    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

              PRIVATE STUDENT LOAN BANKRUPTCY FAIRNESS ACT OF 2010

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

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                       COMMERCIAL AND ADMINISTRATIVE LAW

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 SECOND SESSION

                                       ON

                                   H.R. 5043

                                   __________

                                 APRIL 22, 2010

                                   __________

                               Serial No. 111-91

                                   __________

             Printed for the use of the Committee on the Judiciary

          Available via the World Wide Web: http://judiciary.house.gov

                                   ----------
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    56-069 PDF                       WASHINGTON : 2010

    For sale by the Superintendent of Documents, U.S. Government Printing
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                           COMMITTEE ON THE JUDICIARY

                     JOHN CONYERS, Jr., Michigan, Chairman
    HOWARD L. BERMAN, California         LAMAR SMITH, Texas
    RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr.,
    JERROLD NADLER, New York                 Wisconsin
    ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
    MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
    ZOE LOFGREN, California              BOB GOODLATTE, Virginia
    SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
    MAXINE WATERS, California            DARRELL E. ISSA, California
    WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
    STEVE COHEN, Tennessee               STEVE KING, Iowa
    HENRY C. ``HANK'' JOHNSON, Jr.,      TRENT FRANKS, Arizona
      Georgia                            LOUIE GOHMERT, Texas
    PEDRO PIERLUISI, Puerto Rico         JIM JORDAN, Ohio
    MIKE QUIGLEY, Illinois               TED POE, Texas
    JUDY CHU, California                 JASON CHAFFETZ, Utah
    LUIS V. GUTIERREZ, Illinois          TOM ROONEY, Florida
    TAMMY BALDWIN, Wisconsin             GREGG HARPER, Mississippi
    CHARLES A. GONZALEZ, Texas
    ANTHONY D. WEINER, New York
    ADAM B. SCHIFF, California
    LINDA T. SANCHEZ, California
    DEBBIE WASSERMAN SCHULTZ, Florida
    DANIEL MAFFEI, New York
    [Vacant]

           Perry Apelbaum, Majority Staff Director and Chief Counsel
          Sean McLaughlin, Minority Chief of Staff and General Counsel
                                     ------

               Subcommittee on Commercial and Administrative Law

                        STEVE COHEN, Tennessee, Chairman

    WILLIAM D. DELAHUNT, Massachusetts   TRENT FRANKS, Arizona
    MELVIN L. WATT, North Carolina       JIM JORDAN, Ohio
    DANIEL MAFFEI, New York              HOWARD COBLE, North Carolina
    ZOE LOFGREN, California              DARRELL E. ISSA, California
    HENRY C. ``HANK'' JOHNSON, Jr.,      J. RANDY FORBES, Virginia
      Georgia                            STEVE KING, Iowa
    ROBERT C. ``BOBBY'' SCOTT, Virginia
    JOHN CONYERS, Jr., Michigan
    JUDY CHU, California

                         Michone Johnson, Chief Counsel

                        Daniel Flores, Minority Counsel

                                C O N T E N T S

                                  ----------

                                 APRIL 22, 2010

                                                                       Page

                                    THE BILL

    H.R. 5043, the ``Private Student Loan Bankruptcy Fairness Act of
      2010''.........................................................     4

                               OPENING STATEMENTS

    The Honorable Steve Cohen, a Representative in Congress from the
      State of Tennessee, and Chairman, Subcommittee on Commercial
      and Administrative Law.........................................     1
    The Honorable Trent Franks, a Representative in Congress from the
      State of Arizona, and Ranking Member, Subcommittee on
      Commercial and Administrative Law..............................     6
    The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in
      Congress from the State of Georgia, and Member, Subcommittee on
      Commercial and Administrative Law..............................     7

                                   WITNESSES

    Ms. Deanne Loonin, National Consumer Law Center, Boston, MA
      Oral Testimony.................................................     9
      Prepared Statement.............................................    11
    Mr. John A. Hupalo, Ramirez Capital Advisors, Weston, MA
      Oral Testimony.................................................    23
      Prepared Statement.............................................    26
    Ms. Valisha Cooks, Los Angeles, CA
      Oral Testimony.................................................    30
      Prepared Statement.............................................    33
    Mr. Adrian M. Lapas, Adrian M. Lapas, PA, Goldsboro, NC, on
      behalf of the National Association of Consumer Bankruptcy
      Attorneys
      Oral Testimony.................................................    36
      Prepared Statement.............................................    38

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Material submitted by the Honorable Jim Jordan, a Representative
      in Congress from the State of Ohio, and Member, Subcommittee on
      Commercial and Administrative Law..............................    58

                                    APPENDIX
                   Material Submitted for the Hearing Record

    Prepared Statement of the Honorable Henry C. ``Hank'' Johnson,
      Jr., a Representative in Congress from the State of Georgia,
      and Member, Subcommittee on Commercial and Administrative Law..    65
    Response to Post-Hearing Questions from Deanne Loonin, National
      Consumer Law Center, Boston, MA................................    67
    Response to Post-Hearing Questions from John A. Hupalo, Ramirez
      Capital Advisors, Weston, MA...................................    68
    Letter to the Honorable Steve Cohen, Chairman, Subcommittee on
      Commercial and Administrative Law, from the National Consumer
      Law Center and the National Association of Consumer Bankruptcy
      Attorneys......................................................    69
    Coalition Letter to the Honorable Steve Cohen, Chairman,
      Subcommittee on Commercial and Administrative Law..............    70
    Prepared Statement of the Financial Services Roundtable..........    71

              PRIVATE STUDENT LOAN BANKRUPTCY FAIRNESS ACT OF 2010

                                  ----------

                            THURSDAY, APRIL 22, 2010

                  House of Representatives,
                         Subcommittee on Commercial
                                and Administrative Law,
                                    Committee on the Judiciary,
                                                        Washington, DC.

