 1955, 3 million young people attended a college 
or a university. By 1980, that number had risen to 12 million. 
Today it stands at 18 million, and our Nation's economy during 
the past half-century has not coincidentally become the 
strongest and most prosperous in the history of the world. 
College education is expensive, but if you think education is 
expensive, as has been pointed out by many in the past, then 
try ignorance as a cost. Our Nation could ill afford to support 
its children and their families as they work to achieve 
prosperity and economic security for themselves and our Nation.
    I want to point out here that the other Committee, one of 
the other committees on which I serve, the Health, Education, 
Labor, and Pensions Committee, will be marking up the Higher 
Education Act--I think it is next week, is the plan here. This 
Committee hearing this morning originally was going to be a 
joint hearing between Senator Kennedy and myself, combining the 
two committees because of the joint jurisdiction over the issue 
of higher education and its cost. Senator Kennedy, as many of 
you may know, is involved in the immigration bill on the floor 
of the U.S. Senate, and so he could not take the time this 
morning to be a part of this hearing.
    We are going to focus on, obviously, the lending issues 
here. The substantive issues involving the Department of 
Education are a matter we will bring up under the Higher 
Education Act. But we are anticipating a track here that will 
allow us to complement that work, and so, again, I appreciate 
Senator Kennedy's cooperation and the work of his staff and 
others in working with us jointly, along with Senator Enzi, who 
is on this Committee, by the way, as well.
    But let me turn to my colleague for any comments he has. 
Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Chairman Dodd.
    Over the past 20 years, the cost of tuition for higher 
education has increased substantially. Last year, tuition and 
fees at private 4-year colleges rose almost 6 percent. Funds 
available to students through Federal Government lending 
programs, however, have remained largely unchanged since the 
mid-1990's. And matriculating freshmen can qualify for a 
maximum amount of $3,500, sophomores are eligible for up to 
$4,500, while juniors and seniors may qualify for up to $5,500. 
Graduate students may obtain a maximum amount of $8,500 
annually. Clearly, there is a large and growing gap between the 
cost of tuition and the funds available to students through 
Federal lending programs such as the Federal Family Education 
Loan Program, the Direct Loan Program, and the PLUS Program.
    As a result, more students and parents are turning to the 
private market to fulfill this gap. Sources such as home equity 
loans and lines of credit have been used to meet the needs of 
many college-bound students. At times, parents and students 
alike have used credit cards to meet their immediate financial 
demands. Given the recent reversal in the housing market, 
accessing homeowners' equity is becoming less of an option for 
some families. Also, credit cards are rarely the best choice to 
finance long-term debt. Therefore, more and more students and 
parents are turning to the private lending industry to make up 
the difference.
    The growth of this industry has been exceptional over the 
past 10 years. Private lending for higher education accounted 
for approximately $1.3 billion of student loans originated in 
1995 and has since risen to over $17 billion in 2005. Some 
industry experts believe that by 2009, 2 years hence, the 
industry will see somewhere between $30 to $50 billion of loans 
originated annually. I believe this Committee, Mr. Chairman, 
has a responsibility to examine the private student lending 
market. We should assess whether there are any shortcomings in 
existing banking laws or enforcement tools to ensure adequate 
safeguards are there in place for students.
    Because the cost of higher education will continue to 
climb, I am afraid, we should also make sure that we encourage 
the growth of private lending and the choices they offer those 
seeking advanced education. I look forward, Mr. Chairman, to 
working with you, as always, and learning more about the 
lending industry from the experts that we will hear from today.
    Chairman Dodd. Thank you very much, Senator Shelby.
    What I am going to do here, Senator Tester has a short 
opening statement, and Senator Allard, I presume, may make some 
short comments as well. But Senator Schumer--is that all right 
with you? I do not want to--let me turn to Senator Tester.

                STATEMENT OF SENATOR JON TESTER

    Senator Tester. Thank you, Mr. Chairman.
    Very quickly, I want to thank you for having this hearing 
today. I think as you and the Ranking Member have pointed out, 
college tuition costs have risen dramatically over the past 30, 
40 years, and I am hopeful that this Committee hearing will 
shed light on the private loans, which are a critical component 
in our children's ability to get a higher education, and the 
marketing practices that surround those.
    I want to welcome Attorney General Cuomo. I look forward to 
your comments involving what has been going on in your State as 
far as the recent marketing practices, to be kind.
    And I would just say this: I graduated from college some 30 
years ago. My kids are out of school. I am much older than you, 
Mr. Chairman. I know that. My oldest kid is out of college. She 
has got a Bachelor of Science in nursing. My parents were able 
to pay for my education. She had to borrow money to get 
through. We helped her, but we could not pay the whole thing. 
My son is a senior in a 5-year program, is on the 5-year plan, 
and he too is racking up debt. And I think it just takes away 
opportunity from our kids to be successful when they get out of 
college.
    So I look forward to the hearing. Thank you, Mr. Chairman. 
I appreciate your indulgence.
    Chairman Dodd. Thank you very much, Senator.
    I should point out, by the way, that obviously myself, 
Senator Reed, Senator Brown, Senator Enzi, and Senator Allard 
are all Members of the Education Committee and Members of this 
Committee as well. So we have a lot of overlap on this subject 
matter.
    Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Yes, thank you, Mr. Chairman and Ranking 
Member Shelby. I would like to thank you both for agreeing to 
hold this Committee hearing. I think it is important and timely 
so that we might examine the role of private student lending.
    As the American economy has evolved, education has 
increased in importance. When America was simply an agrarian 
economy, many people only completed very basic schooling, and 
academic education was less valuable than practical experience.
    Core education and training became more important as the 
economy shifted to a manufacturing base. In today's highly 
technological, globally based economy, higher education has 
become necessary for Americans to remain competitive. In order 
to succeed in life, people must have strong knowledge and 
skills, and higher education is one of the best ways to access 
the opportunities they can bring.
    As a veterinarian, I am well aware of the importance of 
higher education. I could not have pursued my career without 
undergraduate and graduate studies. More and more people are 
realizing that their career or lifestyle goals will require 
postsecondary studies.
    Education can require a significant commitment of time and 
financial resources, though. The Federal Government has created 
a number of programs designed to make education more 
affordable, including tax credits, tuition repayment and 
forgiveness grants, and Federal loans. These options can go a 
long way in making college more affordable.
    Now, private student lending is one additional option to 
the broad menu of choices available to students and parents in 
determining the best way to finance an education. Like any 
option, it may not be appropriate for all circumstances, but 
for some borrowers, it is the final piece that enables them to 
attend college or enables them to afford a practical path of 
study.
    As a member of the HELP Committee, I have had the privilege 
of working with Chairman Dodd on Higher Education Act 
reauthorization, including student lending provisions. I would 
also like to acknowledge the work of that Committee's Ranking 
Member, Senator Enzi, for all his work on student lending. In 
particular, I have been pleased to work with him on the Student 
Loan Accountability and Disclosure Reform Act. He has been a 
strong advocate for fairness, accountability, and disclosure so 
that students and families can make informed decisions about 
how to pay for college based on clear, accurate, comprehensive 
information.
    I look forward to this opportunity to get more information 
on the financial aspects of private student lending, and I look 
forward to today's testimony.
    Thank you.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Casey.

              STATEMENT OF SENATOR ROBERT P. CASEY

    Senator Casey. Thank you, Mr. Chairman. I will be very 
brief because I know you want to get to our witnesses.
    I want to thank you, Mr. Chairman and Ranking Member 
Shelby, for calling this hearing. Attorney General Cuomo, 
welcome to you, and thank you for all your work in this area. 
And you are being introduced by a good guy there, and I know he 
wants to say a few words, so I will be brief.
    By the way, I did not know that Jon Tester is 30 years out 
of college. You look great, Jon.
    [Laughter.]
    Senator Tester. I will give you some money.
    Senator Casey. It took us about 20 minutes to get to this 
chair, so we want to be nice to the guy next to us.
    Just very briefly, I think what brings us together here--
and I would ask that my whole statement be submitted for the 
record.
    Chairman Dodd. It will.
    Senator Casey. But what brings us together here is a real 
concern about what is happening in this market, so to speak. 
Two trends, really, two regrettable trends: one, cost of 
college tuition going through the roof--we all know that; but 
at the same time the failure of loan programs to meet that 
challenge in the lives of people; and then, of course, the real 
scandal that we have seen over the last couple of months, if 
not longer. So we have a lot of questions, and we want to hear 
the testimony of the witnesses.
    I do want to note that on the next panel, from 
Pennsylvania--and I may not be here for this--is Mr. Jonathan 
Avidan, who is going to testify and give personal witness to 
this, tragically so, and I wanted to make sure that I mentioned 
him.
    But we thank you, Attorney General Cuomo, and we appreciate 
the work you have done, and we are looking forward to your 
testimony. Thank you very much.
    Chairman Dodd. Chuck, thank you very much. Senator Schumer 
is going to introduce our witness, but I just want to say to 
you, Mr. Attorney General, it is a pleasure to have you back 
before this Committee. I know you must be having sort of a 
Pavlovian response here, having spent some time at that table 
in your previous job as Secretary of HUD, in which you did a 
fabulous job for this country.
    Senator Shelby. Mr. Chairman, will we get to question 
Schumer since he is there?
    [Laughter.]
    Chairman Dodd. No, I will step in. I will defend you, 
Chuck. I will not allow any questions--unless you want to 
answer them.
    Senator Schumer. Remember the Woody Allen movie ``Bananas'' 
where he sat here and he was the witness, he testified, and he 
was the lawyer, and he kept going back and forth?
    [Laughter.]
    I am not going to do that, I assure you, my friend.
    Chairman Dodd. Well, anyway, Andrew, first of all, I have 
been a personal friend, and I have a high regard for you, and I 
am delighted you are here this morning, and we all admire what 
you have been doing over the last number of weeks and months 
here on this very, very important issue. So it is highly 
appropriate you are here. We thank you for offering to come 
before us and share your thoughts and ideas on how we can do a 
better job here on oversight, and also looking at the 
possibility of some legislative activity here to better manage 
a very, very important issue, a critical issue for America's 
well-being.
    So, Chuck, why don't you go ahead.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Well, thank you, and I want to thank you, 
Mr. Chairman, for having this hearing. We have had a whole 
series of timely hearings on a whole bunch of other issues, and 
your leadership on this Committee is greatly respected and 
needed. I want to thank Ranking Member Shelby, who did the same 
thing when he was Chairman, and I want to welcome all of the 
witnesses here today to testify on this important issue.
    I am pleased to be here to introduce the 64th Attorney 
General of my home State, the Honorable Andrew Cuomo. The 
Attorney General is here today, of course, to talk about the 
investigation he has spearheaded to shine light on the 
practices of the student loan industry and its partners. Thanks 
to his efforts--intelligent, thoughtful, unfailing--
universities and colleges across the country are now entering 
into a voluntary College Loan Code of Conduct to ensure that 
their students are being offered a fair deal to fund their 
education.
    Attorney General Cuomo has a long and illustrious record of 
fighting on behalf of New Yorkers and Americans. A native New 
Yorker, he attended two proud New York institutions--Fordham 
University and Albany Law School. He began his legal career as 
an assistant district attorney in Robert Morgenthau's fabled 
D.A. office, and then served at the firm of Fried, Frank, 
Harris, Shriver & Jacobson.
    In 1986, Mr. Cuomo founded Housing Enterprise for the Less 
Privileged, well-known across the country as HELP, which 
quickly became the Nation's largest provider of transitional 
housing for the homeless. Its innovative model led to his 
appointment to the New York City Commission on the Homeless by 
former Mayor Dinkins.
    In 1996, President Clinton, as you mentioned, Mr. Chairman, 
nominated Mr. Cuomo to serve as Secretary of HUD, where his key 
focus became fighting racial discrimination. As HUD Secretary, 
he brought over 2,000 antidiscrimination cases across the 
country and successfully led 400 mayors and local law 
enforcement in a coalition to help fight gun violence. His work 
as HUD Secretary earned him the prestigious Innovations in 
American Government Award from the Ford Foundation and the 
Kennedy School of Government.
    In addition to being a dedicated public servant, he is the 
father of three beautiful daughters--Mariah and Cara, and the 
youngest, Michaela--and they are cuties. They are great little 
kids, and I love to see them at the events where we bump into 
one another.
    So, Mr. Chairman, I thank you for allowing me to introduce 
my friend and colleague in Government, and I know the Committee 
looks forward to hearing his testimony. However, before we 
begin, I just want to touch on the issue at hand, the focus of 
today's hearing: the role of private loans to pay for higher 
education. As you have mentioned, Mr. Chairman, college degrees 
are essential to the success of our children, also our country. 
Enrollment in higher education has increased from 3 million to 
18 million. The United States has fallen to number 7 on the 
list of developed countries with the highest graduation rates. 
We used to be number 1 or 2. And the problem in higher 
education, by and large, is not quality. We are still way up 
there in terms of quality. Our K through 12 is not, when you 
look at the developed nations. But it is cost. And to maintain 
global competitiveness, we need to ensure our students and 
their families have the ability to pay. Tuition is 
skyrocketing. We all know that.
    In the past year, two out of three students have had 
student loan debt, up from less than one-half in 1993. My 
experience is the same as Senator Tester's. My parents probably 
on an economic basis certainly had less money than I did--than, 
you know, my wife and I earn, but they were able to pay for all 
their kids' college and graduate school educations. We cannot. 
And I have two daughters--one starting college, one starting 
law school--and we are looking into the loan program as a 
consumer. Now, I can tell you, it is confusing and it is 
difficult as you go through it.
    Over the past decade, debt levels for graduating seniors 
have more than doubled, from $9,000 to $19,000. That is a 58-
percent increase. And the rising student debt can affect a 
student's livelihood. For decades after graduation, kids are 
not able to pursue the profession they want because they have 
all this debt hanging over their head, and they go do something 
that enables them to repay the loans. They might delay the 
purchase of a home or a car. They are discouraged from starting 
an earlier family. It has all kinds of ramifications way beyond 
just paying the loan back.
    So what is the answer? There are a lot of answers, but one 
that I would hope this Committee would focus on is just clearer 
disclosure. There may be other things we should do. It is 
confusing, as I said, as a consumer going through this now. And 
one of the reasons that kids get taken advantage of is that the 
competition is not there because it is so confusing.
    Good old-fashioned American competition is the great 
antidote here. And if people understood the varying costs and 
complications and just my experience, you not only have to look 
at the interest rate, you have to look at when the interest 
starts accumulating. You have to look at the points and fees. 
You have to be almost a math genius to figure out the different 
programs, and as Andrew Cuomo has admirably shown, many 
colleges and institutions steer you to one lender, and that 
sort of eliminates competition from the get-go. Andrew just 
told me that about 90 percent of the students go to the place 
that is recommended by their institution.
    So one thing we might consider is something that, as you 
know, Mr. Chairman, throughout my career in the House and the 
Senate I worked on, disclosure, we have a Schumer box for 
credit card applications. It is simple. Everyone can compare 
what the interest rate is. Everyone can compare the three 
things, and, in fact, Secretary Bernanke just made some 
changes. We ought to have a similar box, a similar Schumer box, 
for loan application packages so that people can understand and 
compare. And if the college says do this one but you can look 
at another private loan and it is cheaper, you will be able to 
see it quickly and easily, and you do not have to hire a Ph.D. 
in mathematics to figure out which loan is cheaper, because it 
is not as cut-and-dried as you might be.
    So I would hope, Mr. Chairman, one of the things we can 
do--and I know under your capable leadership we will pursue 
every aspect that this Committee has jurisdiction on in this--
is look at disclosure, make sure it is simple and fair. Make 
sure prospective loan applicants can just compare the basic 
programs and see how much they pay, without much duress, and 
making that sort of like we did in credit cards in a simple 
box-like form on every application I think would be a good 
start.
    With that, I want to thank the Attorney General for being 
here again.
    Chairman Dodd. Thank you, Senator Schumer, very, very much, 
and thank you for your statement.
    Mr. Attorney General, welcome. Thank you for being with us. 
We will include your statement and any supporting evidence or 
documents you think would be worthwhile for the Committee to 
have as well, and that will be true of all of our witnesses. Go 
ahead and proceed.

