[Senate Hearing 112-754]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-754
 
    PRIVATE STUDENT LOANS: PROVIDING FLEXIBILITY AND OPPORTUNITY TO 

                               BORROWERS?
=======================================================================


                                HEARING

                               before the

                            SUBCOMMITTEE ON

             FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION

                                 of the

                              COMMITTEE ON

                   BANKING,HOUSING,AND URBAN AFFAIRS

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                                   ON

 EXPLORING THE PRIVATE STUDENT LOAN MARKET AND THE CHALLENGES FACED BY 
                   BORROWERS OF PRIVATE STUDENT LOANS

                               __________

                             JULY 24, 2012

                               __________

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


                 Available at: http: //www.fdsys.gov /



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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                     Riker Vermilye, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

     Subcommittee on Financial Institutions and Consumer Protection

                     SHERROD BROWN, Ohio, Chairman

            BOB CORKER, Tennessee, Ranking Republican Member

JACK REED, Rhode Island              JERRY MORAN, Kansas
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MIKE JOHANNS, Nebraska
DANIEL K. AKAKA, Hawaii              PATRICK J. TOOMEY, Pennsylvania
JON TESTER, Montana                  JIM DeMINT, South Carolina
HERB KOHL, Wisconsin                 DAVID VITTER, Louisiana
JEFF MERKLEY, Oregon
KAY HAGAN, North Carolina

               Graham Steele, Subcommittee Staff Director

         Michael Bright, Republican Subcommittee Staff Director

                 Marjorie Glick, Legislative Assistant

      Darlene Rosenkoetter, Republican Financial Services Counsel

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, JULY 24, 2012

                                                                   Page

Opening statement of Chairman Brown..............................     1

Opening statements, comments, or prepared statements of:
    Senator Corker...............................................     3
    Senator Akaka................................................     4

                               WITNESSES

Rohit Chopra, Student Loan Ombudsman, Consumer Financial 
  Protection Bureau..............................................     4
    Prepared statement...........................................    33
    Response to written questions of:
        Senator Reed.............................................    79
Deanne Loonin, Attorney and Director of Student Loan Borrower 
  Assistance Project, National Consumer Law Center...............    17
    Prepared statement...........................................    38
    Response to written questions of:
        Senator Reed.............................................    80
Jennifer Mishory, Deputy Director, Young Invincibles.............    19
    Prepared statement...........................................    62
Jack Remondi, President and Chief Operating Officer, Sallie Mae..    21
    Prepared statement...........................................    74
    Response to written questions of:
        Senator Reed.............................................    81

              Additional Material Supplied for the Record

Prepared statement submitted by the Education Finance Council 
  (EFC)..........................................................    86
Prepared statement submitted by the Consumer Bankers Association 
  (CBA)..........................................................    89

                                 (iii)


    PRIVATE STUDENT LOANS: PROVIDING FLEXIBILITY AND OPPORTUNITY TO 
                               BORROWERS?