        The Subcommittee met, pursuant to notice, at 9:35 a.m., in
    room 2141, Rayburn House Office Building, the Honorable Steve
    Cohen (Chairman of the Subcommittee) presiding.
        Present: Representatives Cohen, Johnson, Scott, Chu,
    Franks, Jordan, and Coble.
        Staff present: (Majority) James Park, Counsel; Adam
    Russell, Professional Staff Member; and Zachary Somers,
    Minority Counsel.
        Mr. Cohen. Thank you. This hearing of the Committee on the
    Judiciary, Subcommittee on Commercial and Administrative Law,
    will now come to order, in the presence of Mr. Apelbaum and his
    two beautiful young ladies.
        Without objection, the Chair will be authorized to declare
    a recess of the hearing.
        I will now recognize myself for an opening statement.
        Last September, this Committee held a hearing on the
    dischargeability of educational debt and bankruptcy. Based on
    the discussion that occurred at that hearing, I have joined
    with Representative Danny Davis, longtime champion on this
    issue, to introduce H.R. 5043, the ``Private Student Loan
    Bankruptcy Fairness Act of 2010.''
        Our bill is very narrowly tailored to make debt resulting
    from student loans issued by private, for-profit institutions
    dischargeable in bankruptcy. Currently, the bankruptcy code
    conditions the discharge of educational debt on a debtor
    showing that the debtor will suffer ``an undue hardship'' if
    forced to repay the debt. This standard makes educational debt
    effectively non-dischargeable, except in the most extreme
    circumstances, ``undue hardship.''
        In 1978, Congress gave student loan creditors more
    favorable treatment in bankruptcy than other unsecured
    creditors in order to protect the viability of the Federal
    student loan program and, more generally, the public's money.
    Over the next 27 years, Congress made a series of amendments to
    the student loan non-dischargeability provision, making it
    progressively harder and harder for student borrowers to
    discharge their educational debt.
        In 2005, Congress extended conditional dischargeability to
    private student loans issued by for-profit entities without any
    substantive discussion or empirical evidence to support such an
    extension. The private student loan industry contends that such
    an extension was needed to dissuade borrower abuse of the
    bankruptcy process and to minimize the risk for lenders,
    thereby making private loans affordable.
        Now that we have had 5 years of experience with making
    private student loans non-dischargeable, we have found that
    private student loans are no cheaper than they were prior to
    2005, as interest rates and fees remain high.
        Moreover, private student loans continue to carry risks
    that are not present with Federal student loans and make
    bankruptcy relief more necessary for borrowers, should they run
    into financial trouble as private loans, lack many of the
    consumer protections of Federal loans.
        Relative to Federal student loan borrowers, private student
    loan borrowers often find themselves trapped under the weight
    of tens of thousands of dollars of expensive, high-interest,
    high-fee student loan debt with no guaranteed opportunity for
    income-based repayment, deferment forbearance, or partial loan
    forgiveness, in essence, a lifetime of debt to private lenders.
        H.R. 5043 addresses these concerns by amending bankruptcy
    code section 523(a)(8) in two ways. First, it eliminates
    section 523(a)(8)(B), which currently makes debt from private
    loans issued by for-profit lenders non-dischargeable in
    bankruptcy absent undue hardship on the debtor and the debtor's
    dependents.
        Second, the bill amends section 523(a)(8)(A)(i) to clarify
    that only loans for which substantially all of the funds were
    provided by a non-profit institution remains non-dischargeable
    in bankruptcy. This change helps to ensure that only genuinely
    non-profit lenders are protected and not-for-profit lenders
    that issue loans guaranteed by a non-profit guarantor.
        Access to education has been one of the defining issues in
    my legislative career, which has extended now 3 decades. As a
    Tennessee senator, I fought for 18 years to bring about
    Tennessee HOPE education lottery scholarships. I was inspired
    to direct the funding of the scholarship money to college
    loans, college tuition because of a young lady like Ms. Cooks
    who came to me who had been an intern in the Tennessee
    legislature and later came to me with pounds of debt.
        And I looked at her debt, which was like 20-some-odd-
    thousand dollars at a time when 20-some-odd-thousand dollars
    was a lot of money--more like $60,000, maybe, today--and I
    thought, ``My god, she will never be able to pay this off. The
    rest are for life. She will be stuck with this debt.'' And it
    just didn't seem right, and so we ended up passing our
    scholarship program.
        But this issue is a deja vu. Students with large debts that
    can't get out of them and people making money, which is kind of
    the American way, but nevertheless, when there is a better
    American way, we ought to pursue it. So these scholarships gave
    many Tennesseans that opportunity, and they get out without as
    much debt or any debt because of that effort.
        I view with great concern this particular issue. And seeing
    our young people the opportunity of America and America's
    future being used as fodder for people who probably are doing
    pretty well already and are just doing better--and there are
    circumstances where we need to modify our laws to give somebody
    a better chance, whether it is the young student, as
    distinguished from the successful financial institution, I
    think most of us kind of go with the young student.
        There may be--and I understand from the hearings--some
    folks that might want to be--use this as a basis to get a loan
    and then discharge it, and we need to find a way to ferret
    those out, and I think that is something we can do.
        So I thank Representative Davis for his work on this issue.
    He has done it for a long time and has been a very, very
    passionate supporter. And I appreciate the opportunity to work
    with Senator Durbin, a great leader in the Senate. He
    introduced the Fairness for Struggling Students Act, Senate
    bill 3219, which is similar in goals and similar in approach to
    the bill that we have introduced here, not as artfully drafted
    as the one Mr. Park drew for us, but it is the Senate.
        And that is where we are. So I thank our witnesses for
    being here today, and I look forward to their testimony.
        And I now recognize my colleague, Mr. Franks, who I know
    has a great concern for students, as well, him having been a
    student at one time, the distinguished Ranking Member for his
    opening remarks.
        [The bill, H.R. 5043, follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________
        Mr. Franks. Thank you, Mr. Chairman. I think I am still a
    student.
        Yes, Mr. Chairman, I have to say at the outset, so that my
    perspective is taken in context and from the point of view and
    the spirit that it is given, that some of us in this Congress
    believe that government should not be measured by how many
    people it helps, but by how many people no longer need
    government's help.
        So I want to make that clear. It is never a--I think
    sometimes that those of us that are against bills like this are
    seen as not caring about the people, but we are concerned that
    this will even cause them greater harm in the long run than it
    would have had it been left as it was.
        So let me just start out and say that H.R. 5043 makes
    private student loans fully dischargeable in bankruptcy.
    Currently these loans are dischargeable only if repaying the
    loans would constitute an ``undue hardship.''
        This bill singles out private student loans for less
    favorable treatment in bankruptcy than loans funded by the
    government and non-profit organizations. Now, why should we
    single out private student loans for less favorable treatment?
    Private student loans are an important means for financing
    higher education. They are used to help fill the gap between
    the actual cost of attendance and the limits on Federal loans
    and school-provided financial aid.
        And because this gap is increasingly growing wider, private
    loans are becoming a more and more important tool to finance
    education. In fact, the student from the Institute for Higher
    Education policy found that ``private loans help students
    attend schools that they want to attend, rather than the
    schools that they might have to attend because of inadequate
    financial resources.''
        The exception from bankruptcy discharge that private
    student loans currently receive is vital. First, the exception
    ensures that private capital continues to flow into the student
    lending market. This is kind of an important point, Mr.
    Chairman, which has tightened considerably over the last 2
    years due to economic conditions.
        Student lenders are finding it more difficult to raise
    capital because investors are not buying securities backed by
    student loans. Why would they?
        Legislation like H.R. 5043 that makes student loans less
    attractive to investors will inevitably have the effect of
    shrinking an already depressed private student loan market. If
    lenders are forced to scale back student lending because
    private student loans are subject to bankruptcy discharge, many
    students will be denied access to higher education.
        Second, the bankruptcy exception for student loan wards off
    abuse by student borrowers. Unlike other debt, student loans
    are secured only by the anticipated future success of the
    individual student borrower. Upon graduation, student borrowers
    typically have few assets to discharge from just--from filing
    bankruptcy.
        However, student borrowers have substantial future earnings
    potential. The bankruptcy exception for student loans is
    designed to remove the potential for recent graduates to use
    the bankruptcy system to unencumber those future earnings.
        In short, 5043 will discourage private lending and
    encourage abuse of the bankruptcy system. Moreover, this
    legislation is a blunt force rather than a nuanced approach.
        If the current law is too harsh, then, Mr. Chairman, let's
    clarify what constitutes an undue hardship. There is a great
    deal of work that we could do there, latitude that we could do
    there, because we all understand undue hardship.
        Or if certain private loans are abusive, then let's create
    a ``safe harbor'' for future--for the features a private loan
    must have to get the protection. Let's not target all private
    loans based on a subset of arguably abusive loans or lenders.
        Mr. Chairman, H.R. 5043 is not the answer to the growing
    debt burden that our Nation's graduates face. The real culprit
    is the rising cost of higher education. Nothing in this
    legislation will even remotely address that problem. In fact,
    as lenders are forced to increase the pricing of student loans
    to account for the new risk this bill creates, borrowers will
    end up paying even more for higher education.
        And, Mr. Chairman, I guess the thing that is the greatest
    concern to me is that I believe that this legislation is well
    intended, but it will inevitably have the effect of hurting the
    very ones that it ostensibly intends to try to help. So with
    that, I yield back.
        Mr. Cohen. Thank you, Mr. Franks.
        Do Mr. Johnson or Mr. Scott seek recognition? Mr. Johnson
    is recognized for an opening statement, distinguished Chairman
    of the Subcommittee on Antitrust.
        Mr. Johnson. Thank you, Mr. Chairman, for holding this very
    important hearing on the Private Student Loan Bankruptcy
    Fairness Act. Fairness is so important, and I know you have had
    a long history of working in this area to ensure fairness.
        And it is imperative that we examine the issues of
    dischargeability of private student loans in bankruptcy,
    particularly in light of the record-breaking unemployment
    numbers that we have seen in this economy. This is the same
    economy that is causing everyday Americans to go bankrupt in
    order to meet basic needs. It is also the same economy that
    allows corporations to wipe out their pension obligations to
    retired workers under the bankruptcy code.
        Student loans are unsecured debt, and unsecured debt is
    typically dischargeable in bankruptcy. However, the bankruptcy
    code has a specific carve-out that does not exempt student
    loans, unless a debtor is able to demonstrate that continued
    repayment of the debt would impose an undue hardship on the
    debtor.
        In essence, this means that current bankruptcy law treats
    students who face legitimate financial distress the same severe
    way as people who are trying to discharge child support debts,
    alimony, overdue taxes, and criminal fines.
        We are not discussing tax evaders or absent fathers. We are
    talking about unfairly penalizing adults who, as naive and
    financially unsophisticated young people, agree to be confusing
    terms of a private loan agreement in order to get an education
    to become productive citizens and contribute to our society.
        And unlike Federal loans, private student loan borrowers
    are often unable to work out terms that ensure a reasonable and
    fair repayment schedule. Federal loans contain mechanisms to
    ensure repayment without excessive financial distress on the
    part of the borrower. Private loan students--private student
    loans lack access to the most important deferment income-
    based--income-based repayment or loan forgiveness options that
    come with Federal student loans.
        This leaves most private student lender--excuse me. This
    leaves most private student loan borrowers at the mercy of the
    lender if they face financial distress due to unemployment,
    disability or illness.
        In short, private student loans must be addressed as we
    have a responsibility to ensure that our youth can obtain a
    quality education without going broke.
        Thank you, Mr. Chairman, for scheduling this hearing. I
    look forward to the hearing and from our witnesses today. Thank
    you.
        Mr. Cohen. Thank you, Mr. Johnson.
        We now will start the panel. And, Mr. Scott, did you desire
    to make an--you just desire to lobby Mr. Johnson? Okay, good
    luck.
        I am now pleased to introduce the witnesses and hear their
    testimony for today's hearing. First, thank you all for
    participating. Our program, like all others, is that your
    written statements, without objection, will be placed in the
    record.
        I ask you limit your remarks to 5 minutes. You have got a
    lighting system kind of in front of you there, and when it is
    green, it means you are starting, and you have got--you are
    within the 4 minutes of your opening. When it gets to yellow,
    you have got a minute to wind down. And when it gets to red,
    Beulah blows the buzzer and you are finished, so you need to be
    completed.
        We have an opportunity for each witness after their
    testimony for Subcommittee Members to ask you questions. We are
    also under the same 5-minute red, yellow, green program, and--
    but we can submit questions to you later, so it doesn't mean
    you are home-free.
        Our first witness is Ms. Deanne Loonin. Ms. Loonin is the
    staff attorney with the National Consumer Law Center and the
    director of the National Consumer Law Center's student loan
    borrower assistance project, a resource for borrowers, their
    families, and advocates representing student loan borrowers.
        She assists attorneys representing low-income consumers and
    teaches consumer law to legal services, private consumer
    attorneys, and other advocates. She also provides direct
    representation of low-income student loan borrowers and
    maintain student loan borrower assistance Web sites. She has
    served as legal aid representative at the recent Department of
    Education negotiated rule-making sessions.
        Prior to joining the NCLC, she worked at legal services in
    Los Angeles known as DEC--DEC? Whatever. You got it.
        Thank you for being here. We appreciate Ms. Loonin and
    appreciate her for announcing the name of her 1997 employer.
    And now you can begin your testimony.