 STATEMENT OF ANDREW M. CUOMO, ATTORNEY GENERAL, STATE OF NEW 
                              YORK

    Mr. Cuomo. Thank you very much. First, it is my true honor 
to be introduced by Senator Schumer. He is a great U.S. 
Senator, but he is a New York treasure, and we take special 
pride in watching the great work the Senator is doing. I have 
had the good fortune to work with him for many years, and it is 
a true pleasure to work with him on this very, very important 
issue.
    Chairman Dodd and Ranking Member Shelby, it is a pleasure 
to be back before the Committee. As you mentioned, I was HUD 
Secretary so I spent 8 years testifying before the Committee. 
The chair does not seem as warm as it was when I sat in it as 
HUD Secretary. So it is a pleasure to be back. And as the 
Members of the Committee have pointed out, it is a very, very 
important issue indeed. It affects families all across the 
United States. It is one of the most precious assets that we 
are trying to protect. And I believe in this case with the 
student loan issue, Government has really hit students and 
their families with a real one-two punch.
    First, as has been pointed out, Government student aid has 
not even come close to keeping pace with the rising cost of 
college. If a student or their family cannot self-finance this 
enormous cost, they must enter the private loan market.
    The second punch lands when the Federal Government fails to 
police that marketplace. After pushing students into the arms 
of private lenders, the Federal Government has failed to ensure 
that those lenders operate ethically and legally and has 
allowed students to be victimized.
    There has been much discussion about the Department of 
Education's failure to police these rampant abuses. If 
jurisdiction is the issue, then where were the FTC and the OCC 
and the FDIC? In my opinion, it is a double debacle of 
Government failure, an alphabet soup of acronyms that have 
failed to do their jobs.
    The private loan arena is growing exponentially. It is now 
over 20 percent of the market. Why? Because that is where the 
money is. Private loans are big business. Let me give you an 
example of the high cost of these private loans. One private 
lender, for example, markets private student loans at interest 
rates as low as 7 percent, yet over 40 percent of its loans are 
at interest rates of 10 to 16 percent. Some loans go as high as 
19 percent. Only 17 percent of the lender's loans are actually 
at rates between 6 and 8 percent. And let us not forget that 
the interest rates on these private loans are variable, meaning 
they may significantly increase over time.
    I urge this Committee to ask a very simple question to the 
private lenders: What are your rates and at what colleges? I 
think you will be surprised by the answer.
    The worst practices we have seen in the college loan 
investigation came out of this sector of the student loan 
business. It is the Wild West of the college loan business. 
Most of the troublesome activities that schools and lenders 
have engaged in focus on what is called ``preferred lender 
lists.'' These are the schools' lists of recommended lenders. 
The benefits to being on a preferred lender list are powerful. 
As Senator Schumer mentioned, 90 percent of the students follow 
the recommendation of the school; 90 percent of the students 
take one of the ``preferred lenders.'' Why? Because the 
students trust their schools. This is not a normal consumer 
transaction. When the school recommends a preferred lender, it 
carries significant weight in the recommendation. And the worst 
practices and inducements offered by lenders are about getting 
on these preferred lists in the private loan arena.
    Let me describe some of the worst practices we have seen in 
this area.
    Revenue sharing, and we believe this is the most egregious 
practice that we have found. This practice was exclusive to the 
private loan sector because it is specifically illegal in 
respect to Federal loans but not in private loans. In revenue-
sharing arrangements, the lender pays the school a set 
percentage of the student loan volume. These revenue-sharing 
arrangements are essentially undisclosed loan brokerage 
schemes. In my opinion, they are no better than illegal 
kickback arrangements found in other industries and they should 
be banned.
    Perks to school financial aid officers--expensive meals, 
travel to attractive locations, conferences in attractive 
locations, tickets to entertainment events, honoraria to serve 
on lender advisory boards. In some instances, financial aid 
officers even held stock in the lending companies that they 
were recommending to students.
    We have also found numerous other benefits to schools, 
including lender-funded printing of materials, lender-run call 
centers, co-branding of lender materials using the school's 
logo, improper use of sweepstakes to get students to take 
loans, and leveraging of opportunity loans.
    There are also significant rate disclosure issues, as 
Senator Schumer points out. Amazingly, although lenders 
advertise their ``as low as'' rates, students often do not get 
the actual rate until the time the loan is being signed up. 
Financial aid officers who do not even know what the rate is 
going to be suggest preferred lenders without knowing the 
rates.
    How did this happen? Because the Department of Education 
claims that they were unable to regulate this sector, and 
because the Department of Education did not refer the problems 
to the Federal banking and consumer regulators, such as FDIC, 
Federal Reserve, OCC, OTS, as well as the FTC.
    The Federal banking regulators, by the way, could have 
addressed the problem without any referral, but they did not. 
Interestingly, while all this has occurred, my office has still 
not heard from a single Federal regulator. Even more 
interesting, I believe, is that all the actions we brought in 
the Attorney General's office and other Attorneys General are 
bringing all across the country could have been brought by the 
OCC or the FTC if they wanted to bring these actions.
    The good news is that as my office has exposed these 
illegal practices, consumers and the industry have heard the 
problems, and they are responding. Consumers are demanding 
reform, and schools and lenders are actually willing to change 
course and set a new industry standard. To that end, we have 
entered into numerous settlement agreements with seven major 
lenders across the country, all from the private loan sector, 
and 25 schools in which they adopted a new College Code of 
Conduct. And this is before the Federal Government has even 
acted.
    So where are the Federal regulators? Well, just last week, 
the Department of Education issued new proposed regulations in 
the spirit of addressing this problem. These regulations, 
however, are still inadequate, in my opinion. They still allow 
some perks to be dangled before financial aid officers, and 
they do not make it clear that when a school picks a preferred 
lender, that decision should be in the best interest of the 
student, period. We passed a law in the State of New York 
called SLATE, which would do just this. But I believe in the 
Department of Education rules, there is still a gaping hole.
    Finally, the regulations do not and, according to the 
Department of Education, cannot extend the Department's 
supervision to the private loan sector. This is not a defense. 
If the Department of Education cannot regulate the private loan 
market, then why not refer these actions to the appropriate 
banking and consumer protection regulators, such as the FDIC, 
the Federal Reserve, OCC, OTS, as well as the FTC? And why 
can't the Federal banking regulators do their job unprompted?
    In a nutshell, we suggest increasing the Federal student 
aid to keep pace with the cost of college and to having the 
Federal Government perform its function as a regulator and 
protector of the American consumer. The Department of Education 
was asleep at the switch, but so were the banking regulators, 
who must now also awake and act. This is, as the Committee has 
pointed out, a far greater than purely economic issue. It is a 
moral issue. It is more than just dollars and cents. If we 
believe in the American dream of higher education for all its 
children, then we must do far better. We must ensure that the 
students can afford the dream without becoming enslaved in a 
nightmare of long-term debt.
    The good news is I believe we have an opportunity here, Mr. 
Chairman. We have disclosed the problem. We have disclosed the 
solutions. Students are crying out for help. Colleges and 
lenders are saying they are ready to reform. We just need the 
political will now for Government to act, and hopefully with 
the leadership of this Committee we will.
    It is my pleasure to be before you, and anything I can do 
to be of service, I will.
    Chairman Dodd. Well, again, congratulations on your fine 
work in this area, and actually you end on a good, encouraging 
note as well. I was delighted to hear and read the other day 
about a number of the lenders as well as the institutions 
stepping up and offering to accept certain guidelines. Our 
intention would be here as well to take a look at clearly what 
we might be able to do legislatively and try and marry that 
with the Higher Education Act moving forward so we can 
complement the efforts there that need to be practiced.
    Senator Shelby and I were mentioning here something that I 
presume you are aware of. In fact, you may have mentioned it 
already, but under the Real Estate Settlement Procedures Act, 
RESPA, which you are very familiar with, they prohibit 
kickbacks under the law in the mortgage industry. And I guess 
the simple question I would ask is: Shouldn't a similar 
provision be included when it comes to students loans?
    Mr. Cuomo. Mr. Chairman, and as Ranking Member Shelby 
knows, it is a very interesting parallel to me. The student 
loans, I think, at one time were much smaller in terms of 
volume than a home mortgage, so they never received the same 
level of scrutiny or regulation. Student loans now rival home 
mortgages. In some families, the student loan indebtedness is 
higher than the home mortgage. But if you look at the way we 
regulate the home mortgage industry--the disclosure, the 
transparency, the definition of relationships--it is not even 
close. The home mortgage transaction is a much safer, better 
regulated, consumer-friendly transaction than the student loan 
industry. RESPA, the RESPA laws, the disclosure of the role 
that you are serving, disclosure of fees, disclosure of 
kickbacks, is a much more protected loan system than the 
student loan system. And I think if we just replicate what we 
did in the home mortgage system, we would greatly enhance the 
student loan system and the protections for consumers.
    Chairman Dodd. You know, let me draw upon your earlier 
experience as well. I could not help but think, in anticipation 
of your presence here today, we have had a lot of discussion 
over the years, certainly during your tenure at HUD, about 
redlining in a sense, where entire neighborhoods and so forth 
would be treated differently than others based on the 
assumption that there were going to be higher default rates in 
those communities or parts of those communities.
    One of the concerns I have here is that we are looking at, 
in some cases here, anyway--and I would like you to comment on 
this--that institutions are being sort of in effect redlined 
when it comes to student loans based on the economic status of 
the parents or the families of the children who attend these 
institutions, rather than looking as to whether or not the 
individual student is going to be in a position to meet the 
obligations under the loan at all.
    Tell me what you discovered or what you are finding in 
regard to that and what recommendation you have. We are going 
to have witnesses here this morning from some schools that I 
suspect--I do not know this, but I suspect that overall the 
financial status of the families there are going to be less 
than they would be at some of the Ivy League schools in some 
cases, and whether or not those students ought to be 
discriminated against based on the fact that they come from 
families that are less well off and thus are denied the 
opportunity to get some of these loans.
    Mr. Cuomo. Mr. Chairman, it is an excellent point, and I 
think it is a helpful parallel to remember the home financing 
system, the mortgage system, when we are thinking about student 
loans. And you will see on the student loan side that 
competition is nowhere near as productive, the disclosure, the 
transparency, the fees, the relationships are nowhere near as 
transparent and clear to the consumer. And we just--and I want 
to be careful what I say because we have recently commenced an 
investigation into exactly what you have just inquired about--
the underwriting of these loans. And on the home finance side, 
the redlining suggested that by virtue of just being in a 
geographic area, the borrower may be put in a different 
situation. And on the home finance side, the mortgage side, we 
are familiar with what criteria are allowed in underwriting and 
what are not, what are the civil rights ramifications of using 
certain criteria in mortgage underwriting.
    We are now looking at the same on the student loan side. 
What criteria are they using in doing the underwriting of 
student loans? Parental income in the case where the parents 
are actually signing or co-signing the loan. Student income, 
student creditworthiness.
    How about the school that you attend? And are different 
schools weighted differently in the underwriting criteria? If I 
go to Harvard, is that one score versus going to a public 
school? If I go to a historically black college, how do you 
weigh that, if at all, in the underwriting criteria?
    And we are investigating that now in the Attorney General's 
office. Of course, a financial institution has a right to make 
the determination as to creditworthiness and scoring and FICO 
scores, et cetera. But there are also civil rights and legal 
ramifications to what criteria they are counting, and that is 
what we are now looking at.
    Chairman Dodd. Well, good. I encourage you to do that, and 
we want to take a look at that as well. In fact, I will raise 
that issue with some of the witnesses who will come after you.
    Last, before turning to Senator Shelby, you mentioned here 
you have not heard back from any Federal agencies at all. That 
is disturbing to me in light of all the news around this and 
the obligation here, at least one would think, the interest 
being raised about what either existing law would allow Federal 
agencies to engage in, what practices they could examine, and 
where there may be a legitimate area even by regulation or by 
statute to expand our involvement.
    Expand on that a little bit further. You have heard from 
none of these agencies. You mentioned the FTC. Who else would 
you have assumed to have heard from? And what other Federal 
agencies do you think should be stepping up or at least 
expressing some interest in this matter?
    Mr. Cuomo. Well, Mr. Chairman, first, my premise is that 
the actions that we brought, the actions that other Attorneys 
General are bringing, they could have all been brought by the 
Federal regulators. My reading of the Federal Trade Commission 
Act clearly speaks to jurisdiction to protect consumers in 
unfair transactions, deceptive practices. It is what the FTC 
could be doing. I believe the FDIC also has jurisdiction, and 
the OCC. And we have heard from none of those agencies, not 
even inquiring, and a lot of the actions we have brought are 
involving Federal institutions.
    Chairman Dodd. Have you communicated with any of them at 
all yourself, any correspondence or any inquiries from your 
office to theirs, or just not hearing back?
    Mr. Cuomo. We have been communicating with the Department 
of Education, but we are now going to be contacting the Federal 
regulators also, because it is ironic in some ways, there is a 
separate discussion on the issue of preemption where the 
Federal regulatory argument is you do not need these State AGs 
doing consumer protection because the Federal regulatory 
agencies already have that legal jurisdiction and that mandate, 
so why confuse it with these State Attorneys General running 
around?
    Well, if that is the theoretical position--and I believe it 
is a reading of the law. The FTC could have brought these 
actions. But they did not. Why didn't you? And even when you 
are on notice, why didn't you? And even when the Department of 
Education had all sorts of information and Inspector General 
reports about these circumstances, why didn't you act? And if 
you are not going to act, well, then, why not allow the AGs 
across the country to act and fill a vacuum when you are 
leaving it? And it is clear that there are voids and there are 
vacuums.
    So I believe they have the jurisdiction. I believe they did 
not exercise it. I believe that from the Federal Government's 
point of view, this is not the situation by the old expression 
where the left hand did not know what the right hand was doing. 
I think that it is a situation where the left hand did not know 
what the right hand was not doing. If the Department of 
Education cannot do it and they do not have jurisdiction, then 
the banking regulators should have been doing it.
    Chairman Dodd. Thanks very much.
    Senator Shelby.
    Senator Shelby. Attorney General Cuomo, we mentioned RESPA 
a minute ago. You know a lot about it. You served as HUD 
Secretary. We dealt with you. Senator Allard was very involved 
in this and, Senator Dodd will recall, in stopping that 
proposed regulation change where there would not be full 
disclosure of where fees went and so forth. They could lump 
things together and they could do different things, and Senator 
Allard was very involved when he was Chairman of the 
Subcommittee in that area then.
    Some of us thought, my gosh, why do you want to create 
something and not have full disclosure? What we tried to do, as 
I understand, we tried to create conditions in Government, make 
public policy where the public, the consumer, will know what 
they are getting to try to eliminate conflicts, and I commend 
you for what--and people that are getting kickbacks in one form 
or another. They are never called kickbacks, but, you know, we 
know what--and if we can do this and you are in the forefront 
of it, I think it is for the good. But the average person needs 
a level playing field.
    I want to ask you this. We deal with the banking 
regulations here and jurisdiction, Senator Dodd. The Truth in 
Lending Act presently governs most student lending. Is this law 
appropriately tailored for this kind of lending, in your 
judgment? In other words, does it work better for, say, credit 
cards than private student loans or so forth? You understand 
what I am getting at.
    Mr. Cuomo. Yes, I do.
    Senator Shelby. In other words, is this something that we 
need to look at from this perspective on the Banking Committee?
    Mr. Cuomo. It is a good question, Senator. I believe this 
is not a case where you need new law and new regulations to 
give the Federal Government the authority that they do not 
have. I believe they had the authority. I believe they did not 
exercise it. I believe it would be appropriate to spur them to 
act or clarify the law or the regulation. But I do not believe 
it is a question of creating new jurisdiction----
    Senator Shelby. They do not need any new laws. They just 
need more action.
    Mr. Cuomo. They need more action.
    Senator Shelby. OK.
    Mr. Cuomo. And when you compare this, Senator, to the 
conversations we have had on RESPA and all those conversations 
about disclosure, the lack of disclosure here, it is not even a 
comparable conversation. We have disclosure on the mortgage 
side that has gone so far, is so protective, that is where I 
come up with the expression this is the ``Wild West'' compared 
to the mortgage side. You have colleges making recommendations, 
90 percent of the students are following them because it is not 
even a normal marketplace transaction. People believe the 
school.
    Senator Shelby. And people are making money off of those 
recommendations.
    Mr. Cuomo. They are making money. They were revenue sharing 
as they were getting a commission. It was undisclosed. It was a 
significant amount of money. We did a settlement with one 
school where we made them return the commissions, $500 per 
student. None of this would be close to legal, I am----
    Senator Shelby. Didn't some of them have stock in some of 
the deals, too?
    Mr. Cuomo. Some of the financial aid officers actually had 
stock. There is no competition in the industry. Once you are on 
the preferred list because of your relationship, you are on the 
preferred list. And no one else can get on that preferred list, 
so you are not even allowing the marketplace to work where they 
could compete against each other, get the rates down, so the 
students would have the benefit of the competition.
    Senator Shelby. Mr. Attorney General, it would be helpful 
for us here in our oversight if you could share with us any 
specific instances where lenders have violated Federal banking 
laws so that we can focus our oversight efforts? As you said, 
the laws are there. It is a question of enforcing the laws. The 
regulators and others are supposed to enforce the laws. We are 
going to do our oversight, but you can help us in that regard.
    Mr. Cuomo. It would be my pleasure, Senator, but I do not 
believe----
    Senator Shelby. If you would furnish this for the record, 
and our staff would be----
    Mr. Cuomo. It would be my pleasure. But just as a general 
statement, Senator Shelby, I do not believe there is an action 
that I have taken that the Federal regulators could not have 
taken.
    Senator Shelby. OK. Thank you.
    Thank you, Mr. Chairman.
    Chairman Dodd. Yes, Senator Tester.
    Senator Tester. Yes, thank you, Mr. Chairman. I want to 
thank Ranking Member Shelby for his questions because I think 
whether we have to change the policy or not or whether it is 
ineptness in the bureaucracy I think are important points to 
make.
    I would ask you, Attorney General Cuomo, why you think that 
they did turn a blind eye to this issue of consumer protection 
for our young folks. But my guess is it would just be 
supposition, unless you know.
    Mr. Cuomo. Senator, it is an interesting question, and the 
evolution of this situation is interesting. This market has 
grown very quickly. The rate of growth on this private loan 
market--which has really been established to fill this void. 
The college costs went up. The Government student loan programs 
did not go up. You came up with a gap. Someone had to fill that 
gap. The private loan market expanded very rapidly to fill 
that, with very little specific regulation. So then the market 
overheated, the market competed, and it became a situation 
where everyone was being entrepreneurial, and they were pushing 
the envelope, in my opinion. And one of the lines I have heard 
over and over again is, ``Well, everyone was doing it.'' So 
since your competition was offering a certain perk, you had to 
offer a better perk if you wanted to compete. And that fed on 
itself, and the regulators did not step in.
    In that case, it is a classic situation where an overheated 
private market without appropriate governmental regulation can 
abuse consumers, and it did.
    Senator Tester. How did you find out about--who gave you 
the information by which you took the initiative to find out 
what the heck is going on in this marketplace?
    Mr. Cuomo. Well, you know, Senator, I wish I could come and 
say that my office was prophetic on this. Actually, the issue 
has been out there for quite some time, and there have been 
congressional sources that have been looking at it; other AGs 
have been looking at it.
    Senator Tester. So it is something the bureaucracy should 
have known about and did probably know about.
    Mr. Cuomo. Oh, yes. No, there was no secret here.
    Senator Tester. OK. I am just curious. Your best guess, the 
percentage of higher education, private and public, that are 
doing the revenue sharing and the perks and, you know, a lot of 
stuff that is not quite square, do you think it is all of them?
    Mr. Cuomo. On the private loan side, it is rampant, because 
you almost had to, if you were going to compete. If I am a 
private loan officer and I am offering a financial aid officer 
a conference in the Bahamas, well, then my competition is going 
to have to do something else. If I am offering the school 1 
percent of the loan volume, then the competition is going to 
have to work against that bid. And that fed on itself, and it 
overheated, and no regulator came in and said, ``Slow down. Let 
us look at the law here.''
    Senator Tester. Well, I just want to make just a final 
comment. I really appreciate your work on this issue, and I 
appreciate your testimony here today to bring it to our light, 
and hopefully that will not be the last we hear about this 
issue, and I am sure it will not. Thank you, Attorney General 
Cuomo.
    Mr. Cuomo. Thank you, Senator, for your kindness.
    Senator Tester. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you.
    Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    The Federal Reserve is currently undergoing an examination 
of Regulation Z, which implements the Truth in Lending Act, and 
student loans fall under the Truth in Lending Act. What 
regulation do you think is necessary over and above what is 
provided in the Truth in Lending Act now?
    Mr. Cuomo. I think you could provide clarity or direction 
on how those current regulations apply to student loans: no 
revenue sharing, no undisclosed kickback arrangements, open 
competition. If the school is putting together a preferred 
lender list and you know the students are in a position of 
reliance on that list, then the essence of the word 
``preferred'' means preferred by the students, not preferred by 
the school. That is what ``preferred'' means in that context, 
that the preferred list should be in the best interest of the 
students, not in the best interest of the school.
    I do not really believe it is a question of new laws or new 
jurisdiction. If you wanted to clarify how those regulations 
pertain to this area, I think that would be appropriate.
    Senator Allard. Do you believe that this can be 
accomplished under the Fed's existing authority?
    Mr. Cuomo. Yes, sir.
    Senator Allard. Or do you think there is a need for new 
legislation now?
