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




                               BEFORE THE

                            SUBCOMMITTEE ON

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES


                             SECOND SESSION


                               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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                       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
  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
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California

       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
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


                                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


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 
  Oral Testimony.................................................    36
  Prepared Statement.............................................    38


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

               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



                        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 
    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:]
    Mr. Franks. Thank you, Mr. Chairman. I think I am still a 
    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 
    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 
    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 
    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 
    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 
    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 
    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, 

    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 
    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


    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, 

    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 
    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. 
    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 
    Thank you.
    [The prepared statement of Mr. Hupalo follows:]
                  Prepared Statement of John A. Hupalo



    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 
    Ms. Cooks, thank you for coming here and telling us your--
giving us your testimony and telling us about your history. 
Thank you.


    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 
    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 
    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 
    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



    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 
    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 

                      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 
    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 
    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 
    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 
    [The prepared statement of Mr. Lapas follows:]
                 Prepared Statement of Adrian M. Lapas



    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 
    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 
    Mr. Hupalo. I can talk a little bit more about that than 
what you should do with regard to dischargeability of credit 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    Mr. Johnson. Now, do you know whether or not there may have 
been a connection between the loan officer and the lending 
    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 
    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 
    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 
    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 
    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, 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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, 
    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 
    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:]

    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


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


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


    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


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


        Prepared Statement of the Financial Services Roundtable