                      TESTIMONY OF DEANNE LOONIN,
                NATIONAL CONSUMER LAW CENTER, BOSTON, MA

        Ms. Loonin. Thank you very much, Mr. Chairman, and the
    other Members of the Committee. Thank you for inviting me here
    to testify today.
        I am here today on behalf of NCLC's low-income clients.
    Through my work at NCLC, I hear not only from these clients who
    I work with directly, but also from thousands of student loan
    borrowers through my Web site and also through the attorneys
    and advocates I work with across the country who also represent
    student loan borrowers.
        It is a diverse group of students who I hear from, all
    ages, all class levels, all different parts of the country, but
    they all have one thing in common, at least one thing in
    common. They all tried to better themselves through education.
        It is one of the strongest messages out there as we grow
    up. If you go to college, you are much more likely to succeed,
    and they listen to that message. Some graduated who I hear
    from; some didn't. It is a diverse group, as I said. But one
    other thing they all have in common, more unfortunately, is
    that they are all struggling with the debt burden of student
    loans.
        When they come into my office, it is sort of a frustrating
    scenario, but what usually happens is we first try to figure
    out, what kind of student loan does the person have? And most
    borrowers have no idea, very confusing. It is a complex
    process, understanding the difference between a private loan
    and a Federal student loan.
        The way I know it is a private student loan is I look at
    the interest rate. And I see, unfortunately, APRs 11 percent,
    12 percent, 13 percent, higher, up to sometimes over 20
    percent. And that is when we know for sure there are other ways
    to tell, too, that this is a private loan we are dealing with.
        If it is a Federal student loan, they could still be very
    deep in debt. It is still a problem. But there are some
    imperfect, but some of them actually better than imperfect
    solutions out there for those borrowers.
        When I talk to the private loan borrowers, it is a
    completely different story. Basically, we have to try to
    negotiate with the lenders--and I do this all the time, and
    they offer virtually nothing for my clients.
        The consequences to these--to these borrowers are severe in
    terms of their credit report, in terms of their psychology, in
    terms of thinking about whether they ever want to go back to
    school again. It is a huge burden for them, and bankruptcy is
    not a realistic option.
        That is why we are here today in support of this
    legislation, not because bankruptcy is the best option--I want
    to be clear about that. When I speak to my clients, they always
    tell me, ``We really don't want to file for bankruptcy.'' It is
    considered a failure in their eyes in a lot of ways or
    humiliating. But in some cases, it is the only choice they have
    to move on with their lives.
        So we support the legislation for them, but also because
    there is no rationale for this heightened standard for
    students--for the private student loans. And I want to just go
    through a couple of reasons in the few minutes I have left that
    we often hear. Some of them--some of these reasons have already
    been mentioned.
        The first one is that we need this restriction to stop the
    supposed excess filing by student borrowers. There is no
    evidence that there was ever such excess filings. And in fact,
    there are safeguards in the bankruptcy system--many of them
    passed in 2005, when the--with bankruptcy reform--that can weed
    out such borrowers.
        The other reason we hear a lot is, well, we need this
    restriction to make private loans more available, sort of an
    incentive system though the bankruptcy system.
        Well, the first question I would ask is whether that is a
    legitimate goal for bankruptcy policy, because private loans
    are not financial aid. They are private credit products. But
    even if you consider this a goal, it hasn't worked. Lenders
    have responded to the market, not to bankruptcy policy.
        The industry grew, frankly, very, very astronomically and
    exploded quite a bit prior to the 2005 change, and as was
    mentioned, the industry has contracted more recently, and yet
    there is still the restriction in the bankruptcy policy. So,
    again, the lenders are responding to the market incentives, not
    to the bankruptcy policy.
        Another rationale is that this will supposedly make the
    private loans less expensive. Well, this, too, has not
    happened. We have seen the most high-rate, other kinds of
    subprime private loans during the time that the bankruptcy
    restriction has been in place.
        The policy has also not improved college access. In fact,
    college enrollment is now growing even though private loans are
    less available. And the last thing I would say is, we certainly
    know that the policy has not made college more affordable.
    Tuitions have continued to grow.
        So we urge passage of this bill to help the struggling
    borrowers who I work for who, unfortunately--I wish they could
    all be here today with me, but I am here on their behalf. And
    what they did was they chose education; they deserve an
    opportunity for a fresh start.
        And I am happy to answer any questions later. Thank you
    very much.
        [The prepared statement of Ms. Loonin follows:]
                      Prepared Statement of Deanne Loonin

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                                   __________

        Mr. Cohen. Thank you, Ms. Loonin. I appreciate your
    statement and your timing your statement perfectly.
        The next witness will be Mr.--is it ``Hupalo''? Mr. Hupalo
    is managing director at Ramirez Capital Advisers--or Edvisers.
    Nice play on words, I guess.
        Previously, he served as the CFO and senior executive vice
    president of the First Marblehead Corporation, one of the
    largest publicly traded student lenders. Prior to that, he was
    managing director in the education loan group at UBS, Salomon
    Smith Barney, and Manufacturers Hanover security corporation.
        Thank you, sir, and we welcome your testimony.

                     TESTIMONY OF JOHN A. HUPALO,
                  RAMIREZ CAPITAL ADVISORS, WESTON, MA

        Mr. Hupalo. Thank you, Mr. Chairman, Ranking Member Franks,
    the other Members of the Committee for the invitation to be
    here this morning.
        My experience with student loans began in 1978 as a
    borrower. And I am deeply indebted to the Congress for passing
    that legislation and giving first-time college aspirants like
    myself this opportunity.
        Although I did not initially plan for my professional
    career to be focused on helping others pay for college, it has.
        As you noted, my work in investment banking and at First
    Marblehead Corporation, I focused on helping both state
    agencies and not-for-profit companies around the Nation, as
    well as for-profit companies, structure a responsible private
    student loan program.
        The narrow, but important question you asked today--whether
    to permit the discharge of private student loans to
    bankruptcy--is another in a long line of policy issues which in
    isolation appear fairly simple, but are actually quite complex
    when considered along the broader spectrum of education lending
    policy.
        I understand the intended benefit of repealing non-
    dischargeability of private student loans, but I am very
    concerned that it will be counterproductive to the country's
    shared goal of making college education more accessible to the
    greatest number of students possible.
        Although I am not an expert in Federal bankruptcy law, I do
    understand why non-dischargeability is a cornerstone of keeping
    private student loan interest rates affordable. Unlike most
    other loans, student loans are generally made to very young
    borrowers. At a time of borrowing, they have no job, no
    immediate prospect for a job, no credit history, and often no
    other assets.
        Furthermore, the loan products themselves are the most
    friendly consumer products in the marketplace. The loan may be
    paid over a relatively long period of 10 to 30 years, most not
    requiring any payment until a student separates from school,
    often many years after the first loan was made. There are no
    prepayment penalties for borrowers who wish to pay ahead of
    schedule, and there are opportunities for borrowers to stop
    making payments for a period of time even after the repayment
    period commences.
        This combination of borrower profile and product is very
    difficult for lenders to serve absent some other incentive to
    make the socially necessary loans. Non-dischargeability is one
    such feature.
        When lenders--be they not-for-profit state agencies, for-
    profit financial institutions, schools, or finance companies,
    or the Federal Government, for that matter--enter into the
    competitive marketplace, they share a few commonalities,
    including the requirement that the loans make some amount of
    money, a risk-adjusted return for the lender.
        Admittedly, the nomenclature can be confusing. Even lenders
    with nonprofit charters and public purpose missions need to
    offer economically responsible, profitable products to be
    viable. This is true for the Federal Government loan programs,
    as well.
        In order to design such a product, the lender must assess
    the risk that a borrower will be unable to repay the loan in
    full. Private student lenders faced with borrower profiles and
    required product sets previously discussed create lower-cost
    loans as a result of the value of the non-dischargeability.
        There is no question that interest rates for all borrowers
    would have to increase in order to compensate for the increased
    risk if borrowers had the option to routinely discharge private
    student loans.
        Students are smart, but relatively immature consumers of
    very expensive goods and services, like a college education.
    Some would undoubtedly seek to exploit the narrow question of
    today's discussion. With no assets to lose, an education in
    hand, why not discharge the loan without ever making a payment?
        I fear that borrowers just out of school would discount
    other risks and be saddled with unintended consequences for
    many years to come with a bankruptcy noted on their credit
    profile for 7 or more years that will hamper their ability to
    buy furniture or a car or other necessary consumer goods or
    even their first home on credit. In the long run, discharging
    this debt will not benefit these borrowers.
        The plight of these borrowers, however, should be properly
    addressed with existing law using the undue hardship exemption.
    Judges may benefit from a clearer explanation of congressional
    intent in this area and more specific criteria.
        I hope that this perspective is useful to you. I will make
    two other brief comments.
        First, the bill removes non-dischargeability retroactively.
    A retroactive re-writing of a contract strikes me as simply
    wrong. How could any transaction in our consumer society be
    taken seriously if the material terms could be retroactively
    changed by one party--or one party or another or the U.S.
    Congress?
        As I noted earlier, lenders initially priced loans based on
    the perceived risk and mitigants including the contract's non-
    dischargeability. Furthermore, investors around the world who
    previously purchased these loans in the secondary market would
    no doubt be injured by retroactively negating the non-discharge
    provisions. Preserving the sanctity of this contract law should
    be paramount.
        Second, the legislation calls for separate treatment of
    dischargeability for for-profit and not-for-profit entities.
    Maintaining the 2005 legislation's goal of identical treatment
    of dischargeability for private student loans, regardless of
    the corporate structure, continues to make sense.
        Creating classes of lenders is inequitable and will lead to
    marketplace confusion. Students already face a dizzying array
    of choices when selecting a loan product. Adding the
    consideration of different bankruptcy options will only further
    confuse them. All private loans should be non-dischargeable.
        In conclusion, I again commend the Subcommittee for taking
    on this hearing. Although the proposed legislation is no doubt
    well intended, I am concerned that it could increase the cost
    of all private student loans, reduce access for some borrowers,
    and increase the risk of unintended consequences for those who
    successfully discharge their loans.
        If the Subcommittee's goal is to protect the most
    distressed borrowers, then I believe that clarifying the undue
    hardship standard--a current consumer protection lynchpin for
    student loan borrowers--is far preferable to undoing the 2005
    legislation.
        Thank you.
        [The prepared statement of Mr. Hupalo follows:]
                      Prepared Statement of John A. Hupalo

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________

        Mr. Cohen. Thank you, sir. Appreciate your testimony.
        Our next witness is Ms. Valisha Cooks. Ms. Cooks lives in
    Los Angeles, California, Kobe Bryant country, a single mother,
    and works full-time as an education coordinator at UCLA. She
    worked her way through Long Beach Community College and spent 1
    year--1 year at Chaminade University--I guess that makes you a
    silver sword or something like that--before finishing her B.A.
    at the University of Phoenix in 2007 with a bachelor's degree
    in business management. She now has more than $80,000 in
    student loan debt, including about $53,000 in private student
    loans.
        Ms. Cooks, thank you for coming here and telling us your--
    giving us your testimony and telling us about your history.
    Thank you.