    Mr. Cuomo. Well, I think because of the inaction, there is 
a need for legislation, direction. Thinking back to my days as 
HUD Secretary, there were a number of ways the Senate could 
communicate its desire to me. It happened in this room many 
times. Sometimes I got a law passed. Sometimes I got a letter. 
Sometimes I got a phone call. But I think the--I do not think 
it was a question of additional jurisdiction. Legislation that 
would clarify and specifically apply the current Federal 
jurisdiction to student loans either through the Truth in 
Lending Act or through the deceptive practice FTC jurisdiction.
    Senator Allard. Now, students spend a good deal of time 
searching out a university or college that they want to go to. 
Is there anything that we need to do that would give them more 
information when they are seeking out a loan other than the 
disclosure part from the university when they put them on the 
preferred list? Anything beyond--it seems that most of your 
testimony is just directed to the school and having them--what 
happens when they get it on a preferred list? Is there anything 
over and above that other than what is required by Truth in 
Lending that we could do to help the student be a better 
shopper, somewhat in the manner in which they are out there 
shopping for the university they want to go to?
    Mr. Cuomo. Senator, that is what we are working to do in my 
office. We are going down two tracks:
    No. 1, we are trying to inform high school graduates who 
are planning to attend college and their parents, educating 
them as to the maze of options they face, because as Senator 
Schumer said, it is confusing. It is confusing for me to try to 
understand all these programs and all these options. So we are 
undertaking an education effort for high school graduates and 
their families here. Here are your options: Stafford loan, PLUS 
loan, private loan. We are also operating a website and an 
information hotline where people can call in and say here is my 
situation, here is my question, and they can get an objective 
response.
    Incidentally, some schools operate an information hotline, 
and you could call a school, a financial aid office, think you 
are talking to the financial aid office, but you are actually 
talking to a lender who mans that call-in center for the 
school, and you would never know it. You wind up taking that 
loan because that is how the school financial aid officer 
suggested it. But I believe there is an education effort for 
high school graduates.
    The second prong, stop the scams that are misleading them. 
At the top of that list is the ``preferred lender'' list, 
revenue sharing, undisclosed kickbacks and commissions--
stopping the scams which are now affecting them. We are trying 
to do both.
    Senator Allard. Is it possible a diligent student today and 
their parents, is it possible for them under current law to get 
the total cost of that loan?
    Mr. Cuomo. You can put together a package of loans that can 
cover the total cost, if you are creditworthy, if you can--if 
you qualify for the loan, if you are willing to sign the loan.
    Senator Allard. My question for comparison purpose, you 
know, they can go to several lenders and say, OK, here is the 
loan, here are the fees that we request, here is the payment 
schedule, and you have three or four lenders out here. Is there 
enough information that is generally provided for students if 
they are diligent to be able to make those comparisons between 
three and four different loans, loan providers if they would go 
to them and ask the total cost of that loan?
    Mr. Cuomo. It is theoretically possible. I would argue it 
is practically impossible. Trying to determine what your 
interest rate would be on a private loan, you often do not get 
that number, the interest rate that you are going to pay, until 
you are virtually signing the agreement. So it is very hard to 
comparison shop where you can go to one website or one source 
and price different loans. It is extraordinarily hard, if not 
impossible.
    Senator Allard. I think my time has expired here, Mr. 
Chairman. Thank you.
    Chairman Dodd. Well, thank you very much, Senator.
    Senator Casey.
    Senator Casey. Mr. Chairman, thank you.
    Attorney General Cuomo, thank you again for your testimony. 
I wanted to direct your attention to two areas: one is the Code 
of Conduct, and the second is the question of oversight.
    I noticed in your testimony--and you had spoken to this 
directly in your written testimony--that the Code of Conduct 
that you entered into with these institutions covered, I guess, 
four or five, at least in terms of prohibitions: gifts, trips, 
the kickback issue, as well as the call centers. In other 
words, these schools agreed to do this, and it became, in 
essence, voluntary.
    The question I have for you--and I am thinking of my own 
experience as a State official, a State elected official, where 
we had a code of conduct in the department that I ran, the 
Auditor General's Department, and we would actually have 
employees sign it, which kind of conveyed a sense of commitment 
and seriousness. In that instance, it was mandatory because I 
could make it mandatory.
    Do you think it should be kind of a case-by-case or 
institution-by-institution decision that they enter into an 
agreement with your office or a similar office in various 
States? Or do you think it should be somewhat made mandatory 
either at the State or the Federal level?
    Mr. Cuomo. Senator, I believe it should be mandatory. I 
think it should be a Federal directive, Federal regulation, 
Federal piece of legislation, whatever vehicle you would deem 
appropriate.
    We have passed a law in the State of New York that makes it 
mandatory in the State of New York. So our Code of Conduct is 
the law of the land in the State of New York. It applies to 
every college, every lender doing business in the State. That 
is one State. I would argue that same law, through whatever the 
appropriate Federal vehicle, become the Federal law of the 
land.
    Also, Senator, we have signed up 25 schools. We have signed 
up seven of the largest lenders. In many ways, we are getting 
there anyway. It is now a function of settlements on specific 
actions, and that is how we have gotten to 25 schools. But we 
have the seven lenders; we have the top five largest lenders in 
the country who have already agreed.
    So I believe we are getting there, and the marketplace is 
demanding that we get there. Students are demanding that we are 
getting there. We have been trying to inform students that when 
you go to the school, ask your school, ``Have you signed on to 
the Code of Conduct? And if not, why not?'' When you go to shop 
a loan, ask the lender, ``Have you agreed to the Code of 
Conduct? If not, why not?''
    But you can make this the law of the land. You could take 
this reform that the marketplace is already accepting. If this 
was impossible, Senator, we would have known about it by now. 
If it was impossible, the largest lenders in the United States 
would not have signed on to the code. Some of the largest 
schools in the country would not have signed on to the code. 
They are telling you they can do it. Since they can do it, with 
the appropriate Federal action it will become the law of the 
land. It hurts no one. The lenders will still do business. I 
argue that it is going to be better for the lender's business. 
The students will be protected; the schools will be protected.
    Senator Casey. It became the law in New York when?
    Mr. Cuomo. Several weeks back.
    Senator Casey. OK, just this year. Have any other States 
done anything similar to this in terms of passing this law?
    Mr. Cuomo. No.
    Senator Casey. OK.
    Mr. Cuomo. New York State passed the law. Many of these 
investigations have come out of New York, have been pushed by 
my office. We drafted a piece of legislation which just takes 
the Code of Conduct that the lenders are signing and schools 
are signing, takes that Code of Conduct, made it a piece of 
State legislation. That State legislation I think is very 
similar to the sunshine proposal, sunshine law proposal in the 
Congress, which would take a lot of the same concepts of the 
Code of Conduct and make it Federal law.
    Senator Casey. My second question--and maybe more than one, 
but under the heading of oversight, you said a couple of 
times--and I wanted to make sure I got this right--that all the 
actions you took as the Attorney General of New York could have 
been taken or similar actions could have been taken by FTC, 
OCC, and FDIC, those three at least?
    Mr. Cuomo. Yes. And, Senator, as you heard, before your 
time here I was in this seat as HUD Secretary. I believe in the 
Federal Government, and I believe in the authority and the 
ability of the Federal Government. I am now a State official. I 
really believe this is better handled by the Federal 
Government. This should not be up to a State Attorney General. 
This should not be one State's law where, if you happen to be a 
New York student, you are going to have this level of 
protection, but if you are Connecticut student, you do not, or 
if you are a Pennsylvania student, you do not.
    I believe this is the place where the Federal Government 
can and should act, and I believe they already had the 
jurisdiction. They chose not to exercise it. Omission or 
commission. But I do not believe there is a single action I 
brought that the Federal regulators could not have brought if 
they were attentive.
    Senator Casey. And in light of your experience, you know 
what being called before a Committee can do. You prepare for 
it. You are cognizant of what the oversight means to you, and I 
think that stands to reason.
    I will not ask you to comment on this. You can if you want, 
but I think one thing we should consider is bringing some of 
these agencies in front of this Committee to ask them why they 
were not taking such actions, and I think that is something the 
Committee should consider. And, of course, when and if that 
happens, we would ask you to help us prepare the questions.
    Mr. Cuomo. It would be my pleasure, Senator.
    Senator Casey. Thank you.
    Mr. Cuomo. The world turns, Mr. Chairman.
    Chairman Dodd. I was going to say, the idea of a former 
Cabinet Secretary preparing questions for other Cabinet 
people----
    Mr. Cuomo. Oh, I know the tough ones, Mr. Chairman.
    [Laughter.]
    Chairman Dodd. Ones we never asked you when you were in 
that chair.
    Senator Shelby. I think he was asked a few.
    Chairman Dodd. Senator Reed.
    Senator Reed. Thank you, Mr. Chairman, and I want to 
commend you, Attorney General, for your very visionary and 
aggressive efforts in this regard. You have saved lots of 
families a lot of money that is desperately needed for college 
education, so thank you for that.
    Mr. Cuomo. Thank you, Senator.
    Senator Reed. Do you think that the authority exists today 
to clearly delineate and label so that there is no confusion a 
Federal loan versus a private loan? And should that be done? Is 
that a first step?
    Mr. Cuomo. First, Senator, it is a pleasure to be before 
you once again.
    I believe the distinction between the two loans is clear. I 
think what practices are allowed under each is unclear. The 
revenue sharing we are talking about, that is not a question of 
a lack of clarity. Revenue sharing is illegal under the Federal 
loan program. I believe it is illegal under the private loan 
program, but that is a possible area of lack of clarity.
    Senator Reed. So that it would be helpful, either through 
regulatory guidance or through legislation, to clarify that the 
revenue sharing is not permissible in the private loan field? 
Is that your view?
    Mr. Cuomo. Yes. The Department of Education proposed new 
regulations last week that would only apply to the Federal loan 
side. They say they have no jurisdiction on the private loan 
side. But all the wrongs that they are trying to right--which I 
would argue too little, too late, but they now have at least 
proposed regulations--that does not apply to the private loan 
side.
    Senator Reed. And I understand that our colleague, Senator 
Kennedy, is working on legislation that will closely parallel 
the Code of Conduct, and Senator Dodd and I and others on the 
Committee will be involved, we think next week, in the Higher 
Education Act reauthorization, the beginning of the markup. And 
I would assume that you would encourage us to include those 
provisions in any bill with respect to higher education.
    Mr. Cuomo. Yes, Senator.
    Senator Reed. Well, thank you. Again, Attorney General, 
thank you. You have really gotten off to a very aggressive and 
very productive few months in office. Thank you.
    Mr. Cuomo. Senator, I told the Chairman before I came in, I 
said it is because you taught me well when I was down here, 
Senator. The 8 years I had in the Federal service, sometimes 
being Attorney General seems easy compared to what I went 
through in Washington.
    [Laughter.]
    Chairman Dodd. Well, Mr. Attorney General, we thank you 
very much--I am sorry. I did not see you. Senator Crapo, I 
apologize. I did not see you walk in.
    Senator Crapo. Thank you very much, Mr. Chairman, and, Mr. 
Attorney General, I appreciate having you with us. I am sorry I 
was not here for all of your testimony, but I have reviewed it, 
and one question that I had is: As you have indicated in your 
testimony, we have found that some lenders have been able to 
get on the preferred lender list by paying schools to put them 
on the list or somehow providing an incentive to the school to 
get on the list so that they are presented to the students. Do 
you have any data to indicate whether those institutions at 
that point are able to adjust the interest rates that they 
utilize for their loans because they have made it on to the 
preferred list?
    Mr. Cuomo. I am sorry, Senator. I may----
    Senator Crapo. In other words, are they able to raise, to 
increase the rates of interest that they would otherwise charge 
for their loans by having made it on to the list?
    Mr. Cuomo. Once they get on the list, do they raise their 
rate?
    Senator Crapo. Yes.
    Mr. Cuomo. I am sorry. I am not following the question.
    Senator Crapo. Well, as I understand it----
    Mr. Cuomo. Or are the ones with the lowest rates getting on 
the list?
    Senator Crapo. No, it is the former. The question I have 
is: Is there an ability by an institution that is able to 
successfully get on the list to then charge a higher interest 
rate than it had previously been charging for its loans?
    Mr. Cuomo. Well, Senator, it is not that you get on the 
list necessarily because you have the lowest interest rate.
    Senator Crapo. Right.
    Mr. Cuomo. This is not like an open competition or a 
bidding process. Thinking about it today, it reminds me that I 
had conversations with the Committee about their problems with 
sole-source contracting, and their point was you should have an 
open competition, get the lowest rate for the taxpayer.
    These are akin to sole-source contracts. You wind up on the 
preferred lender list because you had a relationship, because 
you went to the right conference, because you were offering 
revenue sharing to the school, because the financial aid 
officer has stock in your company. It is not that you wind up 
on the list because you won the place on the list necessarily 
because you offered the lowest rate.
    That is one of the problems with these lists. They are not 
encouraging open competition which would drive the interest 
rates down and get the best deals for students. To the extent 
there is competition, it is on perks, it is on what I call 
kickbacks to the schools, it is on personal relationships with 
financial aid officers, but it is not about offering the best 
interest rates to students as a rule.
    Senator Crapo. Now, it is my understanding that you are not 
proposing that we get rid of the list. You are saying that the 
system by which an institution gets on a list should be more 
competitive and, therefore, drive the rates down in the lists 
that are presented to the students.
    Mr. Cuomo. Yes. I believe the school can serve the purpose 
that Senator Allard was referring to, who is going to decipher 
this maze of options and this multitude of lenders. The school 
could say, ``We undertake that service. We are going to do the 
due diligence. We are going to do the research, and then we are 
going to recommend to our student population these are the 
three best lenders, in our opinion, for our school.'' That 
could be a great service. It could be a great service--if they 
undertook that responsibility and if they did it in the best 
interest of the student.
    My problem is they are saying these are the preferred 
lenders. It is often not because of due diligence, because they 
were thinking about the student, because they had a competition 
and brought down the rates. It is preferred by the school in 
actuality, not preferred by the student, and that is deceptive, 
in my opinion.
    Senator Crapo. And do you have a suggestion or an idea as 
to how we could cause that to happen? Obviously, we could pass 
a law or something. Do you think legislation is needed, or do 
you think that some other kind of incentives are needed to 
cause schools to do what you just described?
    Mr. Cuomo. That you would need to do by a regulation or 
clarification or advocacy of one of the agencies to propose a 
regulation that does it or legislation, if nothing else is 
effective, if not always fast.
    Senator Crapo. Do you have any suggestions as to what 
students or families of students could do to obtain the best 
possible loans for college, private loans?
    Mr. Cuomo. We also chatted about this with Senator Allard 
before you came in. The education process that a family or an 
individual has to go through here to be an informed consumer is 
burdensome and tedious because this is a very, very complicated 
transaction. That is why 90 percent of the students tend to be 
taking a preferred lender by the school, because they look at 
the landscape and they say, ``This is complicated. It is hard 
for me to figure out. I will trust my school. I believe in the 
school. That is why I tried to get in. That is why I am paying 
all this money, so I will trust the school.'' Ninety percent 
follow the recommendation of the school.
    So I think that could be a good vetting vehicle, but then 
that vehicle actually has to operate in the best interest of 
the student, which they are not doing. As a matter of fact, 
they are, I believe, taking an undisclosed commission at the 
expense of that student.
    Senator Crapo. All right. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Mr. Attorney General, we thank you once again for joining 
us here. You have made some very good recommendations, and 
Senator Shelby and I will be talking with our colleagues here 
about the best way to proceed on this. And Senator Casey 
suggested--and I think it is an idea we will take into 
consideration--the idea of having actually some of the 
regulators come in to talk about what they believe they have 
the authority to do or not to do in this regard, and to examine 
whether or not some action could be taken. We have the Higher 
Education bill moving along in the other Committee, and my hope 
would be that if there is action to be taken by this Committee, 
we would try to think of doing so at least in conjunction with 
that action at some point either on the floor or whatever. But 
we need to examine this thoroughly and carefully to determine 
whether or not new authority is necessary or just getting the 
institutions to exercise existing authority. And I would be 
very interested to hear what my colleagues have to say about 
that at the appropriate time.
    Senator Shelby. Senator Dodd, I just want to make an 
observation. The laws ought to be uniform if it is a Government 
loan or if it is a private loan. We cannot have one standard 
for one and another standard for the other. I think the 
Attorney General pointed that out, alluded to it several times.
    Mr. Cuomo. And, Senator, if I might, the Department of 
Education just put forth a regulation, which is not perfect but 
it could be improved, that applies to the Federal loans. If 
that same regulation was just applied to the private loans, you 
would have done these students and families a great service.
    Senator Shelby. Yes. Thank you.
    Chairman Dodd. That is what we want to look at here. 
Certainly, my intention would be to insist that happen. The 
question is: Can you do it under existing regulations and 
statutes, or does this Committee and the Congress need to act 
to give these agencies additional authority which they may 
claim they do not have? If that is the case, then I would 
aggressively pursue taking such action. If they can do it 
without it, then my intention would be to pursue them 
aggressively to see that they exercise the authority they have. 
But I think all of us here--I would hope all of us here agree 
that this is a very, very important area of interest. This is a 
critical component of the economic success of this country. If 
you leave the American student behind for a decade, you are 
going to leave this country behind for a century, in my view, 
when it comes to competitiveness in a global marketplace today. 
This is a very, very critical issue not just from an economic 
standpoint and fairness standpoint. Someone mentioned last year 
the number--and I do not know if this is an active number--that 
somewhere between 200,000 and 250,000 students who graduated 
from high school were accepted to a higher institution of 
learning and did not go because of cost.
    If we are losing close to a quarter of a million kids who 
are not going on because they cannot afford to go on, that is a 
frightening statistic to me, not to mention the half million to 
a million students who drop out of school every year. These 
numbers are startling and very troublesome in terms of our 
ability as a Nation to continue to compete effectively in a 
very competitive global marketplace, and the ability for 
students to get on and get that higher education is very 
important to them and their families. It is also important, 
very important, to us as a country.
    Mr. Cuomo. Yes.
    Chairman Dodd. And so beyond just what happens to students 
and their families, as bad as that is, our country will pay an 
awful price indeed if we are pricing education out of the 
market for an awful lot of families in this country, and 
students. That really does great damage to our Nation.
    So we want to move quickly on this, and we will, to try and 
close this gap. But thank you again immensely for your 
leadership.
    Mr. Cuomo. Well stated. My pleasure, Mr. Chairman. Thank 
you.
    Chairman Dodd. Thank you very much.
    We will go now to our second panel here, and I thank them 
for their patience. I am going to call you up and ask you to 
take the witness stand, if you will, and we will move along as 
quickly as we can. I will get back to my list of witnesses here
    [Pause.]
    Chairman Dodd. Well, again, you have already joined us 
here. Well, thank you very much. You are all very quick here 
getting up to the chairs.
    Jonathan Avidan works in Newtown, Pennsylvania, for Calle 
Financial Network, an investment advisory business, is Director 
of Operations. He is a registered representative with NASD, 
attended Boston University School of Management with a B.A. in 
Science in 2004.
    Luke Swarthout works as a higher education associate with 
U.S. PIRG on higher education access and affordability issues. 
He is the author of several reports on student debt and 
financial aid, including ``Paying Back, Not Giving Back: 
Students' Debt Negative Impact on Public Service Career 
Opportunities.''
    Jennifer Pae is the elected president of the United States 
Student Association, the country's oldest and largest national 
student association, representing millions of students 
nationwide. Ms. Pae oversees the national campaign for the 
organization and recently ended her term as the primary student 
negotiator for the Department of Education's Negotiated 
Rulemaking Student Loan Committee. Thank you, Ms. Pae, for 
being with us.
    Sevester Bell is the Director of Student Financial Aid at 
Howard University. Mr. Bell began his career in banking and 
finance as assistant manager of Household Finance Corporation 
after serving 4 years in the United States Marine Corps. He 
began his Howard University career in 1979 as the Assistant 
Director of the University's Office of the Bursar and has 
served in various roles in student aid administration until 
January of 2005, when he was appointed Director of Student 
Financial Services, and we thank you very much, Mr. Bell.
    Peter Tarr joined First Marblehead as general counsel in 
2005, elected Chairman of the Board of Directors in October of 
2005. From 1986 to 2005 he was the senior partner in the 
Corporate Law Department and member of the Executive Committee 
of the law firm of Wilmer, Cutler, Pickering, Hale & Dorr. He 
received his B.A. from Yale, M.A. from Yale Divinity School, 
and J.D. from the University of Virginia, and we thank you very 
much for being with us.
    Tracy Grooms is the Senior Vice President of Student 
Lending at Bank of America. Ms. Grooms joined Student Lending 
in March of 2006 and leads aspects of the business, including 
credit loan organization and student call center capability. 
Tracy Grooms joined the Bank of America in 1983 as a financial 
analyst and has held a variety of positions in the finance 
group, including planning and financial reporting. A graduate 
of the University of South Carolina, Tracy has a degree in 
accounting and holds an MBA from the McColl School at Queens 
University in Charlotte.
    And, last, Barry Goulding has been a Senior Vice President 
and Sales Manager at SLM Corporation since May of 2001, where 
he manages the company's internal lending brands, education 
loan product management, including private credit loans, online 
school solutions, and sales reporting. From 1994 to 1999, Mr. 
Goulding served as Vice President of Education Loan Product 
Management. He was promoted to Assistant Vice President in 
1984. He has his B.S. degree from Carnegie Mellon University.
    We thank all of you. A rather long list here, and I 
apologize for packing you in this tightly along the way. I am 
going to ask each of you to keep your remarks to 5 minutes, if 
you would, and then we will submit your full testimony as part 
of the record and any supporting documents you think are 
worthwhile.
    Let us begin in the order that I introduced you.

