[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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Washington, DC 20402-0001
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
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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
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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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