              TESTIMONY OF VALISHA COOKS, LOS ANGELES, CA

        Ms. Cooks. Thank you.
        Hi. My name is Valisha Cooks. When I took out private
    student loans, I had no idea that I was condemning myself to a
    lifetime of ruined credit, harassment by collection agencies,
    and the hopelessness of endless debt.
        I assumed that I would be better off with a college degree.
    But after college, my loan payments were $1,150 a month; $750
    of that were private loans. That amounts to more than half of
    my take-home pay.
        I filed for bankruptcy, but that only resolved about
    $10,000 in other debt. Now, even though I have a good job, I
    can't afford to pay all my bills in any 1 month, I go to food
    banks to feed my son, and I will never be able to afford a
    house.
        While my high school classmates were going to prom and
    playing sports, I was working full-time as a waitress and
    studying. I went to community college and 1 year of a private
    nonprofit university while working the whole time. It was a
    struggle, but I always paid my rent, paid my car note, and my
    other bills on time. I prided myself as being financially
    responsible.
        After some time away from college, the University of
    Phoenix was one of the few schools that would fit my work
    schedule. I took out as much as I could in Federal loans, but
    it wasn't enough. The financial aid officer said I either had
    to take out private loans or drop out. I decided to stay in
    school. I really wanted to finish my education.
        He steered me to Wachovia for a private loan and told me
    that it was just like a Federal loan. I knew the money wasn't
    free, and I only borrowed what I absolutely needed. University
    of Phoenix also told me that I would have 30 years to pay back
    the loans at a reasonable monthly rate, but that turns out it
    wasn't true for the private loan.
        I paid the interest on my private loans while I was in
    school, but the interest rates rose by 0.5 percent to 1 percent
    every single month. That is when I realized that these were not
    the same as Federal loans, but it was too late. These loans
    seemed like the only way I could get my degree, and I thought
    that would make it worthwhile.
        I graduated with about $41,000 in Federal loans and $36,000
    in private loans. In just 3 short years, the lender for my
    private loans has tacked on more than $16,000 onto my principal
    balance, which are now $53,000.
        About 5 months after I graduated in 2007, I got a job at
    UCLA as an education coordinator. Shortly after that, I became
    pregnant. As I began to prepare for my maternity leave, my
    student loan bills became due. I immediately asked for
    forbearance or deferment.
        The lenders for my Federal loans accommodated me
    immediately, but Wachovia repeatedly lost my paperwork for the
    forbearance of my private loans. They made me fax and mail it
    over and over, saying it was misplaced or never received or
    missing a date.
        There was always an excuse. They were constantly
    transferring my calls and never let me talk to a supervisor. I
    couldn't get the same person on the phone more than once. I
    spent months trying to get a forbearance with them until I
    thought it finally went through.
        I was diagnosed with preeclampsia and was on bed rest. My
    son was born 5 weeks early. He only weighed 3 pounds. Even
    though I thought I had my forbearance, the collection agents
    started calling me. Their calls started from 5 o'clock in the
    morning until 9 o'clock at night. This was a nightmare, and the
    stress made it hard for me to focus on keeping myself and my
    son healthy.
        I had about $10,000 in other personal debt from credit
    cards, my car loans and medical bills. I decided to file for
    bankruptcy because I knew I could never pay that amount along
    with the mountain of student loan payments that I had.
        This was not a decision I made lightly. Filing for
    bankruptcy was expensive and, most of all, humiliating. I was
    raised to work hard, pay my bills, and be responsible. My mom
    worked three jobs so she wouldn't have to be on welfare and
    raised me to be the same way.
        After working hard to pay my way on my own, I could never
    have imagined I would have to face such a painful choice. I
    attempted to include the private education loans in my
    bankruptcy, but they were not discharged. I had already paid
    more than $2,000 for the attorney, and it would have cost even
    more for me to file for undue hardship, and my lawyer told me
    that I probably wouldn't be able to get it, anyway.
        So after the bankruptcy, I still owed over $1,000 a month
    in student loans. I recently consolidated my Federal loans and
    signed up for the income-based repayment. My Federal loan
    payments went from $400 a month to $124 a month, and this is
    affordable for me, and I am so grateful that this program
    exists.
        But my private education loans are in default. They are
    asking for more than $600 a month, and the collection agency is
    unwilling to give me a forbearance or take a lesser payment. I
    send them whatever I can afford each month--usually about
    $120--but they still call and threaten to send my account for
    wage garnishment. They refuse to negotiate an affordable plan
    that will allow me to repay my loans.
        I live in constant fear that the hammer will one day drop
    and ruin my life and the hope for my son's future. It is a
    scary, hopeless feeling.
        Bankruptcy is supposed to help manage my debt, but I am
    worse off now after my bankruptcy than I was before. My brother
    and I tried to buy a house together, but they wouldn't allow me
    to co-sign a mortgage because of my bankruptcy.
        I know how to build up my credit, but as long as I am in
    default on my private loans, that will never happen. I think
    part of the reason why my lender refuses to help me in any way
    is that they know I am stuck with the loan no matter what.
        I didn't go to college to borrow a bunch of money and then
    shirk my responsibilities. I earned my degree to better my life
    and to set an example for my son, and I ended up bankrupt and
    still crushed by private loan debt with no way out, no light at
    the end of the tunnel, and no options.
        Thank you for your time.
        [The prepared statement of Ms. Cooks follows:]
                      Prepared Statement of Valisha Cooks

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________

        Mr. Cohen. You are welcome, Ms. Cooks, and thank you for
    your testimony.
        Our final witness is Mr. Adrian Lapas. Thank you. He is
    currently the sole practitioner at Adrian Lapas in Goldsboro,
    North Carolina, primarily representing individuals in consumer
    bankruptcy cases and pursuing violations of consumer protection
    statutes.
        Prior to opening that firm, he practiced with William
    Strickland and Jackson, did criminal defense, P.I.s, and
    general legal matters. He also served in the United States
    Navy, and we thank you for your service. And proceed with your
    testimony.

     TESTIMONY OF ADRIAN M. LAPAS, ADRIAN M. LAPAS, PA, GOLDSBORO,
         NC, ON BEHALF OF THE NATIONAL ASSOCIATION OF CONSUMER
                          BANKRUPTCY ATTORNEYS

        Mr. Lapas. Mr. Chairman and Members of the Subcommittee,
    good morning. And as the Chairman said, my name is Adrian
    Lapas. I am a bankruptcy attorney from Goldsboro, North
    Carolina.
        I appear today on behalf of the National Association of
    Consumer Bankruptcy Attorneys, or NACBA, for short. NACBA is
    the only national organization dedicated to serving the needs
    of consumer bankruptcy attorneys and protecting the rights of
    consumer bankruptcy debtors.
        I appear this morning in strong support of H.R. 5043, the
    Private Student Loan Bankruptcy Fairness Act, and I want to
    thank you, Mr. Chairman, for your leadership on this issue.
        Most Americans see a college degree as the single-most
    factor for financial success. But with skyrocketing tuition and
    related expenses, more and more students and their families
    must turn to loans to pay for that education.
        What borrowers are learning is that there is no margin for
    error when it comes to student loans. Students who choose
    public service or other low-paying careers or whose education
    does not provide the opportunities they expected to often begin
    their adult lives saddled with student loans they can't pay.
    This creates a financial black hole from which they may never
    escape.
        I see these people in my office every day. And since the
    2005 bankruptcy laws gave private student loans preferential
    treatment previously reserved for government guaranteed student
    loans, there is little that I can do to help. These loans are
    simply not dischargeable, except under very extreme
    circumstances.
        Private student loans are huge profit centers for lenders,
    while students often find themselves loaded up with high
    interest rates and mountains of debt. Indeed, interest rates
    and fees on private loans can be almost as bad as credit cards
    themselves. And unlike Federal student loans, there is no limit
    on the size of private loans and no regulation as to their
    terms or cost.
        Like other private loans, student loans are made and priced
    based on risks. There is simply no public policy justification
    to treat this one type of private loan differently in
    bankruptcy, that is, by denying the discharge simply because of
    how the money is used.
        The discharge is the fundamental purpose of individual
    bankruptcy. It provides the unfortunate, but honest debtor a
    critically important fresh start. Exceptions to the bankruptcy
    discharge should be carefully considered and adopted only where
    necessary to further other important policy choices. Because
    private loans are usually made at market rates and on the same
    basis as other loans, we see no reason to give them special
    treatment in bankruptcy.
        Some raise the illusory argument that, without the special
    treatment, private student loans will become more expensive and
    less available. Allowing discharge in bankruptcy will not
    affect their availability any more than allowing the discharge
    of credit card debt and other private loans resulted in the
    lack of these forms of credit.
        The private student loan industry was expanding rapidly
    before the 2005 amendment, and that expansion likely would have
    continued regardless of whether the exception to discharge can
    be included. And after the 2005 amendment, private student
    loans did not become significantly more available or offered at
    a lower interest rate than previously.
        This suggests that there would be a minimal, if any, change
    in lending if the law is returned to its pre-2005 status and
    private student loans become dischargeable once again.
        NACBA supports this reasonable and commonsense legislation
    to restore bankruptcy protections to private student loans.
    Borrowers can still be subjected to all the scrutiny and all
    the limitations imposed under the 2005 bankruptcy amendments,
    and we would urge this Subcommittee and, indeed, the full
    Congress to pass H.R. 5043 and help individuals and families
    struggling under the weight of private student loans.
        Thank you for your time and your leadership, Mr. Chairman,
    and I would be happy to answer any questions this Committee may
    have.
        [The prepared statement of Mr. Lapas follows:]
                     Prepared Statement of Adrian M. Lapas