             STATEMENT OF JONATHAN AVIDAN, CONSUMER

    Mr. Avidan. Chairman Dodd, Ranking Member Shelby, thank you 
for the opportunity to appear here today to discuss private 
student loan lenders.
    My name is Jonathan Avidan. I am 25 years old, recently 
married and living in Langhorne, Pennsylvania. I attended 
Boston University and graduated in 2004 with a bachelor's 
degree in business Administration. I work for Calle Financial 
Network, an investment advisory business, as its Director of 
Operations.
    My parents, like the majority of middle-class Americans, 
struggled with the enormous challenge of spiraling college 
costs during my first 2 years at Boston University. Prior to my 
junior year, they told me they could not afford to pay my 
tuition anymore. I was faced with a grim choice: go home and 
enroll in my local community college, or stay at Boston 
University. I wish I knew at the time that the choice to stay 
would be the most expensive decision of my life.
    I was able to borrow $18,000 of Government loans at a fixed 
3 percent, but this only covered a fraction of school costs. I 
would be forced to find the vast majority of funds through 
private loans--over $60,000 for the remaining 2 years. I have 
been making payments every month for the past 2 years, but the 
balance has managed to increase to $69,000.
    I was told up front that the original 6.36 percent variable 
interest rate was capped at 10 percent and that it was tied to 
the prime rate. How many 20-year-olds really know what that 
means? The truth was the variable rate was not capped. In fact, 
the rate was the current LIBOR rate plus a margin of 4.85 
percent. The 4.85 percent was derived, at the time, from my 
parent's credit score and our combined creditworthiness. I 
cannot believe that the original terms of the promissory notes 
could not be reevaluated after 5 years. Then I was 20 years old 
and I had no credit history or income. Now I am 25, with a 
flawless credit history and a credit score of over 720 points. 
I deserve a better margin now than I did 5 years ago. Currently 
the rate is 9.92 percent.
    Right now, despite generous and timely raises and my wife's 
income, we are hard pressed to keep up with the combination of 
rate increases and graduated payments. My private student loan 
payments, $250 when I first graduated, have gone up over 200 
percent in the last 24 months. Currently, I am paying $600 a 
month. By April 2009, my payment will be approximately $1000 a 
month. I will not begin to reduce the principal for another 2 
years, and my expected payoff date is November 2024. When it is 
all over and I have paid off all my debt to these lenders, I 
will have paid back close to triple the amount that I borrowed.
    As a new borrower, I purchased a used car for $18,000 at 
10.1 percent interest over 6 years. I find it rather remarkable 
that the rates on my private loans would come so close to the 
percentage rate on my used car. Surely, I am a better risk than 
a 4-year-old sedan.
    Ultimately, my life is completely affected by my private 
student loans. Instead of renting a one-bedroom apartment, my 
wife and I could be taking a mortgage on a house. Instead of 
decades of interest, I could be contributing to an IRA or 
putting money away in a 529 Plan for my children. Instead of 
being forced to work right out of school so I could afford to 
pay my private loans, I could have pursued a graduate degree at 
Wharton, a lifelong dream of mine.
    Our country is supposed to be a country of opportunity for 
anyone that has a dream. In the world we live in today, 
receiving an undergraduate degree is increasingly a 
prerequisite for success. By allowing these companies to 
voraciously apply wide margins to the money they lend, we risk 
crippling a generation with massive debt. These companies have 
taken advantage of an unregulated market and young Americans 
who want to better themselves through higher education.
    Young men and women graduating from colleges around the 
Nation are supposed to strengthen the economy once they enter 
the workforce. But how are we supposed to help the economy when 
we are struggling to help ourselves? I know that I am only one 
voice and one story, but I am sure all of you know that it is 
young people like myself that are the future of this country 
and it is only getting worse.
    So, again, I would like to thank both of you for having me 
here. Thank you.
    Chairman Dodd. Thank you very much.
    Ms. Pae.