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________

        Mr. Cohen. Thank you, Mr. Lapas. You are not related to the
    Lapas--is it Steve, the coach of UCLA?
        Mr. Lapas. No, sir, your honor, different spelling.
        Mr. Cohen. Different--oh, he had two P's, maybe?
        Mr. Lapas. I believe he spells it--yes, he does have two
    P's.
        Mr. Cohen. Yes. I just didn't know if you and Ms. Cooks had
    something--anyway. Thanks. Now is the time for questioning. And
    being Chairman, you get to go first, and so I am first.
        And, Mr. Hupalo, let me ask you a question. You were at--I
    believe it was Marblehead. It is a bank, right?
        Mr. Hupalo. I am sorry, sir?
        Mr. Cohen. Marblehead. Is that a bank?
        Mr. Hupalo. First Marblehead Corporation owns banks, sir,
    but it is not a bank, no.
        Mr. Cohen. All right. Do those banks that they own issue
    credit cards?
        Mr. Hupalo. I am sorry?
        Mr. Cohen. Do you think those banks issue credit cards?
        Mr. Hupalo. No, sir, they do not.
        Mr. Cohen. They don't?
        Mr. Hupalo. First Marblehead does not.
        Mr. Cohen. Do you know anything about folks that issue
    credit cards, though?
        Mr. Hupalo. Just as a general consumer I do.
        Mr. Cohen. Yes. And do you think that maybe they go on
    college campuses or used to go on college campuses and kind of
    encourage students to get credit cards and give them a towel or
    a radio or something like that to sign up to get a credit card?
        Mr. Hupalo. I am not an expert in what the marketing
    techniques are of different credit cards.
        Mr. Cohen. Let's just assume--let's assume that happened in
    America, that they went on college campuses.
        Mr. Hupalo. There are newspaper reports that that has
    happened, certainly.
        Mr. Cohen. Yes. And so if they did that, those students
    don't have any better way--they are in the same situation
    getting those credit cards as they are in getting these loans
    that you all make, and they are out and don't necessarily have
    a job or a bunch of capital to be surety or collateral for
    loans, and yet the banks are really looking for them as prime
    prospects. Should they be--have a different system written into
    the law to where those credit cards given to college students
    aren't dischargeable in bankruptcy?
        Mr. Hupalo. Again, sir, I am not an expert in credit cards,
    but I have to tell you, I disagree vehemently with the idea
    that a credit card and student loan are comparable assets.
        Mr. Cohen. Why not? If what your argument is, that the
    reason they should be non-dischargeable is because these
    students go and they don't have much money--and I know they are
    paid back over a long period of time----
        Mr. Hupalo. Yes, sir.
        Mr. Cohen [continuing]. But they don't have much money, and
    they don't have a whole lot of collateral, a whole lot of
    assets, they just got some potential, that is the same thing
    with credit cards, isn't it? How do you distinguish that?
        Mr. Hupalo. I will be glad, if I could spend a few moments
    talking about that, which I think is a really important
    question that you are raising, sir. The difference between a
    credit card and a student loan is fundamentally different. They
    share two common traits. One is that they are credit
    underwritten. And the second, of course, is that they are
    unsecured consumer assets, debt, rather.
        Other than that, though, the similarities are vacant for
    me. First, on a loan, lenders ask to make a commitment that the
    borrower asks for on day 1 for some period of time, perhaps 20
    or 30 years in the future.
        When a student applies for a credit card, the credit card
    lender will say, based on your credit profile, I will lend
    you--or I will make a line of credit available to you for $500
    or $1,000 or whatever it might be, but they can limit that on
    that very first day. A student--a borrower doesn't have a say
    in how much credit card exposure they get. The bank sets that.
        The second, sir, is that there is a long-term commitment,
    again, on a student loan or any loan. The credit card is a
    short-term commitment. And if the borrower has difficulty
    paying, if they miss a payment, the credit card companies have
    opportunities to mitigate their risk that a student loan issuer
    does not have, a bank, and that specifically is the idea that
    they can stop the credit.
        So if I have a $5,000 limit on my credit card and I am
    delinquent, I am going to get a note from the credit card
    company saying, ``Your limit is now $2,000 or $1,000,'' or
    whatever that balance might be, ``and I am going to take other
    actions to try and collect that debt more rapidly.''
        Mr. Cohen. Slow down for a minute, because you are in my 5
    minutes, and we have--and I appreciate it. But you sound more
    of an expert on credit cards than you started out. You know,
    and so obviously, you know, I hit a question that you were
    prepared to answer, so you boned up on the subject.
        Mr. Hupalo. Well, I think a lot about these things, sir.
        Mr. Cohen. What if we changed the credit card law and said
    that they could pay it back over a longer period of time and
    took that into consideration, because they were just right out
    of the, you know, nest and didn't have any job and income and
    stream and a home and all those things? Would then--should they
    be dischargeable?
        You know where I am getting at. Why should--why are your
    debts different from all other debts, going back to recent
    holidays?
        Mr. Hupalo. I can talk a little bit more about that than
    what you should do with regard to dischargeability of credit
    cards.
        Mr. Cohen. Good. Let's move on to that subject.
        Mr. Hupalo. So I think the answer, sir, is that the student
    loan is a unique asset. It has all the attributes that we have
    talked about. And lenders do not have an opportunity after that
    first loan is made to go back and work with a borrower on these
    other programs of reducing their risk.
        The loan has been made. And, believe me--I think Mr. Franks
    said it correctly--I have been in the industry a long time, and
    there is deep care for borrowers across the country. And if you
    look at the norm that the average borrower has a good
    experience with a private student loan, and I am afraid that
    the atypical experience is the one that we talk more about.
        Mr. Cohen. Ms. Loonin, just like ``Saturday Night Live''
    when they had, you know--respond.
        Ms. Loonin. Well, I mean, I think that, first of all, the
    first point about--you know, comparing to credit cards, really,
    a student loan is actually much more like a credit card, other
    than this sort of open-end versus close-end argument, and that
    is that the lender has the ability to assess, a reasonable
    ability to repay, and underwriting at the outset, whether it is
    a student loan or whether it is a credit card, and choose to
    evaluate the risk at that point, and that is what the private
    lenders are doing now.
        They are making these loans much--every loan has some
    element of risk, but they are taking a lot of the risk out of
    them by requiring underwriting and other things. And that way
    there is less likely to be the same level of write-offs as
    others.
        So in that sense, there is nothing really unique in
    whether--you know, in what the incentives are for creditors to
    make the loans. The private loan creditors are making--or were
    making a lot of money on these loans for a long time, so
    obviously they had the incentive to make them.
        Mr. Cohen. And what about the--did you all characterize
    some of these possibly as kind of subprime?
        Ms. Loonin. Absolutely. I mean, there is every--and we did
    a report a couple of years ago which is on our Web site--
    welcome to look at it--but all of the features of subprime
    lending, including the failure to assess reasonable ability to
    pay, so poor underwriting, irresponsible lending, high fees,
    origination fees up to 10 percent, APRs up to--all variable
    rate, 15, 20 over that percent.
        Basically, the most vulnerable borrowers are the least
    likely to be able to repay the loans, and they are the ones who
    are hurting the most.
        Mr. Cohen. And in essence, our system where we have this
    non-dischargeability in bankruptcy, Ms. Cooks has got nothing--
    she has got no relief, does she? What is Ms. Cooks' relief? Any
    at all?
        Ms. Loonin. Well, that is--and that is what I mentioned.
    What I do--call the creditor and see what they will do. And she
    mentioned that a little bit with Wachovia, that she had trouble
    reaching them in the first place. I am able to reach them. I am
    not here to complain about that. I have contacts with a lot of
    the creditors. They are respectful. But they look at my
    clients' profiles and they say, ``There is nothing we can do
    for them.''
        Mr. Cohen. And is there nothing they can do for them? I
    mean, you can't discharge in bankruptcy, so what can you do? I
    mean, you can--you can just pay it off the rest of your life or
    you can slit your wrists?
        Ms. Loonin. Well, there is something the creditors can do.
    They can choose to work with the borrowers. And I think,
    frankly, in some cases, that might be even worth their
    investors--worth--you know, might make some value, because that
    way--instead of writing them off and getting nothing, they
    might be able to work out some agreements and be more flexible,
    modify the terms, do some things where maybe there is some
    possibility of getting some cash flow from these borrowers.
        In some cases, the loan is so expensive it was destined to
    fail, there really is nothing to do.
        Mr. Cohen. With the indulgence of the Committee and the
    prerogative of being Chairman, I am going to ask Mr. Hupalo, is
    there some type of a modification of the law that you could see
    that would be beneficial to the student and yet leave your--
    your business ventures whole?
        Mr. Hupalo. Yes, sir, I think there is. And one of the
    recognitions that we all should have is that the private
    student loan industry has really developed over the course of
    maybe the last 5 to 7 years in significant volumes and that we
    have gone through an interest rate cycle and a--and a global
    financial calamity that really has changed the face of finance,
    and you all know that as well as anyone.
        The specific answer to your question, I think, is that the
    market will evolve. I think that there are a lot of lessons
    learned from the mistakes that were made by lenders and by
    borrowers, frankly, over the course of the last 5-or 7-year
    period, and I think there will be financial innovation that
    will come out that will make these products more accessible,
    the underwriting criteria will be better, the data that is in
    place in the pools now will inform how we keep borrowers in a
    position where they can make comfortable payments over time.
        One thing that I think about is that--like, in the--when
    you take your vacation, you can buy trip insurance. Perhaps the
    market will evolve to a place where lenders will offer
    borrowers upfront opportunity to buy insurance against the loss
    of a job for a period of time or against the bankruptcy filing
    or something of that nature.
        But my point before, sir, was that there are borrowers on
    both ends of the spectrum--those who take these private student
    loans, get their degrees, and repay them very quickly. There
    are other borrowers, unfortunately, on the other side who have
    the difficulties as we heard today, and this is heartbreaking
    testimony to hear these, but those are--both borrowers are
    atypical.
        The students and the majority of them in the middle can
    take private student loans, they go to school, they get their
    degrees, they get a job, and they make their repayment on time.
    The data shows that the overwhelming majority of these
    borrowers have successful experiences with private student
    loans, and I think the market will help other borrowers as time
    goes on.
        Mr. Cohen. And, Mr. Hupalo, I am going to go on a little
    bit more, but your answer basically is to what Mr. Franks would
    have normally been asking you, about the free market. What I
    asked you, is there legislation that you think could be
    proposed or offered that might remedy some of these problems?
        Mr. Hupalo. I can't offer any comment on that, sir.
        Mr. Cohen. You could. You just don't--you either don't have
    any--you don't have--you don't have a thought on it?
        Mr. Hupalo. I haven't thought about it, sir.
        Mr. Cohen. Okay, thank you.
        Mr. Hupalo. Thank you.
        Mr. Cohen. I will yield to Mr. Franks, and thank you, sir.
        Mr. Franks. Well, thank you very much.
        And as always in these discussions, you know, there is a
    desire on the part of policymakers to try to create the kind of
    atmosphere that will incent people and the system to--to allow
    people like Ms. Cooks to gain a college education. And that is
    something I desperately want to see happen.
        The challenge is that oftentimes with legislation like this
    we never take into consideration that--Ms. Loonin was correct,
    that sometimes people make these loans because they believe
    they are going to make some money doing so. And if you take
    that out of the equation, they will simply stop making the
    loans. And the result will be the next person, like Ms. Cooks,
    that comes along will not be able to gain a college education.
        And I--it is always hard as a conservative to make those
    arguments, because it seems like it lacks the heart, but I
    really believe that it is the most heartfelt argument that I
    can make.
        If we want to make this work, we cannot repeal the laws of
    mathematics. And the idea that we will, you know, wipe out the
    private industry in favor of government and the nonprofit
    industry, we don't realize how much those other two entities
    depend upon the private market.
        If the private investment, the private individuals, private
    endeavors fail, then government will have nothing to give
    anyone anything, and certainly nonprofits are largely dependent
    upon the private market, as well.
        So my concern is that we are going to be successful here at
    some point in chasing private capital out of the market. And
    when we do that, we will not like the result.
        So, Mr. Hupalo, the total volume of private student loans
    dropped 52 percent for the 2008-2009 school year. And according
    to the Wall Street Journal, this is because private lenders--
    private student lenders are having a difficult time raising the
    capital from investors necessary to make student loans.
        Could you explain why it is likely that H.R. 5043 will both
    further decrease the availability of private student loans and
    likely cause lenders to raise the interest rates they charge,
    like happened with credit cards when we messed with credit
    cards?
        Mr. Hupalo. Yes, sir. Thank you. And I touched on it
    briefly in my verbal comments earlier and the written testimony
    I provided, and that is that the--although the recent
    experience in the--in the credit markets has masked, I think, a
    lot of the underlying tendencies that occur with consumers,
    because interest rates have been at historic lows, it is hard
    to make a judgment looking from 2005 to 2010 to have a cause
    and effect of what the 2005 legislation did to consumers during
    the period of 2005 to 2010, because it was just so absent,
    particularly the second half of that period.
        And so my concern, though, sir, is after working in this
    industry for quite a long time, is to know that as a risk-based
    product, which this is, and it is risk-based Federal Government
    loans or risk-based loans, as well as a private loan, as well