  STATEMENT OF JENNIFER PAE, PRESIDENT, UNITED STATES STUDENT 
                          ASSOCIATION

    Ms. Pae. Thank you, Mr. Chairman and Senator Shelby, for 
allowing me to be here today.
    As stated earlier, private student loans are the fastest-
growing and most profitable part of the student loan industry. 
Ten years ago, only 5 percent of total education loan volume 
was in private loans. Today they represent 20 percent of what 
all students and their families borrow to pay for school. With 
the rising cost of tuition and fees and the lack of sufficient 
Federal and State grant aid for low- to middle-income students 
and families, the private loan industry has grown exponentially 
off the backs of those who are the most vulnerable.
    Private loans have higher interest rates, fewer borrower 
benefits, and often saddle students with larger debt levels 
than Federal loans. Nearly two-thirds of the 15 million college 
students graduate in debt that averages nearly $20,000. This 
number is only expected to increase without Congress taking 
action to protect student borrowers from unmanageable levels of 
debt.
    Students are continually inundated with solicitations from 
lenders through direct mail, the Internet, and savvy 
advertising campaigns promising to guarantee up to $50,000 in 
just seconds. From letters that are made to look like official 
documents from the Federal Government or the Department of 
Education to co-branded loans with colleges and universities, 
most borrowers cannot distinguish differences between loans 
that are helpful and those that are harmful.
    Not only are students faced with skyrocketing tuition and 
fees, but they are graduating with high levels of debt that 
force them to put off starting a family, buying a home, 
pursuing careers in public service, and even furthering their 
education. Paul Perry graduated last month with a degree in 
political science and international studies from American 
University and also with a bill for over $75,000--$45,000 of 
which are private loans. Paul will be giving back to a 
community in need through Teach for America this fall and 
unfortunately, like millions of other borrowers, has no idea 
how he will repay such massive debt. Regardless of economic 
backgrounds, from low-income working class families to middle-
income families, students are being forced to rely on private 
loans to fill the gap between available Federal aid and the 
cost of attending college.
    For all of these families, especially first-generation 
college students like myself, a college degree is the best shot 
at future economic security and achieving the American dream. 
Yet college is quickly becoming out of reach for millions of 
students. Instead of America stepping up to the challenge to 
vie in a highly competitive global economy, we are retreating 
by failing to invest in higher education and providing adequate 
protections from the private student loan industry. Every 
qualified student should be able to access higher education 
regardless of their economic status. With student loan debt 
spiraling out of control and the compromised integrity of both 
the Federal and private student loan industry, the need for 
congressional action is more apparent than ever before.
    Last fall, we filed a complaint with the Federal Trade 
Commission against Loan to Learn, a division of EduCap, based 
on their distribution of misleading information relating to 
Federal student loans. Materials provided by Loan to Learn to 
potential customers made numerous deceptive claims designed to 
discourage customers from applying for Federal aid and to make 
the company's loans appear to be a preferable alternative.
    This case highlights an alarming industry practice of 
tricking borrowers into higher-cost private loans before 
exhausting their safer and lower-cost Federal student aid 
options.
    Under current law, borrowers who have fallen victim to 
these deceptive practices have no real legal recourse because 
it is extremely difficult for a borrower to file a claim 
against a private lender. Policymakers need to regulate the 
industry to hold lenders accountable for deceptive marketing 
and lending practices.
    The focus should really be to reduce the need to rely on 
private loans, ensure that private loan borrowing that does 
occur is affordable, and mandate that clear and accurate 
information is presented to student borrowers to allow them to 
make responsible educational financing decisions. We also urge 
Congress to adopt legislative solutions proposed by The Project 
on Student Debt. These solutions include: treat private student 
loans like other consumer debt in bankruptcy so there is a 
safety net for vulnerable borrowers buried in private student 
loan debt; clearly label private student loans as different 
from Federal loans so students understand their options before 
making crucial financial decisions; make it easier to compare 
private student loans and require private lenders to disclose 
in plain English the rates, terms, and conditions of private 
loans when the student or parent receives approval; and to 
protect borrowers who are harmed by conflicts of interest or 
fraud so that students are not caught in a cycle of debt due to 
deceptive practices by lenders or schools.
    In conclusion, we urge Congress to pass legislation that 
regulates the growing private loan industry in order to protect 
the rights of current and future borrowers. The door of higher 
education is closing for millions of Americans under the weight 
of high-cost private loans due to inadequate Federal financial 
aid. Economic insecurity is replacing economic opportunity for 
hard-working college graduates who are confronting spiraling 
debt. By enacting reforms in the private student loan industry, 
we are taking a step toward opening these doors of opportunity.
    Thank you again, and we look forward to working with you to 
be able to address these problems.
    Chairman Dodd. Thank you very much, Ms. Pae.
    Mr. Tarr.

          STATEMENT OF PETER B. TARR, GENERAL COUNSEL,
                  FIRST MARBLEHEAD CORPORATION

    Mr. Tarr. On behalf of First Marblehead, I thank Chairman 
Dodd, Ranking Member Shelby, and the Committee for inviting us 
here to discuss this very important issue.
    First Marblehead provides outsourcing services for private, 
nongovernmental education lending in the United States. Founded 
in 1991, First Marblehead today employs more than 1,000 people 
working primarily in the Boston area.
    First Marblehead helps meet the growing demand for private 
education loans by providing financial institutions with an 
integrated suite of private loan services--from program 
design----
    Chairman Dodd. Come a little closer to the microphone.
    Mr. Tarr. I am sorry. From program design through 
application processing. Over the past 16 years, we have helped 
our lender clients deliver more than 1 million loans, and in 
the process we have assisted more than 600,000 students in the 
pursuit of their educational goals.
    As we have heard this morning, the annual funding gap 
between the cost of education and traditional funding sources 
such as Federal student loans, scholarships, and grants 
continues to widen, and today we estimate that gap at 
traditional 2- and 4-year public and private institutions to be 
$122 billion.
    To address this huge funding gap and to meet the growing 
demand for long-term, supplemental financing for education, 
First Marblehead and other reputable companies have over the 
past 16 years created innovative products that provide 
reasonable, market-based pricing and attractive features for 
borrowers. In the upcoming academic year, we estimate the total 
private education loan market will exceed $20 billion. Today, 
private loan providers are competing vigorously on the basis of 
price, product features, customer service, and borrower 
benefits. The result is better choices for students and their 
families seeking financing options that work best for their 
circumstances.
    Private education loans are funded by financial 
institutions and are not guaranteed against default by the 
Federal Government. Many private education loans have features 
similar to federally guaranteed student loans, including no 
prepayment penalties, in-school payment deferment, and 
forbearance. Many programs also offer borrower rewards for on-
time and electronic payment, as in the Federal programs.
    Because they are not federally guaranteed, the risk of 
default on private education loans is borne by the lender or 
loan holder. This most fundamental difference is a key limiting 
factor as to who might actually qualify for a private student 
loan. Private loan borrowers must typically qualify for the 
loan by meeting certain credit criteria. Not all applicants for 
private loans are approved for the loans. Approximately one-
half of the applicants for First Marblehead-facilitated private 
loans are declined due to insufficient credit. In fact, few if 
any undergraduates can meet our strict underwriting criteria on 
their own, so they enlist their parents or another experienced 
borrower to co-sign the loan. As a result, the ``typical'' 
private loan borrower in the programs we administer is an 
undergraduate student with a 50-year-old parental co-signer 
with an average FICO score in excess of 700. Approximately 80 
percent of the loans we process are co-signed. The remainder 
are generally to older students or non-traditional students--
who have the requisite credit history.
    The interest rates on First Marblehead-facilitated private 
loans are determined by a borrower's credit quality. Again, 
because of the absence of a Federal guarantee, rates are 
typically higher than those on Federal loans. For private loan 
products facilitated by First Marblehead, interest rates are 
based on the London Interbank Borrowing Rate--an 
internationally recognized money rate index. Also, many private 
loans include an origination or guarantee fee which provides a 
reserve against potential loan default. While these may result 
in higher rates than Federal student loans, these rates are in 
most cases better than those offered on credit cards or other 
unsecured debt, which are frequently utilized by students to 
pay some portion of education expenses.
    Private education loans are offered by providers through 
two distinct channels. Historically, most private loans have 
been originated via the school financial aid office, similar to 
how Stafford loans are administered. An increasing percentage 
of private loans are originated directly between the borrower--
typically a student and an adult cosigner--and the loan 
provider. The growing range of product types, features, and 
providers allows borrowers to choose private loan products and 
providers based upon their own personal preferences and 
selection criteria.
    Postsecondary education is a large and highly impactful 
investment for students and families. With the cost of college 
continuing to rise at a rate far exceeding inflation, it is 
critical that students make sound financial decisions in 
determining how to pay for college. No one benefits--not the 
student, the school, the lender, nor First Marblehead--when a 
borrower struggles to repay their private education loan. To 
foster smart borrowing, First Marblehead initiated a borrower 
information program in mid-2006 to encourage students and 
families to carefully consider the full range of opportunities 
available to them.
    Our industry is heavily regulated, and I have listed in my 
prepared remarks the agencies that we are subject to. We are 
also governed by Truth in Lending, Equal Opportunity 
Employment, and Title IV Gramm-Leach-Bliley.
    In closing, First Marblehead thanks the Committee and 
Chairman Dodd for the invitation to testify today. The 
employees of First Marblehead are deeply committed to working 
with our lender clients to provide attractive, high-value 
financial solutions for students and families pursuing their 
educational goals. We firmly support product innovation and the 
objective of making the process of financing higher education 
more efficient, transparent, and understandable for students 
and families.
    Thank you.
    Chairman Dodd. Thank you very much, Mr. Tarr.
    Ms. Grooms.

   STATEMENT OF TRACY GROOMS, SENIOR VICE PRESIDENT, BANK OF 
                            AMERICA

    Ms. Grooms. Good morning, Chairman Dodd, Ranking Member 
Shelby, and staff of the Committee. My name is Tracy Grooms. I 
am Senior Vice President and Student Lending Executive for Bank 
of America.
    Bank of America plays an important role in education 
lending. In 2006, our student lending business made it possible 
for over 630,000 students to attend schools by originating 
approximately $4.6 billion in education loans. We originate 
loans that are federally backed through the Federal Family 
Education Loan Program--called FFELP loans--and we originate 
private education loans, which are not federally backed.
    The bank is optimistic about growth prospects in the 
student lending industry, and private lending in particular. 
The number of people choosing higher education continues to 
grow. The cost of higher education also continues to grow, and 
the availability of grants and lower-cost direct Government or 
FFELP loans has not kept pace.
    Consider, for example, that the average annual cost to 
attend a 4-year public college is almost $13,000, while the 
maximum amount per year of a Government-backed loan is only 
$5,500. As a result, Americans are filling this gap with 
private education loans. Such trends have led Members of this 
Committee to express concern about rising levels of student 
debt.
    We believe individual students' debt levels should be 
manageable for two reasons. First, the bank's overall business 
objective is to serve customers throughout the major financial 
events in their lives--buying that first home, saving for 
retirement, and, yes, saving and providing for children's 
education. Second, industry participants are vigilant in 
managing credit losses resulting from student loans, as 
defaults impact the overall customer experience and margins. 
Accordingly, we seek to ensure consumers receive loans in 
amounts and with terms they can afford.
    The private education loan market has produced affordable 
products with flexible terms. Today, for example, students can 
get unsecured private education loans that: defer all payments 
until the student is out of school and has an opportunity to 
obtain employment; may be repaid over periods as long as 25 
years; and include fair interest rates.
    As part of our marketing, we make students and their 
parents aware of all available options for education financing, 
including grants, lower-interest Government-backed loans, and 
private education loans.
    In sum, the private education loan market serves an 
important consumer need, with Bank of America and lenders 
competing to provide affordable products in appropriate 
amounts.
    In the remaining time I have, I would like to address 
briefly sales practices. At Bank of America, one of our core 
values is ``Doing the right thing.'' Consistent with that 
value, we have several longstanding policies that prohibit 
associates from making improper payments of any kind to 
schools, guarantors, or customers. As a result, Bank of America 
has not provided lavish trips or gifts to financial aid 
officers; Bank of America has not used ``advisory boards'' of 
school representatives; Bank of America has not given stock to 
financial aid officers; and Bank of America has not provided 
staff to operate call centers on behalf of schools or provided 
computer hardware or software to schools.
    Finally, we voluntarily chose to adopt the New York 
Attorney General's Student Loan Code of Conduct as a way of 
leading by example, encouraging others in the industry to 
follow. We will continue to operate our business according to 
the highest business and ethical standards. We are proud to be 
part of the student lending industry. At a time of rising 
education costs, diminishing grants, and federally backed 
financing, private education loans remain a good alternative 
for students and their families.
    Thank you for your time, and I am pleased to answer any 
questions.
    Chairman Dodd. Thank you, Ms. Grooms.
    Mr. Goulding.