    as loans that are offered by not-for-profits, at the end of the
    day, you need to have a positive return, as you said, in order
    to offer additional loans.
        If it comes to a point where access is denied because cost
    is too high, or the credit criteria become too tight that
    borrowers are not able to avail themselves to this kind of a
    loan, then the reality is that there will be a reduction in
    access to school and borrowers will not be able to go to the
    school that they choose, but they may have to go to another
    institution.
        So I think there are multiple potential effects that would
    be negative if this were to go forward.
        Mr. Franks. Well, obviously, I agree with that and, in my
    opening statement, said that H.R. 5043 seems to be an overly
    broad attack on all private student lenders, rather than a
    nuanced approach aimed at abusive lending practices. So I guess
    I would ask you again, Mr. Hupalo, in your experience, is the
    private student lending industry so dominated by unaffordable
    loans that we need bankruptcy legislation that affects the
    entire industry?
        Mr. Hupalo. Sir, thank you for the question. And as I tried
    to indicate in my response to the Chairman earlier, the--when
    you look at the population, a spectrum of private student
    borrowers and the spectrum of private student lenders, you
    realize that it is quite wide and it is broad.
        And the reality is that, if you go to the norm, take away
    the tails of very, very successful student who repays
    immediately and the poorer borrower who has a multitude of very
    unfortunate incidents and circumstances as we heard this
    morning, those out of the equation, the sweet spot, if you
    will, of the data tells you that the borrowers are successful,
    they can repay these loans if they are created properly, they
    are able to achieve their dream of a college education as a
    result of the prudent use of private student loans. And so I
    don't believe that every student should have access to a
    private student loan.
        Mr. Cohen talked about the scholarship program in
    Tennessee. They should take advantage of those. They should
    take advantage of all the other grant opportunities,
    educational funding that comes from the school, then the
    Federal loan programs, which are absolutely essential. And then
    if they need more money and they want to go to that school, a
    private student loan would be the right place for them to shop.
        Mr. Franks. All right. Well, thank you, Mr. Chairman. Thank
    all of you for being here.
        Mr. Cohen. Thank you, sir.
        I now recognize Mr. Johnson for 5 minutes.
        Mr. Johnson. Thank you, Mr. Chairman.
        Ms. Loonin, you referred to these private students loans as
    subprime lending. Would it be fair to also characterize these
    loans as predatory loans in a predatory lending atmosphere?
        Ms. Loonin. Yes, I mean, not all of them, but certainly
    that was a segment of the industry, and I would say, mainly
    because, similar to what we think of as the predatory mortgage
    loans, a lot of these loans were made not so much for the
    purpose of what is best for the borrower, but for the purpose
    of, how soon can we package them and get them sold to
    investors?
        Mr. Johnson. Okay, now stop right there.
        I wanted to ask that question--and I will ask it of Mr.
    Hupalo. Isn't it true that these private student loans are
    bundled and then sold as securities on Wall Street?
        Mr. Hupalo. Some of them and perhaps a majority of them
    were, but no longer as a result of the credit crisis.
        Mr. Johnson. And that is why the lending activity declined
    in 2008 and 2009, isn't that correct?
        Mr. Hupalo. Yes, sir. That was a large component of the
    decline.
        Mr. Johnson. And, in fact, it may have even been a large
    component of why our economic system was on the verge of
    collapse in October of 2008. Isn't that a fact? Yes or no?
        Mr. Hupalo. No, sir, I don't think--I don't think that is
    as it is a fact.
        Mr. Johnson. Okay, well, let me--let me move forward then,
    and I am sure that you would not disagree with that, Ms.
    Loonin, but let me talk with Ms. Cooks. And I think you are the
    American success story in terms of working your way through
    high school and then through college.
        And tell me, did you see an advertisement for your private
    student loan or did someone steer you to the private lender?
        Ms. Cooks. I was steered toward Wachovia specifically.
    There wasn't----
        Mr. Johnson. And who----
        Ms. Cooks. The financial aid officer at the University of
    Phoenix, there wasn't like a paper given to me with a bunch of
    options that I could shop for the best rate. There was one
    person on the list, and that is who we used for our alternative
    loan.
        Mr. Johnson. Now, do you know whether or not there may have
    been a connection between the loan officer and the lending
    institution?
        Ms. Cooks. I am sure that is a possibility. I personally
    don't know. But----
        Mr. Johnson. But you know--you did not know at the time
    that you took this loan, either, I suppose.
        Ms. Cooks. Right.
        Mr. Johnson. And so you were steered to one lender. You
    were told that you were not eligible for a----
        Ms. Cooks. There were no----
        Mr. Johnson [continuing]. Federal student----
        Ms. Cooks [continuing]. Scholarships or--I applied for all
    the other things.
        Mr. Johnson. Did that same student loan official tell you
    that you were disqualified?
        Ms. Cooks. Actually, no, they didn't even give me the
    option. It was something that I researched on my own, and I was
    denied, they said, based on need base, that other people needed
    it more than I needed it, and there wasn't any other----
        Mr. Johnson. So nobody told you that? That was just your
    own----
        Ms. Cooks. Right.
        Mr. Johnson [continuing]. Finding? It could have been right
    or could have been wrong.
        Ms. Cooks. I have always kind of researched a lot of things
    on my own.
        Mr. Johnson. Yes, well, you sound like a very smart young
    lady.
        Mr. Lapas--well, let me go--before I ask you, let me go
    back to Mr. Hupalo and ask whether or not private lending of
    student loans is restricted to only nonprofit entities?
        Mr. Hupalo. It is not restricted, sir.
        Mr. Johnson. So a for-profit school or a nonprofit school
    would qualify to--for the exemption under current bankruptcy
    law as a private lender? Is that correct?
        Mr. Hupalo. The loan, sir, would not qualify, that is
    right.
        Mr. Johnson. So this means that, if I decided to go out and
    set up the Hank Johnson Bible College in a one-room office, I
    could be qualified as a student--as a private student lender?
        Mr. Hupalo. You would need the capital, sir, to do that.
        Mr. Johnson. What kind of capital would I need?
        Mr. Hupalo. You would raise capital privately, perhaps.
        Mr. Johnson. But I could open up a non-accredited
    institution and still get the benefit of the exemption under
    current bankruptcy law?
        Mr. Hupalo. No, sir, you would have to be a regulated
    lender. So in your example, sir--I understand what----
        Mr. Johnson. Yes, I could be like a loan broker, let's say,
    and write the loan on behalf of, let's say, Wachovia, and,
    boom, have Wachovia as the registered entity that is making the
    loan officially.
        Mr. Hupalo. You could ask Wachovia to make loans available
    to your students. Yes, sir, you could.
        Mr. Johnson. This sounds like a giant cesspool of muck that
    contributed to a financial system decline, and there are even
    people who say that Wall Street is doing--is back to doing the
    same thing that it was doing prior to the meltdown, and perhaps
    the private student loan industry is a major contributor to
    this.
        So I believe that this legislation is needed and necessary.
    Mr. Lapas, I am so sorry that I didn't have a chance to ask you
    some questions about this.
        Mr. Cohen. Mr. Johnson, you may have that opportunity. I am
    going to ask you to take the Chair, as I have got some business
    to attend to. And with the prerogative of the Chair, before you
    recognize Mr. Coble, you might be able to ask another question,
    but I appreciate it. I could see Rahm Emanuel channeling
    through you, and I appreciate your ability to ferret that out.
        Mr. Johnson. Thank you, sir.
        Mr. Cohen. So if you would take the Chair for a minute,
    please.
        Mr. Johnson. [Presiding.] All right. We will next go to Mr.
    Howard Coble, the Ranking Member of the Courts and Competition
    Subcommittee of the Judiciary Committee.
        Mr. Coble. Thank you, Mr. Chairman. Good to have you all
    with us, especially my fellow Caroline from eastern Carolina.
    Mr. Lapas, good to have you here.
        Mr. Hupalo, will lenders shy away from originating private
    student loans if the borrower can file for Chapter 7 after
    graduation and fully discharge the debt?
        Mr. Hupalo. Sir, they will either change their credit
    criteria or likely increase the rate charged to offset the
    increased risk of that discharge of--in bankruptcy.
        Mr. Coble. Mr. Lapas, assuming for argument's sake--and I
    am not suggesting this one way or the other--but assuming for
    argument's sake that private student lenders are engaged in
    predatory lending practices, is not amending the bankruptcy
    code an indirect way to get at predatory student lending?
        Mr. Lapas. Mr. Coble, I really cannot speak to that.
        Mr. Coble. Pull the mic a little closer to you, Mr. Lapas,
    if you will.
        Mr. Lapas. I cannot speak to that. I do not know, but
    amending the bankruptcy code for debtors that are in financial
    distress would be the most efficient means of dealing with that
    debt, much as in Ms. Cooks' situation, as opposed to attempting
    some type of private litigation to address any predatory
    practices on behalf of the student lenders.
        Mr. Coble. Let me ask you this, Mr. Lapas. Am I
    pronouncing, Mr. Lapas, that correct?
        Mr. Lapas. That is correct, sir.
        Mr. Coble. Some of the testimony today is that private
    student loans are more akin to credit cards. Of course, we all
    know the fundamental difference between the two. Credit cards,
    of course, are issued based upon the current ability to repay,
    whereas the student loans are based upon future ability to
    repay. What steps outside of bankruptcy can the Congress take
    to make private student loans more like Federal student loans
    and less like credit cards, if you know?
        Mr. Lapas. I would not hazard a guess on that.
        Mr. Coble. Would any of the members of the panel have----
        Mr. Lapas. Perhaps Ms. Loonin would be more appropriate to
    answer that.
        Mr. Coble. Okay.
        Ms. Loonin. Sure. I think Federal student loans really are
    truly much more like financial aid. And the government
    guarantees payment of them, so I suppose that, you know, is
    something that could be done, but I think that is exactly--that
    is not a step we would want to take, because, you know, the
    market--the point about the Federal loans is it is not just
    that the government guarantees them, but there is also strict
    regulation of rates and terms and all the flexible options out
    there.
        Mr. Coble. I thank you for that, Ms. Loonin.
        And let me ask any of the panel members this. Are you all
    concerned that making private student loans unconditionally
    dischargeable in bankruptcy may negatively affect access to
    future loans? Does anyone have any concern about that one way
    or the other?
        Ms. Loonin. No, because there is no evidence that that is
    what the lenders are responding to. As we said, they are
    responding to market incentives. And to the extent that private
    loans are less available now, we consider this a welcome market
    correction, because it is primarily the very high rates,
    predatory loans that have astronomical write-off rates, those
    are the ones that are being made less now.
        And the other, more responsible lending is continuing to go
    on, which, frankly, responsible, prime, private lending is not
    where the problem is. We are--there are some lenders that are
    trying to step in now to fill in the gap, so I am not saying
    that the situation is going to stay, but that is the way it is
    right now.
        Mr. Coble. Mr. Hupalo, want to weigh in?
        Mr. Hupalo. Yes, I would have concern that there would be
    access problems. And, again, the idea of trying to document
    this over the last 5-year period is very difficult, given all
    the market turmoil that has occurred.
        Mr. Coble. Mr. Lapas, want to insert your oars into these
    waters?
        Mr. Lapas. Yes, sir, but also, over the last 5 years, it
    has only been for the last 5 years that private student loans
    have been non-dischargeable. Prior to that time--which would be
    a relevant time period to look at--what has been the access to
    private student loan lenders while those debts were
    dischargeable in bankruptcy? Just to reiterate, it is only
    since 2005 that private student loans were non-dischargeable in
    bankruptcy.
        I do not have that concern that access would not be
    available. And as Mr. Hupalo indicated in his prior testimony,
    there is a small tail of student borrowers that are not paying,
    so that that sweet spot, the middle, where most borrowers do
    pay, is still going to provide the impetus for that access to
    capital.
        I believe the statistics would show--and, again, Ms. Loonin
    may be more expert than I on this matter--but that the amount
    of debt even considered in bankruptcy for student loans--
    private student loan lenders is miniscule in respect to the
    overall market.
        Mr. Coble. Ms. Cooks, you want to weigh in on this?
        Ms. Cooks. On your previous question that you asked, what
    do I think should be done, possibly just options, because like
    I said now, I don't really have very many options. With the
    Federal loans, of course, I have the IBR, the income-based
    repayment option. Now I send my private loan lenders what I can
    afford.
        So if there was a similar type of option with the private
    loans, where they were forced or held to the same standard as
    the Federal loan, to give me an affordable monthly payment or
    even a length of period that I could defer the payment, and
    continue to pay interest, or just any type of options.
        Mr. Coble. I got you.
        Ms. Cooks. Because now I continue to pay my loan even
    though they are in default. I just can't afford to pay what
    they are asking me to pay.
        Mr. Coble. Thank you, Mr. Chairman. I see my red light has
    illuminated. Mr. Chairman, one final point. And I don't think
    anybody has mentioned this.
        One of the--maybe the appropriate word might be culprit--is
    the increasing cost of education. That is one of the--I don't--
    I don't have a handle on that, but if you all do, meet me after
    class. I will be glad to listen to you.
        Good to see all of you. Thank you, Mr. Chairman.
        Mr. Johnson. Thank you, Mr. Coble.
        Next we will hear from the gentlewoman from California, Ms.
    Judy Chu.
        Ms. Chu. Thank you, Mr. Chairman.
        I would like to ask questions pertaining to this premise
    that there would be a widespread abuse of bankruptcy should the
    law be changed. And, of course, we know that in 2005, Congress
    limited the discharge of private student loans through
    bankruptcy, only for when the debtor could show undue hardship,
    and the change was made because of this premise of widespread
    bankruptcy should private loans be dischargeable.
        So, Ms. Loonin, what do you believe about--what do you
    think about that? I know that there was a recent nationwide
    study which shows us that nearly half of all debtors seeking to
    discharge education debt through bankruptcy had incomes at or
    below 200 percent of the Federal poverty level. Would there be
    widespread abuse of bankruptcy, should this occur?
        Ms. Loonin. Yes, thank you. That was the original premise
    for the Federal student loan non-dischargeability without even
    evidence that there was that sort of heightened filing by
    students in the Federal loan program. There is certainly no
    evidence that that is true in the private loan program, so it
    is based on a false premise, and I think really, you know,
    missed--or, you know, mischaracterized the reasons why people
    file for bankruptcy.
        The people file for bankruptcy, as the evidence shows,
    because they have to, because they don't have income or because
    something has happened in their life, a medical situation or
    something like that, that requires them to get this fresh
    start.
        So, again, I don't think that that is something that should
    be concerned. We can--Ms. Cooks spoke to the consequences of
    bankruptcy, the effect on the credit report, the fact that this
    stays on your credit report for 10 years. The other
    consequences of bankruptcy are things that I hear from my
    clients every day when they consider whether they even want to
    think about filing for bankruptcy.
        Ms. Chu. Mr. Lapas, what was the situation prior to 2005?
    Was there widespread abuse of this process with student loans?
        Mr. Lapas. With regards to private student loans?
        Ms. Chu. With regard to private student loans.
        Mr. Lapas. Not in my----
        Mr. Johnson. If you would put your mic on, also.
        Mr. Lapas. Not in my day-to-day practice. I rarely saw
    instances with private student loans where the debtors were
    attempting to in essence game the system. They all had serious
    financial issues that needed to--needed to be addressed.
        Most of the time, the precipitating financial problem that
    caused them to seek bankruptcy assistance in the first place
    was not the student loan, but that compounded it. And in
    discharging a private student loan prior to 2005, it would help
    the debtors get back on track, but it was not the main factor
    most times.
        And, again, prior to 2005, if there was someone with
    student loans, significantly, they were the government
    guaranteed student loans or loans issued by nonprofit, which
    were non-dischargeable, anyway.
        Ms. Chu. Current law says that private student loans can't
    be discharged unless there is an undue hardship. What is the
    difficulty in considering that approach?
        Mr. Lapas. Undue hardship is largely defined as--and
    particularly with regards in my circuit, the Fourth Circuit, as
    a certainty of hopelessness. Not only do you have to show that
    you can't afford to make the payments, but that you have to
    show that you are not going to be able to make the payments for
    an extended amount of time.
        Recently, a Fourth Circuit case came down where the debtor
    was offered--on Federal student loans--an income-based
    repayment plan that would extend for 25 years, 25 years, and
    that was considered a reasonable accommodation. And because she
    declined that 25-year-based repayment plan, the court held that
    we are not going to discharge your student loans. Again, these
    were the Federal student loans.
        Also, one of the difficulties is the cost to the debtor of
    even attempting to get the debt discharged in bankruptcy. And,
    again, going back to my circuit, the Fourth Circuit, another
    case recently was handed down where the debtor filed an
    adversary proceeding to have her loans discharged in bankruptcy
    court. She won in bankruptcy court. The creditor appealed it to
    the district court. The district court remanded it back to
    bankruptcy court.
        They held another hearing. The bankruptcy court ruled in
    favor of the debtor. She won again. It goes to the district
    court. She wins. It was appealed to the court of appeals on the
    Fourth Circuit. She loses.
        So you have got a 3-year timeframe in which not only is she
    hanging in limbo, but she is incurring additional attorney's
    fees, other costs associated with it. She wins all the time, up
    until the Fourth Circuit, and she loses, in another case where
    the debtor wins up through the Fourth Circuit and loses yet
    again.
        Most debtors cannot afford to do that. They cannot afford
    to take that chance. They cannot afford to incur the attorney's
    fees to do that. Or the attorney just takes it for free.
        But it is not only just for free in that the attorney will
    be advancing significant costs of their money to pursue the
    case further.
        There are significant hurdles with that undue hardship.
    Again, we are not here to discuss undue hardship. It is just
    changing the bankruptcy code to allow for the discharge of
    private student loans. But, again, that is a significant
    factor.
        Prior to 2005, government loans--well, private student
    loans were dischargeable. After 2005, they just simply are not.
    The undue hardship does constitute a significant hurdle.
        Ms. Chu. Thank you.
        Mr. Johnson. We have been joined, ladies and gentlemen, by
    my good friend from the great state of Ohio, Congressman Jim
    Jordan.
        Mr. Jordan. Thank you, Mr. Chairman. And I apologize for
    missing your testimony. Actually, I went back to my office to
    meet with the Ohio State Bar Association.
        Mr. Hupalo, will this change fully dischargeable private
    student loans? Isn't it just going to add to the cost of people
    who--future borrowers, I mean, when lenders have to assume this
    risk, they are just going to--it is just going to mean students
    who want to borrow money to pay for their college are going to
    have pay more in the future?
        Mr. Hupalo. Yes, sir, thank you for the question. And
    perhaps we should draw the line a little finer.
        Prior to 2005, private loans made by not-for-profits were
    non-dischargeable. So the 2005 legislation put all of the loans
    made by for-profit lenders and not-for-profit lenders on the
    same footing, so there is some equity put into the system at
    that point.
        To your question, sir, yes, we talked before about the
    tails of students who are able to pay and those who are unable
    to pay, and then the large majority in the middle. I believe,
    sir, that the cost will increase for all borrowers in the--and
    particularly those that will bear the costs in the middle,
    those who are paying on time.
        Mr. Jordan. Okay, let me ask you a slightly different
    question. The provision put in the health care bill, which, you
    know, vastly moved the government direct lending in the student
    loan market, do you think that will lead to greater defaults?
    And, I guess, country boy from Ohio is thinking, if a student
    and a family are getting a loan from their local banker or
    someone they know, less likely to default than if they are
    getting it from the--you know, the big, bad Federal Government,
    and somewhere else.
        Do you think--so do you think the change made in the health
    care bill is actually going to mean more defaults from students
    as we move forward?
        Mr. Hupalo. Sir, I don't--I can't really give you a view on
    that. But I do know that, you know, there is a lot of
    language--relative language that we talked about this morning
    about loans being riskier or costlier, and trying to quantify
    that is sometimes difficult.
        But what should be known is that the Department of
    Education released in December 3-year default rates. This is
    now a change in their methodology that shows that the 3-year
    default rates for Federal loans are in excess of 11 percent,
    with some of them as high as 20 percent.
        So when we talk about private student loan default rates
    and Federal Government student loan default rates, I want to
    make sure that we are on an even footing and to try to identify
    where those relative measures are and what they are.
        For instance, you know, we talk about cost of loans.
    Today's interest rate environment leaves it such that borrowers
    with variable rate private loans may, in fact, be paying less
    than they would pay on their Federal Government fixed-rate
    loan. It is the nature of the interest rate environment.
        Mr. Jordan. Right.
        Mr. Hupalo. But all these questions need to be answered.
        Mr. Jordan. Yes. Is it fair to conclude, as I have, that
    this--the bill we are talking about today, the action that was
    taken in the health care bill, that the current majority in
    Congress and this Administration simply want the government to
    do it all when it comes to student loans?
        Mr. Hupalo. I believe that is right.
        Mr. Jordan. Okay.
        Thank you, Mr. Chairman.
        Mr. Johnson. Thank you, sir.
        Next, the distinguished gentleman from the great state of
    Virginia, Mr. Bobby Scott.
        Mr. Scott. Thank you. Some of this may be a little bit
    repetitious, but let me just get some things on the record.
        Mr. Lapas, the private loans and direct Federal loans are
    both equal in terms of bankruptcy, both non-dischargeable,
    except in hardship. Is that right? They are treated equally?
        Mr. Lapas. That is correct.
        Mr. Scott. In bankruptcy. Now, on the Federal loans, you
    can get deferrals for many reasons, like public service,
    continuing your education, and things like that, is that right?
        Mr. Lapas. That is correct.
        Mr. Scott. Can you do that on private loans?
        Mr. Lapas. Generally no. That would be up to the individual
    private student loan lender and whatever individual policies
    they may have in place. It would certainly be in the lender's
    discretion.
        Mr. Scott. Now, in Federal loans, are you entitled to an
    income-based repayment plan that is a percentage--a reasonable
    percentage of your income?
        Mr. Lapas. That is my understanding, yes.
        Mr. Scott. And is that available under the private loans?
        Mr. Lapas. Again, it would be in the discretion of the
    private lender.
        Mr. Scott. But you are not entitled to it?
        Mr. Lapas. But you are not entitled to it.
        Mr. Scott. Mr. Hupalo, can you--you were talking about
    default rates. What is the default rate on the public loans and
    the private loans?
        Mr. Hupalo. I stammer, sir, because that is a very broad
    question. I think you are looking for a very narrow answer. You
    can look, you know, generally across default rates, and they
    vary by lender, by borrower type, by school type, so I could
    perhaps give you a better answer in the future.
        Mr. Scott. Is there a difference in interest rate charged?
        Mr. Hupalo. Yes, there is, sir.
        Mr. Scott. What is the--what is the difference in interest
    rate charged between public and private loans?
        Mr. Hupalo. Generally, the public Federal Government loans
    are fixed-rate loans, and their percentage varies. The answer
    for private-sector loans, the bank-type loans, are variable
    rate. When the variable rate is based on an index and then
    based on the creditor's borrower, there is an addition to that
    index called the spread, and that varies.
        Mr. Scott. What are some of the kinds of interest rates
    that private loans are charging now?
        Mr. Hupalo. Private loans currently can charge--you know,
    for instance, I can tell you, based on some of my experience
    and knowledge of some of these portfolios, something on the
    order of LIBOR plus 4.75 percent or 5 percent, which in today's
    interest rate environment would be somewhere on the order of 5
    percent to 5.25 percent.
        Some of those--that is for--that is an average. And, again,
    we need to be careful, because there is certainly loans that
    are LIBOR plus 10 percent, and there are loans that are LIBOR
    plus 3 percent, so we need to be careful about our language.
        Mr. Scott. Ms. Loonin, for those that are in trouble, what
    kind of interest rates are they being charged?
        Ms. Loonin. Well, I see a wide range, but for the borrowers
    I see who are in the most trouble, the interest rates are
    usually, again, variable, but at least 10 percent, and then
    generally as high as--I think the average in the study I did
    was 11.5 percent, but I have seen, as I have said, over 20
    percent, as well.
        Mr. Scott. Ms. Hupalo, in 2005, the change was made to make
    private loans, which were then dischargeable, non-
    dischargeable, except for hardship, is that right?
        Mr. Hupalo. Yes, sir.
        Mr. Scott. Did that apply to existing loans?
        Mr. Hupalo. I don't believe so, although I am not an expert
    on that.
        Mr. Scott. Ms. Loonin, did it apply to existing loans?
        Ms. Loonin. Yes, it was for cases filed after that date,
    correct.
        Mr. Scott. Okay, now, does anybody have any evidence as to
    whether or not the interest rates went up, the default rates
    went up, or anything good or bad happening after the 2005
    change to private loans?
        Ms. Loonin. I have some information--that Sallie Mae, for
    example, the average margin on their private student loans
    continued to increase, starting from before the change and then
    through 2007 after the change, as well.
        Mr. Scott. So that you could not--the change did not have
    an effect on interest rates or default rates?
        Ms. Loonin. Correct.
        Mr. Hupalo. May I, sir? I think that the non-
    dischargeability question is one of a number of factors when
    you are pricing a loan, so there may have been other factors
    included in that, including the potential for going down the
    credit scale, which some lenders did do.
        Mr. Scott. Well, if there wasn't much effect when we added
    it, why would there be much effect if you took it out? If you
    went exact to how things were before 2005, why would there be
    much of a difference?
        Mr. Hupalo. Because, again, I don't know how much of a
    difference there would be, but there would be some difference,
    because the lenders would look at the experience that they have
    had and price in what they think will be the increased
    bankruptcies in that forward period.
        Mr. Scott. When the loans were, in fact, dischargeable,
    were students, in fact, filing for bankruptcy? What was the
    experience?
        Mr. Hupalo. Perhaps Mr. Lapas can tell us that.
        Mr. Scott. I mean, they could theoretically--I mean, as Mr.
    Hupalo indicated, they were essentially asset-free and heavily
    in debt, and that is an invitation for bankruptcy. Did they, in
    fact, take advantage of it or not?
        Mr. Lapas. Well, the decision to file bankruptcy is
    certainly an individual decision. And as I indicated to Ms.
    Chu, there are a lot of other factors involved in the decision
    to file bankruptcy.
        On an anecdotal basis and based just on my practice, do
    people come in with student loan debt or particularly private
    student loan debt solely to file bankruptcy? I cannot recall a
    single one solely that came into file bankruptcy in that
    respect. But they were certainly part of the debt picture which
    led to that decision to file bankruptcy.
        Mr. Scott. So, Mr. Chairman, I just want to end up by
    saying, if although theoretically they could be filing
    bankruptcy, if that wasn't the actual practice, and we see
    situations like Ms. Cooks', it seems to me that we are afraid
    of something that just wasn't happening.
        And so unless we see evidence that--of something happening,
    I think we are--it is just theoretical. There wasn't any change
    after 2005 that is apparent, so I yield back.
        Mr. Johnson. Thank you, Congressman.
        Mr. Jordan. Mr. Chairman?
        Mr. Johnson. Yes?
        Mr. Jordan. I would just unanimous consent if we could
    enter the written statement into the record from the Consumer
    Bankers Association.
        Mr. Johnson. Without objection.
        [The information referred to follows:]