 STATEMENT OF BARRY W. GOULDING, SENIOR VICE PRESIDENT, SALLIE 
                              MAE

    Mr. Goulding. Chairman Dodd, Ranking Member Shelby, on 
behalf of Sallie Mae's 12,000 employees, thank you for giving 
us the opportunity to describe how we are helping millions of 
students and families pay for one of the most significant 
investments of a lifetime--a college education.
    We all know that the dramatic rise in college cost has 
outpaced the growth in Federal grants, Federal loans, family 
savings, and family incomes. Students and families face an 
increasing gap between the price tag for college and available 
resources. As a result, many families have been forced to seek 
out other ways to finance college, including private education 
loans. As has been discussed this morning, private education 
loans are regulated, yet we understand that the growth in the 
private education loan market raises important consumer and 
policy questions.
    Consumers, schools, lenders, and policymakers all share a 
common interest in making sure that students have access to 
college, complete their academic programs, and successfully 
transition to the workplace. In an effort to do our part, 
Sallie Mae advises students to minimize their total borrowing 
by tapping into whatever existing resources they have, whether 
it is personal savings or a 529 plan. Our Upromise subsidiary 
manages over $17 billion in 529 college savings plans and 
assists more than 7.5 million members.
    We counsel students on the 1-2-3 Approach to paying for 
college. One, after exhausting personal financial resources, a 
student should tap into free money, such as scholarships and 
grants. Two, if borrowing is necessary after tapping into free 
money, students should take advantage of low-cost Federal 
loans. Three, and only as a last resort, to enable access to 
college students, students should turn to private education 
loans or other consumer lending alternatives.
    Additionally, students should understand how their loans 
work before they undertake any debt. We provide information to 
students about the rates and terms on their loans before, 
during, and after they are in college. And when it comes time 
to pay back loans, borrowers must have access to programs to 
help them manage their debt.
    The financing gap, driven by rising college costs, is what 
has driven the growth in private education loans. To put this 
in perspective, in academic year 2005-06, Sallie Mae originated 
approximately $22 billion in Federal and private loans, 
including $7 billion in private education loans. In fact, even 
though Howard University is a direct lending school, Howard 
borrowers utilized over $10 million of Signature Student loans, 
which are Sallie Mae's private education loans, to help them 
close that gap. We designed our private education loan programs 
to mirror Federal student loan programs in many respects.
    Since many students have little or no income while they are 
in school, we do not require our borrowers to pass an income or 
a debt-to-income test. Like Federal student loans, private 
student loan borrowers can delay making any payments until 6 
months after they complete their studies. While we have been 
successful in mirroring many of the characteristics of the 
Guaranteed Student Loan Program, we cannot mirror Federal rates 
and fees. Without Federal insurance, lenders appropriately 
price private education loans using a risk-based model.
    The bottom line is that lenders take 100 percent of the 
repayment risk on loans made to people with no income, limited 
credit histories, and to people who will not begin to even 
repay their loans for several years. At Sallie Mae, we believe 
that private education loans are an investment in human 
capital. Fortunately, the overwhelming majority of our 
customers are successfully managing their private education 
loan debt, and the median interest rate across our entire $25 
billion in private education loans is prime plus 2.
    As the demand for these products has grown in recent years, 
we have introduced several new enhancements. We expanded our 
disclosures to strongly encourage potential borrowers to max 
out on their Federal student loans before taking out any 
private loans. We believe that the 1-2-3 Approach that I 
mentioned is working. At Sallie Mae, 85 percent of our 
customers only have FFELP loans, and I did bring a sample of 
some of these disclosures that I would request be included in 
the record.
    We created additional safeguards to prevent borrowers from 
inadvertently borrowing more than the cost of attendance. We 
reduced our maximum private loan interest spread and fees. We 
introduced a private loan consolidation program to help 
borrowers lower their monthly payments, and over 75 percent of 
those who have used this program to date have not only lowered 
their monthly payments, they have also lowered their interest 
rates.
    We have launched an online education program to provide 
counseling tools to help borrowers understand debt before they 
ever take out a loan and to manage their debt and to protect 
their credit score.
    In summary, Mr. Chairman, access to private education loans 
is increasingly important and can make the difference as to 
whether or not a student goes to college. At Sallie Mae, we 
will continue to make constructive enhancements, and we look 
forward to working with Congress on this important issue.
    Chairman Dodd. Thank you very much.
    Mr. Bell, thank you for being here.

STATEMENT OF SEVESTER BELL, DIRECTOR OF STUDENT FINANCIAL AID, 
                       HOWARD UNIVERSITY

    Mr. Bell. Chairman Dodd, Ranking Member Shelby, on behalf 
of Howard University, I would like to thank you for the 
invitation to testify during this most important hearing on the 
student loan industry.
    As a participant in the U.S. Department of Education's 
William D. Ford Direct Lending Program, Howard University does 
not accept Federal Stafford loans processed by private lenders. 
Since the university moved to direct lending in 1997, it has 
eliminated the need for Howard students' utilization of private 
lenders as it relates to servicing Federal student loans.
    As a result, the university's cohort default rate was 
reduced from a high of 11.7 to its fiscal year 2005 draft 
cohort default rate of 3.2 percent. For fiscal year 2006, 
Howard University students and parents borrowed nearly $110 
million in Federal direct Stafford and PLUS loans, and almost 
$18 million in non-Federal Stafford loans from private lenders. 
Private loans constituted only 13.8 percent of all student 
loans at Howard University in fiscal year 2006.
    Howard University remains steadfast in ensuring full 
compliance with Federal student aid regulations. In response to 
New York State Attorney General Andrew Cuomo's initial 
inquiries into the private lending industry and its 
relationships with other institutions, Howard University 
immediately clarified its existing policy on private lenders. 
The university's policy on private lenders includes the 
prohibition of a preferred lender list and restricts financial 
aid officer contact with private lenders to only that which is 
necessary to facilitate student loan certifications.
    Financial aid officers are restricted from sitting on 
private lender boards and committees, receiving gifts from 
private lenders, and must disclose any financial interest in 
private lenders or guaranty agencies. In addition, all 
financial aid staff members have signed statements on file 
attesting to their full compliance with university's policy.
    Previously, comparative charts detailing private lending 
interest rates and loan criteria were provided only upon 
request to students. Howard University does not provide nor 
recommend private student loans to those students eligible to 
receive Federal student loans. However, upon inquiry, students 
who may not be eligible for Federal student loans are 
instructed to conduct their own search of private student loans 
which should include comparing loan interest rates, repayment 
terms, deferment and forbearance options, and other loan 
criteria.
    The growth and development of the private educational loan 
industry has increased over the past 4 consecutive years 
despite efforts to decrease our students' overall indebtedness. 
Howard University has continued to experience significant 
growth in the volume of alternative loans processed, from $8 
million in 2003 to nearly $18 million in 2006.
    The popularity in and need for alternative loans are 
centered on four principal reasons. First, students who have 
reached their full eligibility for Federal student loans must 
borrow through an alternative lender to secure funding each 
year. Second, students who have lost their Federal aid 
eligibility due to Satisfactory Academic Progress requirements 
may borrow funds through select alternative lenders who do not 
consider academic progress as a criterion for determining 
eligibility. The third reason relates to students enrolled in 
select graduate and professional programs, such as medicine, 
dentistry, and pharmacy, where students require additional 
funds to offset their direct and indirect expenses, as their 
cost-of-attendance exceeds the maximum annual loan limits 
offered through the Federal programs. Last, doctoral candidates 
in the final stages of their dissertation may be enrolled less 
than half-time; they also would not be eligible considering 
their half-time status.
    In conclusion, Howard University continues to encourage its 
students to first utilize and exhaust all Federal loan sources 
prior to seeking alternative loans. Nevertheless, in many cases 
this advice does not deter them from entering contractual 
agreements within the private loan industry as they present a 
viable, if not the only, resource for students to fund their 
education.
    Chairman Dodd. Thank you very much, Mr. Bell.
    Mr. Swarthout.

STATEMENT OF LUKE SWARTHOUT, HIGHER EDUCATION ADVOCATE, UNITED 
             STATES PUBLIC INTEREST RESEARCH GROUP

    Mr. Swarthout. Chairman Dodd, Ranking Member Shelby, thank 
you very much for convening the hearing. My name is Luke 
Swarthout. I am the Higher Education Advocate for the U.S. 
Public Interest Research Group. We are a national network of 
nonpartisan, nonprofit organizations in 30 States and working 
on 100 campuses. I would like to just briefly summarize my 
written statement, and you can mix it into my written testimony 
below.
    I think what we have seen over the last couple of years is 
that private student loan borrowing has expanded well beyond 
current regulations. In the wake of the student loan scandals 
detailed by Attorney General Cuomo, the subprime mortgage 
crisis, and certainly just families concerned about college 
affordability, it is clear that Congress needs to act.
    Now, Congress has long treated students loans differently 
than other types of debt because they are more socially 
valuable. When a borrower invests in their education, they are 
making an investment not only in their own well-being but also 
in the social, economic, and political health of our country. 
Your decision to pursue the private loan industry and what 
oversight this Committee has jurisdiction on is well within the 
50-year track record of this Congress in helping students 
finance their education.
    Now, private loans are utilized by a subset of student 
borrowers. It has not been said here today, but about 5 percent 
of undergraduates borrow a student loan. Because these loans 
tend to be larger, they comprised about 20 percent of the 
overall loan volume last year. Interest rates on these loans 
are determined by the credit of the student or their parent. 
They can range from prime to prime plus 12, which is 8 percent 
at current market rates, anywhere up to 12 percent.
    Now, there are a couple of reasons to be really concerned 
about the growth in the private loan industry, and one of them 
was actually identified by Chairman Dodd in his opening 
statement, which is that students are already facing a serious 
debt burden paying for college and taking out student loans, 
and private loans and increased reliance on private loans works 
counter to the very financial aid system that this Congress has 
built up.
    We try and target the greatest aid to the students with 
greatest need in our loan programs and in our aid programs. But 
turning students over to the private loan market actually does 
the exact opposite. It asks students with the least, who have 
the greatest need, to pay the highest interest rates and to 
suffer the worst terms.
    The second major problem and one that, Senator Shelby, you 
identified clearly in some of your questioning is that there is 
a lack of clear consumer information for borrowers out there, 
and I think there is a real need--and I will talk about it in 
some recommendations--to expand on the Truth in Lending Act. 
But we see a significant percentage of borrowers every year 
take out private loans when they have not maxed out on their 
Federal loans.
    Now, that shows, at best, that some students are clearly 
misinformed, but at worst, it is the product of misleading and 
manipulative schemes by private lenders seeking to grow their 
private loan portfolios that are more profitable at the expense 
of students.
    For a student who does manage to survey all the options and 
still decides to take a private loan, it is almost impossible 
to compare offers between lenders. Most students do not even 
see the rate they are going to receive until they are signing 
the promissory note. Lenders use other practices such as co-
branding to further confuse students and shield them from the 
harsh reality of their loan terms.
    Exacerbating this problem and worth mentioning is the 2005 
bankruptcy law that treats student loans worse than almost any 
other type of consumer debt. This bankruptcy change, which 
makes it almost impossible to discharge student loans, has 
helped grow the student loan industry at the expense of 
students.
    I would like to make a couple of concrete recommendations 
for this Committee and this Congress to take action on student 
loans: first, per our previous discussion, provide students 
with clear information about student loan terms; mandate that 
lenders provide students with an APR before the time that they 
are taking out the--before the time that they are signing the 
promissory note; provide students with a cooling-off period at 
the beginning of every semester where students can return their 
loans at no cost to the student, similar to what we have in 
Federal loan programs.
    We should mandate that schools clearly distinguish between 
Federal loans and private loans. As mentioned earlier by 
Senator Reed, this is a confusion to some students. We should 
ban co-branding practices detailed by Attorney General Cuomo 
where banks use the logo and the name of the school to try and 
make their product seem more appealing.
    We should treat borrowers more fairly in bankruptcy. 
Students investing in their education should be supported in 
that effort, and we ought to have laws that show that support. 
We should treat students in bankruptcy more favorably than 
other consumers, not less, as we do now.
    And, fourth, provide students with anti-fraud protection. 
We should expand the FTC holder rule to apply to all loans and 
all schools so that when lenders and schools engage in 
relationships, students can hold them accountable and have 
recourse.
    Again, thank you so much for holding this hearing. I look 
forward to any questions.
    Chairman Dodd. Well, thank you very, very much. You have 
all given testimony, and I appreciate your being timely in your 
responses to the 5-minute rule here.
    Senator Shelby and I have a recorded vote on. I think there 
is at least one, maybe----
    Senator Shelby. Two votes.
    Chairman Dodd. Two votes. So what I am going to do is we 
will go into recess here for a few minutes. Let us go cast our 
votes and then come back.
    Senator Shelby. May I make an observation?
    Chairman Dodd. Yes, you certainly may.
    Senator Shelby. Because I do not know if I will get back 
because it is noon and we have other commitments.
    Mr. Chairman, this is a distinguished panel, and it is 
broad in scope, and I think we have learned a lot.
    Ms. Grooms, I was interested in your testimony because you 
represent one of the largest banks in the world, probably the 
largest bank in the U.S. by deposits. And what you said is that 
your bank did not have this policy of conflicts and all of this 
stuff, and I commend you for that. I think that is good. I 
think that is a policy we have got to pursue.
    Mr. Chairman, I might have some comments and questions for 
the record, if you would leave the record open.
    Chairman Dodd. We will do that, certainly, and for other 
Members.
    Senator Shelby. We have a lot of colleagues that are on 
other committees that would--and we know this is a very 
important subject.
    Chairman Dodd. I will be back, and others may come back as 
well after the votes, but I apologize for having you wait 
around a little longer to proceed. But I have some questions I 
want to raise with you as well and give you a chance to comment 
on them before we complete the hearing. So, with your 
forbearance, we will come back as quickly as we can. Thank you 
for your testimony.
    The Committee will stand in recess.
    [Recess.]
    Chairman Dodd. Well, thank you all for coming back. I want 
to apologize. There were two votes that went on a little longer 
than I anticipated. So I appreciate the patience of the panel 
in coming back together on this.
    Let me take a few minutes. What I am going to also do, 
because of time constraints, we will leave the record open--I 
may have mentioned this before the recess here--and submit 
questions or allow questions to be submitted by other members 
of the Committee as well, beforehand.
    Let me, if I can, I was going to jump to some general 
questions here, particularly regarding--well, first of all let 
me ask you, because several of you mentioned this and I would 
like to get a sense on the panel, particularly from the lenders 
here. I think you may have all said this. But if you haven't 
not, let me clarify for the record. And that is that you seek 
to ensure, I understand, that students that come through your 
program, that they take the free money first, the cheap money 
second, and then if you will, they turn to the private loan 
alternative.
    Can I get a recognition? That is your recommendation? I see 
Mr. Tarr says yes. Ms. Grooms.
    Ms. Grooms. Yes.
    Chairman Dodd. Mr. Goulding.
    Mr. Goulding. Yes.
    Chairman Dodd. That is what you advise? How do you deal 
with this? Do you each deal with it differently in some way? 
What is the policy? Do you have a written policy on this?
    Mr. Tarr. What we do----
    Chairman Dodd. Watch that microphone again, Mr. Tarr. I 
apologize.
    Mr. Tarr. What we do, Senator, is in our marketing 
literature we include a specific paragraph advising prospective 
borrowers to consider all alternatives before private loans. In 
addition, when prospective borrowers call into our call 
centers, our telephone operators are advised, either through 
scripts or prior education, to encourage the prospective 
borrower to look at alternatives which would be less expensive 
sources of funds.
    Chairman Dodd. And that is part of your recommendations 
that go to your financial aid officers and so forth?
    Mr. Tarr. Yes.
    Chairman Dodd. How about you, Ms. Grooms?
    Ms. Grooms. Yes, Senator. I would say that it is more of a 
philosophy than it is a policy. And so that philosophy of 
informing students and parents of all of their options, to 
paraphrase you, of the free and cheap money first. We do that, 
whether it is through our call centers, through marketing 
materials such as the student loan guide. We also have a 
partnership with the Monster organization that will provide 
seminars within high schools and then an online tool that walks 
a family and a student through each sequence, each step in the 
sequence, to ensure that they are considering those cheaper 
options first and use the private loans only to fill the gap.
    Chairman Dodd. Is there any kind of a directive here at 
all? You say the philosophy. Now you have got people obviously 
handling these phone centers. Do they have in front of them 
some guidance sheets? Or is there a training period? Or is 
there counseling so how they handle the calls coming in so that 
part of that job they have initiating that conversation or 
beginning it they say to them words to that effect or advise 
them to that effect? Or is it just sort of an overall--I am not 
clear what you meant by the----
    Ms. Grooms. Thank you, Senator, for allowing me to clarify. 
When I say that it is a philosophy, I intended that to mean 
that it pervades every aspect of our business. So specifically 
to your question are our client service reps trained to ensure 
have you completed your FAFSA? That is one of the questions 
that they will ask the family.
    Are you aware of all of your sources? Have you taken 
advantage of those sources?
    And again, we offer the marketing tools. And we also ensure 
on our website that we provide the student loan guide, the 
Making College Financial Planning Count. Again, that is the 
step-by-step plan that students and families can build.
    And it may seem like a small detail, but on that website we 
even list and start with the Federal loans first, to again help 
ensure that the students, that is what they see first, that 
they are considering those options.
    Chairman Dodd. How about you, Mr. Goulding?
    Mr. Goulding. Yes, Senator. As I mentioned in my oral 
remarks, I did bring----
    Chairman Dodd. I heard you say that.
    Mr. Goulding. This is an example. This says the Financing 
College Guide, featuring Sallie Mae's 1-2-3 Approach to Paying 
for College. And it is laid out in detail here.
    Other examples are on the website, under a tab planning for 
college, it has the 1-2-3 approach. But even on a website that 
you get to if you click to indicate you are interested in a 
private loan for undergraduate school, it says the Signature 
student loan is the most popular after Stafford loans. So even 
in kind of our tag line where--and Signature is our private 
education loan--we are emphasizing to the student that it 
should be taken out after they take out their Federal loan.
    And if you click onto our website indicating you are 
interested in a----
    Chairman Dodd. This is Sallie Mae, for the audience.
    Mr. Goulding. This is Sallie Mae. And if you click on our 
website saying you are interested in a private loan for 
graduate school, because of the recent introduction of Grad 
PLUS, a student can actually borrow their entire cost of 
attendance through federally guaranteed student loans. We say 
graduate students are strongly encouraged to first exhaust 
Federal loan availability, including Stafford and Grad PLUS.
    So it is very clear in our materials that we, in fact, are 
strongly advocating the 1-2-3 approach.
    Chairman Dodd. Mr. Bell, I am going to ask you to comment 
on this, as well. What advice do student loan officers give, as 
well, in this regard? Watch that microphone if you would, so we 
can hear you.
    Mr. Bell. Senator, the advice that the Howard University 
students are provided is also to exhaust all Federal funding, 
to exhaust all institutional funding. However, we do not 
necessarily encourage the usage of private loans unless the 
student particularly comes to our office for advice. And then 
that advice is to conduct a search and compare some of the 
critical areas of taking out a loan such as the terms, as the 
forbearance and the deferment provisions, and other criteria, 
and then do a comparison and select your lender.
    Chairman Dodd. Let me ask all four of you here, in any 
reasonable circumstances is it ever advisable for a student to 
forego taking a Federal student loan in exchange of taking a 
private loan?
    Mr. Tarr. Senator, on purely financial terms, I cannot 
envision a situation where a private loan would be more 
economically advantageous than a Federal loan, given the 
Federal guarantee and the rates.
    Chairman Dodd. What do you think of that, Ms. Grooms?
    Ms. Grooms. I agree with that on financial terms. I cannot 
imagine that.
    Chairman Dodd. Mr. Goulding.
    Mr. Goulding. We have seen examples of where a parent who 
is not--who has some concerns about going into debt with a 
parent Federal loan--has actually, parents have actually made 
the decision that they would rather be a coborrower on a 
private loan that their son or daughter is the primary obligor 
on. And we believe that that decision is made because if a 
parent takes the entire debt in their name, they are concerned 
that it might conflict with their ability to plan for 
retirement and things like that. It is not what I would say is 
an economic decision. It is rather how is the family trying to 
position themselves to afford their college for their children.
    Chairman Dodd. Mr. Bell.
    Mr. Bell. Senator, that is highly possible but, of course, 
we have not experienced that at the University, as a 100 
percent direct lending institution. We do have a number of 
parents that are utilizing the Parent PLUS loan.
    As I said, our--in the past year, $110 million was borrowed 
in direct lending and only 13.8 percent, I believe, in the 
private loan industry.
    Chairman Dodd. Let me ask you, Ms. Pae, and you, Mr. 
Swarthout, to respond here. What is the--you have heard the 
responses of the lenders here. Is this pretty much what you 
believe to be the case? Again, we have lenders here and they 
are not the only lenders in the world so I am curious to your 
overall reaction as to whether or not you believe that students 
and their families are getting advised early on that it is 
always preferable to take--at least except in some rare 
circumstance here that Mr. Goulding has identified--it is 
always preferable for the student and their family to take out 
the student loan as opposed to the private loan--or the Federal 
loan?
    Ms. Pae. For us that would be our hope. But unfortunately 
the landscape currently, I think there is two points that I 
would like to raise up. The first thing is the type of 
information that is available to students. The marketplace is 
not fair currently for students because they are inundated with 
so much information. Although a lender or an institution may 
advise the student to go and maximize on their Federal aid if 
there is, for example when checking an e-mail, get $50,000 in 
just seconds, a student may turn to that alternative rather 
than applying for the FAFSA.
    Another issue is if the loan package or the Federal aid 
package comes together with cobranded materials from the 
college and university. And when that information is presented 
to the student, a student can very well be confused by Federal 
aid versus this being a private loan because my institution 
packaged this for me.
    So although we would hope for all lenders to abide by these 
practices, I think unfortunately, due to the amount of 
information that's out there, it is very difficult for a 
student to be able to maneuver whether or not they are actually 
maximizing on their Federal aid versus I am actually taking out 
a private loan.
    Chairman Dodd. I am going to ask you to comment on this 
now, and I want to come back to that question in a minute and 
ask you about TILA and disclosure issues and lenders.
    Mr. Swarthout. I want to associate myself with Jen's 
comments, because if this is the case, and these are really the 
actions of all the lenders, then something is going wrong 
somewhere. We know that 20 percent of dependent students who 
take out private loans did not max out their Federal loans. We 
know about 50 percent of independent students who take out 
private loans did not max out their Federal student loans.
    Chairman Dodd. What is that number again, 50 percent?
    Mr. Swarthout. Fifty percent of independent college 
students do not max out, do not take the maximum Federal 
student loans, so not PLUS loans as Mr. Goulding was referring 
to a situation for parents. Fifty percent of independent 
students do not take at a maximum student loans, the allowable 
Federal student loans.
    Suggesting that something is going wrong. Now whether it is 
cobranding, whether it is inundation of information, whether it 
is some lenders--and we have seen some private lenders that do 
not engage in the Federal loan programs and thus have a 
different profit motive, simply just push their private loan 
product without making mention or in some cases even 
questioning whether students should bother to fill out the 
FAFSA form.
    So maybe it is some of those instances or a combination of 
the three, but there is a real problem here. I would say 
categorically there is no circumstance where a student should 
be taking out a private loan instead of their Federal student 
loan.
    Chairman Dodd. Let me ask you about disclosure because you 
have raised it, Ms. Pae, and it is an important point. It has 
been pointed out that students and parents cannot easily 
compare the terms and benefits of various loans or the 
distinctions and terms of Federal versus private loans. It gets 
confusing. You heard Senator Schumer talking about, in fact he 
was telling me privately because he has two daughters now in 
the midst of going through all of this, that he sat down 
himself to go through it, as someone who is a trained lawyer 
and obviously a member of these Committees. And he said it was 
a nightmare for him to try and understand it as a parent, 
trying to sort this out.
    I wonder if, again the lenders here, let me ask you whether 
or not you believe Congress should make changes to the Truth In 
Lending Act disclosure requirements to provide student 
borrowers with enhanced information about the terms and 
conditions of private loans, including percentage rate 
information? And what other types of disclosures would any of 
you suggest that may be needed? And in conjunction with that, 
let me ask you whether or not--TILA protections do not extend 
to student loans in excess of $25,000. And I would be curious 
as to whether or not, again, the lenders here would agree that 
TILA protections ought to be extended beyond that number to 
cover potentially all student loans? So two questions for you.
    Mr. Tarr. A response to your second question, Senator. We 
would support--we comply with TILA now and we would support any 
regulation changes----
    Chairman Dodd. Do you see any problem with doing that? Is 
there some reason we ought to be thinking twice about that for 
some reason?
    Mr. Tarr. Off the top of my head I cannot, because if we 
have procedures in place to comply with TILA now, the amount of 
the loan should not impact whether or not you can provide the 
Act disclosure.
    One point I would make on the comparison shopping aspect of 
this: as this industry matures--and we estimate there are now 
about 150 providers of student loans in various states of 
maturity--you are starting to see, I think in response to your 
interest, on websites for example where you can go to websites 
and they will compare various loans and it is all in one place.
    One observation I would make, and we have been doing this 
and advocating this, is this is a process that too many 
families start too late. This process should really be started 
at the end of the junior year in high school. Too frequently 
people are scurrying in July and August of the summer before 
their student is about to matriculate. And they really--and it 
is complicated. I cannot mislead you and tell you it is not.
    But it takes a lot of work. My assessment is the 
information is out there. Is it all in one place, to be used as 
efficiently as possible? Probably not. But it is out there. I 
would strongly suggest that if there is any way to educate 
people to start this process much earlier.
    Chairman Dodd. What about that disclosure box we have 
talked about, where you get very clear on what rates are, using 
examples and so forth, that we have done with other financial 
instruments to make it clear for people as they look at it and 
give them much better ideas? Any objections to any of that?
    Mr. Tarr. No, I think a procedure and process and agreement 
on what would be in the box would have to be devised. But 
conceptually, no.
    Chairman Dodd. Ms. Grooms, what are your thoughts on this? 
And again, regarding the $25,000 limit, what is the view of 
Bank of America?
    Ms. Grooms. Bank of America is supportive in a number of 
areas, including this one, of transparency and disclosure that 
is in the best interest of the consumer, in this case the 
student and perhaps their family. So I agree with Mr. Tarr, 
that should not be a problem.
    But also emphasize that we are compliant with the Truth in 
Lending Act, and provide the consumer with a 10-day grace 
period upon receipt of the Truth in Lending statement, in which 
they can cancel the loan.
    Chairman Dodd. Mr. Goulding.
    Mr. Goulding. We already are complying with the Truth in 
Lending Act and all of our private education loan borrowers do 
receive a Truth in Lending Act disclosure today.
    Chairman Dodd. And the number, raising the number, you have 
no objection to that?
    Mr. Goulding. No. We are complying with it up and down the 
line.
    Chairman Dodd. But I am suggesting raising the limit.
    Mr. Goulding. No, we would not have a concern with that.
    Chairman Dodd. Let me come right back, if I can here. You 
stated that in calculating a student's private loan interest 
rate, one of Sallie Mae's considerations is the default rate of 
the individual institution of higher education. I wanted to ask 
Ms. Grooms and Mr. Tarr, do your companies use either default 
rates or graduation rates of an individual institution in 
determining what interest rate you offer a student that is 
applying to those schools or in those institutions?
    Mr. Tarr. No. What First Marblehead does is we are partners 
with a non-profit guarantor, the Educational Resources 
Institute, which has an approved list of 6,500 colleges and 
universities. The criteria they use to determine who is on that 
list include whether it is public or private, operating 
history, financial condition, accreditation by recognized 
national or regional agency, licensing by State authority, 
program course offerings, and Federal Title IV loan programs. 