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                                   __________
        Mr. Johnson. I would like to thank all the witnesses for
    their testimony today. Without objection, Members will have 5
    legislative days to submit any additional written questions,
    which we will forward to the witnesses and ask that you answer
    promptly to be made a part of the record.
        Without objection, the record will remain open for 5
    legislative days for the submission of any other additional
    materials. And, again, I want to thank everyone for their time
    and patience. This hearing of the Subcommittee on Commercial
    and Administrative Law is adjourned.
        [Whereupon, at 11:02 a.m., the Subcommittee was adjourned.]

                                A P P E N D I X

                                  ----------

                   Material Submitted for the Hearing Record

     Prepared Statement of the Honorable Henry C. ``Hank'' Johnson, Jr., a
       Representative in Congress from the State of Georgia, and Member,
               Subcommittee on Commercial and Administrative Law

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            Response to Post-Hearing Questions from Deanne Loonin,
                    National Consumer Law Center, Boston, MA

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            Response to Post-Hearing Questions from John A. Hupalo,
                      Ramirez Capital Advisors, Weston, MA

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        Letter to the Honorable Steve Cohen, Chairman, Subcommittee on
       Commercial and Administrative Law, from the National Consumer Law
      Center and the National Association of Consumer Bankruptcy Attorneys

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           Coalition Letter to the Honorable Steve Cohen, Chairman,
               Subcommittee on Commercial and Administrative Law

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            Prepared Statement of the Financial Services Roundtable

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