Those are the criteria that are used to select the schools that 
we support.
    Chairman Dodd. Ms. Grooms.
    Ms. Grooms. And Senator, we rely on First Marblehead and 
the agency that he referred to for the underwriting. So his 
response is the same for Bank of America.
    Chairman Dodd. So the default rate of students at the 
institution is not a criteria in making a determination and 
that is the case in either case?
    Ms. Grooms. Yes.
    Chairman Dodd. And Mr. Goulding, why do you do that? Why 
does Sallie Mae do that? We heard Andrew Cuomo talk earlier and 
talk about the redlining aspects of all of this. Why does 
Sallie Mae insist on using that as a criteria when the students 
themselves ought to be the determination as to whether or not 
they are going to get the loan?
    Mr. Goulding. We have a number of criteria we look at. The 
primary criteria is certainly the credit score of the borrower 
if they have one, as well as the credit score of a coborrower 
if they have a coborrower.
    Chairman Dodd. I understand that.
    Mr. Goulding. And we do encourage coborrower.
    Chairman Dodd. But why do the institution ?
    Mr. Goulding. Well, we look at academic progress, as well, 
Senator. That is a key issue because we have found that the 
highest correlating event to a default is for a borrower who 
drops out and does not complete their education. And we also 
consider the competitive landscape. We look at the default rate 
of students or borrowers that we have, in our experience, have 
attended a particular institution because we think when you are 
not looking at income and when you are not looking at debt-to-
income ratios, and you are not requiring income or debt-to-
income ratios, that the historic experience you have had with 
students attending a particular institution does have an impact 
on the long-term ability----
    Chairman Dodd. How does that differ from people in banks 
who decided not to lend money to someone because they lived in 
a certain neighborhood based on performance?
    Mr. Goulding. Let me be clear. This is not whether they are 
eligible for the loan or not. This would just be an impact 
potentially----
    Chairman Dodd. Well, it affects their ability to get the 
loan if they----
    Mr. Goulding. No, it does not. No, I am sorry, I misstated. 
It does not affect their ability to get the loan. It would 
affect potentially the rates and fees they would get.
    Chairman Dodd. Well, how should that be the case? If a 
person has got a good record and meets these other criteria 
based on them performing well, why would you brand someone 
because of the institution over the years, for whatever 
reasons? It could be that they have had, just given the 
economic circumstances over the history. Historically black 
colleges, to use an example, historically the kids are coming 
from families that do not do--have not done as well 
economically. Putting aside the reason why here for a minute 
here, that child then or that family is disadvantaged in terms 
of getting a loan because they come from an institution that 
over the years, because of economic circumstances, through no 
fault of the young person or their family, has a disadvantage 
on a rate.
    So they are going to pay a higher rate, counter--actually 
going directly opposite of what we are trying to do, and that 
is to take disadvantaged students to provide greater assets for 
them so they can get that education. You are doing just the 
opposite. Why?
    Mr. Goulding. We actually looked, in preparing for today's 
hearing, we looked at six different historically black college 
and universities on our system. And we found that three of them 
are getting the very best rates that we have and three of them 
are getting the rates that are slightly less attractive.
    So in that case it probably had more to do with the 
competitive landscape, whether or not those schools were 
actively seeking out information from lenders and creating a 
preferred lender list based on the best terms and conditions 
that those lenders had to offer.
    Chairman Dodd. But they are going to get a different 
product, and that is the bottom line.
    Mr. Goulding. No, it is the same product, it is just----
    Chairman Dodd. Well, it is a higher cost.
    Mr. Goulding [continuing]. Slightly different price.
    Chairman Dodd. No, higher price. Higher price, right? More 
costly.
    Mr. Goulding. Maybe 50 basis points or 100 basis points.
    Chairman Dodd. You are out there trying--let me tell you, 
looking at what these costs of college are, that may not seem 
like much to somebody but if you are struggling as a family, 
that 50 basis points can make the difference in some cases 
here.
    And again, going back to the fairness of it, in many ways, 
doing exactly the opposite, it seems to me, is exactly the 
wrong direction we should be heading in on that.
    Let me ask you about the bankruptcy stuff. I opposed the 
Bankruptcy Act. I thought it was a dreadful piece of 
legislation that came along, but obviously I did not prevail. I 
was in the minority on it.
    But advocates suggest here that the standard views in the 
Bankruptcy Act, undue hardship, failing to maintain a minimum 
standard of living before being able to discharge their private 
student loans in Chapter 7. Advocates suggest that the standard 
makes it nearly impossible for borrowers to discharge private 
loans and argue that lenders do not need special bankruptcy 
protection because private loans are often secured by a 
cosigner and banks have no limits on fees and rates they can 
charge borrowers under Federal loans.
    Do you think the Bankruptcy Law is appropriate or 
inappropriate? Mr. Tarr.
    Mr. Tarr. My personal view is it is appropriate.
    Chairman Dodd. You think it is appropriate?
    Mr. Tarr. Yes, and one reason I say that is I think that if 
there is a change to the bankruptcy code in this respect, it 
will have an impact on the availability of private student 
loans. And I think we should all be mindful of what we are 
trying to address, as you eloquently said in your first early 
remarks, a growing gap of the education going like this, 
available funds are like this.
    If there is a change to the Bankruptcy Act, it could impact 
the amount of private student loans that are available to 
address that gap.
    Chairman Dodd. Are you serious about that answer?
    Mr. Tarr. Yes, I am. Yes, I am, sir.
    Mr. Swarthout. God, so many things to say, so many 
objections to that idea.
    This is parallel--this conversation parallels the subprime 
mortgage argument. We have just seen huge default rates in the 
subprime mortgage industry. And the case is we need to be able 
to offer these incredibly predatory rates to borrowers, 
particularly low income borrowers, to be able to provide them 
with a loan for their house.
    If we are setting students up with interest rates that they 
cannot repay, that a significant percentage of students will 
default on, we are not doing favors to students. We are not 
increasing access. We are not increasing affordability. And we 
are certainly not doing what students need in order to succeed 
in our country.
    Mr. Goulding made a comment a little bit earlier where he 
described private loans are an investment in human capital. 
Well, if private loans are an investment in human capital for 
your company, then bankruptcy protections are the shackle that 
keeps that human capital from being able to escape. Because 
essentially we are taking 18-year-olds who are aspiring for a 
higher education and asking them to suffer penalties and 
bankruptcy laws that we provide to almost no other consumer 
credit.
    We treat student loan defaulters in the private loan 
industry the same way we treat people who fail to pay alimony 
and fail to pay their taxes. That is an astounding idea.
    Why, given the social value of student loans, would we 
treat students as the lowest class of borrowers, if we really 
expect to invest in America's future and our higher education? 
I strongly object to that concept.
    Chairman Dodd. Go ahead, Mr. Tarr.
    Mr. Tarr. May I respond?
    Chairman Dodd. Yes, certainly.
    Mr. Tarr. First of all, I do not believe I used the word 
predatory lending. I think we should go back in time and 
focus--we have all commented this morning on how rapidly this 
industry has developed. This industry has developed and grown 
rapidly because it is addressing a gap that previously was 
being addressed by credit cards or not at all.
    So the alternative was, unfortunately, many students were 
not getting to school period. And students--I happen to be an 
advocate of informed choice. And students and their families, 
if provided with the right information, are in the better 
position, I believe, to make a decision whether to take on a 
market priced loan. If the family chooses not to, that may 
prevent someone from going to school.
    And the alternative is credit cards. And I think we would 
all agree that credit cards are not preferable. Their rates are 
more expensive. And oh, by the way, they are not a--they are an 
instrument that has to paid off monthly. This is a 20-year 
unsecured obligation.
    Chairman Dodd. Let me just interrupt for a second. I hope 
we did not create this impression. We all understand there is a 
gap that has to be filled. Even if you increase, as we should, 
the Federal loan program here. I hope none of you argue over 
that point. This is ridiculous. It has been flat-lined for the 
last number of years, watching the costs increase dramatically.
    I doubt it is ever going to close that gap. So you are 
going to be dealing with a gap. And so obviously there is a 
very important market here.
    The question is how does that market work? And to what 
degree is there any kind of a regulatory scheme here and 
oversight, so that we are guaranteeing that the kind of things 
that Andrew Cuomo pointed out are not going to go on.
    And you have all indicated that none of you engage in these 
practices that he talked about, the kickbacks and the financing 
or allowing people to serve on boards and so forth. I presume 
that is the case.
    Is there anything in the criteria that have been laid out 
by the Department of Education or anything that Andrew Cuomo, 
as Attorney General of New York, have advocated that you 
disagree with?
    Mr. Tarr. No, the code of conduct that the New York 
Attorney General supported we support wholeheartedly. We are 
advocates of disclosure and transparency. So I do not believe 
there is requirement for additional regulation. But the 
provisions that were put forward by Attorney General Cuomo we 
are supportive of.
    Chairman Dodd. Ms. Grooms, you agree with that as well?
    Ms. Grooms. Absolutely. As my testimony indicated, we 
voluntarily accepted the college code of conduct. We are 
evaluating the proposed sunshine act which I believe has 
already passed the House. And that is pretty consistent with 
the code of conduct. There is some more specificity there and 
we want to make sure, should that become law, that we not only 
meet but hopefully exceed the expectations.
    Chairman Dodd. Beside from the point we just talked about a 
minute ago, Mr. Goulding, do you have any objections to the 
code of conduct principles that have been laid out?
    Mr. Goulding. No, we have also adopted the code of conduct 
and are supportive of those principles.
    Chairman Dodd. Let me go back. Mr. Avidan, I have not asked 
you any questions at this point here, but again, just from your 
own personal experience here, what is your reaction to what you 
are hearing here?
    Mr. Avidan. I feel that there is a gap. I am personally 
affected by that large gap. But I do not think that that is the 
main issue. I think the main issue is keeping rates low and 
providing support and proper disclosures for the borrower up 
front and during the process of them paying back the loans.
    I feel that once the loans are given they--they, being the 
lenders--they forget those people because they already got the 
promissory notes in their possession and they are signed and 
dated. So they move on to the next people that they can see how 
much of a rate they can get from them.
    Chairman Dodd. Let me, if I can, I want to ask two final 
questions, if I can. I want to raise again, with the lenders 
here, the Community Reinvestment Act issue here.
    It strikes me that we should be promoting, of course, 
incentives for lenders to provide the neediest students with 
good loans. The loans, in my mind, that are similar in rate and 
fee structure to those under the Federal loan program.
    I think you all have said you indicate you agree with that 
general notion. I presume that has been the case. So I wonder 
if your institutions, they receive Community Reinvestment Act 
credit for student loans that you make. Is that true, Ms. 
Grooms?
    Ms. Grooms. We do include our student loan information in 
our $750 billion commitment to low and moderate-income families 
and communities. I cannot affirm specifically that it is 
included in the official CRA data. That is something I would be 
happy to follow up on and respond back.
    Chairman Dodd. What I would like to know is what kinds of 
loans do you receive credit for? And do the bank regulators 
give you credit for giving any loan to any student, including 
loans with high interest rates? I mean, I would be interested 
in whether or not that is the case.
    I do not think you are involved in this aspect at all, Mr. 
Goulding.
    Do you have any comments on this, Mr. Tarr?
    Mr. Tarr. No, I do not.
    Chairman Dodd. OK. Well, I would like to check on that.
    We will submit, by the way, I would ask staff to submit 
that same question to other major lenders here, so we get the 
answer to that question as to how that works, as well before us 
here.
    Let me ask others here, as well. We have got this potential 
sale of Sallie Mae. And I am wondering what impact do you think 
that sale could have on competition and the products and 
services made available to student borrowers? Let me start with 
you, Mr. Swarthout.
    Mr. Swarthout. I think, just a quick preface, which is to 
say at a time when we are seeing a greater demand for 
oversight, a greater demand for transparency, it is interesting 
that the largest player in this market will become less 
transparent and--by becoming a--going from a publicly traded 
company to a private entity.
    As far as products, I mean I think there are reasons for 
concern about the control of the market amongst a small number 
of players. We have seen this for a number of reasons and 
certainly will be continued concern as this process moves 
forward.
    We should note that for a--not on private loans but on 
federally subsidized loans, for a market that has fantastic 
subsidies, we have very little price competition historically. 
I think that is also one of the things that Attorney General 
Cuomo has found in his investigation.
    So there are reasons for inquiry.
    Chairman Dodd. Let me ask you, Ms. Pae, about this, because 
I want to ask Mr. Tarr and I want to ask you, Ms. Grooms. Then 
I want to give you a chance, Mr. Goulding, to respond to what 
you have heard as well, in fairness to you here. Ms. Pae?
    Ms. Pae. Just to let you know that the U.S. Student 
Association has actually partnered with SEIU, Service Employees 
International Union, in regards to this issue. So they have 
some very good materials around why this is a large concern for 
not only the larger industry but specifically for how this 
plays out for students.
    As far as the profits that are at the expense of students, 
I think this plays a larger role in what type of competition is 
really, truly available for students and what type of real 
deals will students get in the private loan industry. So 
although I am not well versed on the issue, per se, I think it 
would be a good point of reference for the Committee to look at 
these materials.
    Chairman Dodd. Mr. Tarr, do you want to comment on this?
    Mr. Tarr. Senator, given that our two largest clients are 
involved, I would prefer not to.
    Chairman Dodd. I thought I might slip that one by you here.
    [Laughter.]
    In a moment of weakness.
    Mr. Tarr. I appreciate your understanding, Senator.
    Chairman Dodd. You are taking the Fifth on this one.
    Ms. Grooms.
    Ms. Grooms. Mr. Chairman, as we have stated, the Bank of 
America student lending business remains separate. It will 
compete separately from Sallie Mae. We continue to serve our 
customers and compete each day. And that aspect has not 
changed.
    Chairman Dodd. Mr. Goulding, do you want to comment on this 
at all? This is not normally a question you would raise, but 
obviously it is on everyone's mind and is out there in the 
proposal. Do you want to share any thoughts or comments on 
this?
    Mr. Goulding. Yes, Senator. First, let me caveat it by 
saying I am being acquired. I am not the acquirer. So I am 
speaking to this from a Sallie Mae perspective. And I have not 
been intimately involved with the transaction that you are 
referring to.
    Sallie Mae certainly has, in our history, conducted 
ourselves with transparency. We plan to continue to do that, 
public or private. And our buyers did put out a press release 
with respect to this issue in May. The statements they made 
were that as a private company Sallie Mae would continue to 
comply with the student loan code of conduct, it would continue 
to be regulated by the Department of Education and the FDIC, 
that we be continued to be subject to Congressional oversight, 
that we would be subject to all Federal and State laws 
including the Higher Education Act, that we would continue to 
participate in the public debt markets and issue relevant 
filings on our performance and financial health with the SEC, 
and that we would apply with all applicable Sarbanes-Oxley 
requirements.
    So on the transparency side, I think that the buyers have 
addressed that.
    On the competitive front, as Ms. Grooms stated, Bank of 
America plans on continuing to vigorously compete with both 
Sallie Mae and the other minority bank investor. I should 
remind all that the banks involved with this transaction are 
minority investors, and that Sallie Mae has competed with both 
these banks historically. We are competing with them now. We 
would envision continuing to compete with them in the future.
    And I would disagree with the statement made by the 
gentleman to my left. I think there is active competition in 
this market. There are new entrants entering this market as we 
speak, and some very formidable consumer finance companies have 
entered this market space.
    Chairman Dodd. Mr. Bell, do you want to comment on this at 
all, as a student financial aid officer?
    Mr. Bell. No, Senator. I really do not have any comment on 
it.
    Chairman Dodd. I wanted to give you a chance to do that.
    Listen, there are a lot more questions people I know are 
going to want to raise here about all of this. But this is a 
very important issue. Again, there is a lot of interest in the 
subject matter, as I know all of you know.
    Again, I want to make it clear here, look, and there is 
going to be a lot more legislative action probably on higher 
education generally. But again, I want to state the case here, 
there is clearly a need here for private loans. There is no 
question about that, particularly in light of the gap that 
exists. So we are not--I do not want anyone to leave here with 
the assumption somehow there is hostile feelings about the 
product. The question is how the product is being handled and 
managed, and to what extent it is being managed in such a way 
as to disadvantage students and their families, with many of 
the items that have been raised by the Attorney General of New 
York and others, that those practices have to stop.
    I am going to inquire as to the--I am going to have a 
meeting with the--with Senator Shelby obviously involved in all 
of this--with the Federal regulators to find out what they are 
doing, why they have not been. We listened to Andrew Cuomo talk 
about this being the wild west. And of course, the obvious 
question one wants to ask is where was the sheriff here? A lot 
of these things were going on for some time.
    We have talked about the subprime lending problem. That was 
going on for some time. We know there were people aware of this 
issue years ago and did nothing from a Federal agency 
perspective where they had jurisdiction, in my view. And I am 
not going to wait around for this problem to grow or become a 
greater concern, but to step in and to find out what, if 
anything, the regulators are doing. And if they need additional 
legislation, we will move on that. If there is additional 
regulatory authority, I want to find out what they need to get 
that, so that we have an aggressive cop here watching all of 
this. So the practices we have heard about are going to stop on 
this one way or the other.
    So again, I thank all of you for being here. We will keep 
the record open for additional questions. But I am very 
grateful to all of you.
    I want to thank the lenders who are here for being here.
    Ms. Grooms. Thank you, Mr. Chairman.
    Chairman Dodd. I realize you are stepping up here.
    Mr. Tarr. Thank you.
    Chairman Dodd. There is a lot of other people who engage in 
this business who are not here, but we are very much aware of 
some of the activities that are going on.
    So I think you for coming. This Committee will stand 
adjourned.
    [Whereupon, at 1:19 p.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]
             PREPARED STATEMENT OF SENATOR ROBERT P. CASEY
    I would like to thank Senator Dodd and Senator Shelby for calling 
today's hearing on this important and timely topic. I would also like 
to thank the witnesses for appearing today. Attorney General Cuomo has 
been on the front line of exposing the problems with private student 
loans as well as the front line of the search for solutions.
    I would also like to say that I am pleased to welcome a constituent 
and resident of the Commonwealth of Pennsylvania. Jonathan Avidan is a 
resident of Langehorne, Pennsylvania. I wish he could be here under 
better circumstances, but unfortunately, he is a victim of bad 
educational loans. I would like to thank him for coming before us today 
to offer his experience.
    The growth in the private student loan market has been a product of 
two regrettable trends--the rapid increase in the cost of education, 
and the failure of federal student loan programs to meet the needs of 
students who have had to find ways to finance their education.
    The fact is that federal policy and institutions of higher 
education have created a vacuum, and the private sector has helped to 
fill that void. That is a good thing, but it has had some negative 
consequences. Past inaction, and lack of leadership on the part of the 
government, however, is no excuse for inaction now, and so I am glad 
that we are holding this hearing to help understand the scope and 
boundaries of the problems we now face.
    This issue involves our families, our education system, our future 
economy and society, and our values. We need more students going to 
college and getting degrees and entering the workforce highly educated 
and highly skilled. But increasing costs and punitive debt burdens work 
in the exact opposite direction.
    Before the witnesses deliver their testimony, I would like to just 
highlight three problems:

      The first is the breach of trust between schools and 
students. There is an important relationship there that some schools, 
though certainly not all, have been far too cavalier with.

      The second is deceptive and in some cases predatory and 
abusive practices on the parts of lenders.

      The third is the way that some of these lending practices 
undermine federal student aid policies, which are designed to make 
college affordable and accessible to all students.

    This last problem is less obvious, but extremely important. As a 
society, we have for a long time directed the most aid to those with 
the most need, because hard work and ability is important and because 
we as a nation benefit when we allow people to use their talents to 
their fullest. All of America and Pennsylvania have benefited from this 
ideal. We cannot afford to let our investment in that ideal be 
undercut.
    I again, would like to thank Chairman Dodd for calling this 
hearing, and would like the witnesses to know I am particularly 
interested in what actions they feel should be taken moving forward to 
help fix the problems we are today confronting.

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