                              ----------                              


                         TUESDAY, JULY 24, 2012

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                     Subcommittee on Financial Institutions
                                   and Consumer Protection,
                                                    Washington, DC.
    The Committee met at 2:30 p.m., Room SD-538, Dirksen Senate 
Office Building, Hon. Sherrod Brown, Chairman of the 
Subcommittee, presiding.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. The Subcommittee on Financial Institutions 
and Consumer Protection will come to order.
    Thanks, always, to Senator Corker for the good work that he 
does with the Subcommittee. And Senator Reed and Senator Akaka, 
thank you for joining us.
    My staff particularly appreciates the working relationship 
with Senator Corker in making these Subcommittee hearings work 
much better as a result.
    On June 29 of this year, Congress passed the Transportation 
and Student Loan Package, essential legislation that not only 
ensured funding for our Nation's infrastructure and its highway 
system but also include extension of the current student loan 
interest rate of 3.4 percent for subsidized Stafford loans, an 
issue that Senator Reed especially had worked hard on.
    The passage of this legislation was important for seven 
million undergraduate students nationwide some, we figure, 
382,000 of them living in Ohio.
    Without this extension, the average student would have 
faced an additional thousand dollars in student loan debt per 
subsidized Stafford loan.
    As others did, I spent a lot of time in community colleges 
and 4-year private and public institutions in my State, 
particularly in Cleveland, Columbus, Cincinnati, Toledo, and 
Dayton, talking about hearing the stories from a number of 
students sharing with me their fears are graduating in a 
challenging economy with high levels, even without this 
legislation obviously, with high levels of student loan debt. 
Others shared the experience of family members and friends who 
are still paying off their loans years after graduation from 
college.
    This is not surprising. Earlier this year, student loan 
debt, as we have heard repeatedly, student loan debt outpaced 
credit card debt soaring to more than $1 trillion. It is a 
problem that affects people of all generations, obviously not 
just the student but the family sometimes, even the 
grandparents.
    According to a report released by the Federal Reserve Bank 
of New York, the average student loan debt burden for borrowers 
under age 30 has risen 56 percent since 2005. Meanwhile 
borrowers in their 40s are the most likely to default.
    Parents and grandparents who may have cosigned for a son or 
a granddaughter must share the burden of younger generations. 
It is clear more must be done to ensure future generations are 
not saddled with high levels of student loan debt while helping 
borrowers of all ages pay off their student loans.
    That is why today's hearing which will focus on the 
challenges facing borrowers in the private student loan market 
is so important. That is a small portion relatively of the 
overall student loan market.
    American consumers owe more than $150 million in 
outstanding private student loan debt, and their numbers have 
increased. Fourteen percent of undergraduates in 2000 to 2007 
have taken out a private loan up from 5 percent in 2003 and 
2004 and continuing to increase. This is troubling.
    Private student loans are the riskiest way to pay for 
college. Often these loans come with a variable interest rates 
ranging from 5 percent, sometimes to 18 percent, often with no 
limits on origination and other fees.
    Additionally, unlike Federal student loans, private student 
loans are less likely to come with affordable payment plans or 
loans forgiveness or with deferment options or cancellation 
rights.
    Given the risks and the challenges as well as the 
opportunities posed by private student loans, I am proud to 
have fought for the inclusion of the private student loan 
ombudsman as part of the Dodd-Frank legislation.
    For the first time in history, private student loan 
borrowers have a central place to go file complaints and have 
an average on it inside the government for them.
    I am still concerned that too many borrowers are not 
receiving the assistance they need from lenders. Last week the 
Consumer Financial Protection Bureau, which was also, as we 
know, enacted as part of Dodd-Frank published a report on the 
private student loan market and the consumers who use these 
loans.
    What was evident from this report is that many borrowers 
took out private student loans without fully understanding the 
terms. Now, many of these borrowers are saddled with thousands 
of dollars of debt with limited options. Hopefully, this 
hearing will allow us to further understand the challenges 
faced by these and other students.
    In the short term, we can explore ways to provide borrowers 
with short-term options to get out from under the burden of 
high-cost private student loans.
    In the longer term, I hope that we can provide students and 
their families with more transparency about private loan 
options and costs as well as predictability when they are 
trying to work with their servicers.
    I will conclude with the story of Teresa from Mentor, Ohio, 
east of Cleveland, and her struggles with private student 
loans. She graduated from college in 2009. She soon after apply 
to join the Peace Corps. She almost had to turn down this once-
in-a-lifetime opportunity because of the unwillingness of our 
lender to defer her loans while enrolled in the Peace Corps.
    She came to one of my constituent coffees to ask for help. 
Through the work of my staff, her lender finally agreed to 
defer her loans. Teresa was able to go abroad last year. While 
domestic issues of broad brought Teresa home sooner than 
expected, her private student loan challenges remain.
    While she has continued to pursue a career in public 
service that began with the Peace Corps, she struggles to make 
her monthly student loan payments that topped $400. In just 2 
years, her balance of one of the loans has jumped from 22,000 
to just under 30,000. Without intervention, these loans will 
continue to grow. We need to think about people like Teresa as 
we make these decisions.
    Moving forward, I am hopeful today's hearings will help 
move us closer to a solution of these important issues.
    Senator Corker.

                STATEMENT OF SENATOR BOB CORKER

    Senator Corker. Thank you, Mr. Chairman, and thank you to 
the witnesses who are here. I am glad we are here today to talk 
about the private student loan market. But to me it is more 
important that we look at the entire picture.
    We have been reading in the news lately that student 
borrowers have nearly $1 trillion in outstanding student loan 
debt. But, we need to remember, as the Chairman just mentioned, 
only 7 percent of those loans are private student loans, and 
the other 93 percent are loans that are backed by the taxpayer.
    I think all of us know the real problem we need to consider 
are the rising cost of college tuition and the amount of 
Federal student loans students are borrowing.
    I might add that on the one hand the Federal Government 
seems to want to help solve this problem, on the other hand 
continues to mandate to States things like Medicaid. In our own 
State, for every percentage that we spend more on Medicaid we 
spend less on higher education. That is the real driver of why 
students are borrowing so much money in our own State.
    The Federal Government recently took over the Federal loan 
program as many of us know. I am unconvinced that that change 
is in any way benefiting students or taxpayers.
    There are income forgiveness programs on the Federal loan 
side where borrowers do not have to pay back the full freight 
of the loans they borrow, sticking the taxpayer with the unpaid 
burden.
    So, I think it is important for us to understand the whole 
picture and not just focus on a tiny fraction of the 
marketplace, and I am pleased that Sallie Mae is here today to 
talk about the progress that they have made in encouraging 
students to borrow more responsibly.
    And, I look forward to the testimony of the witnesses 
today.
    Senator Brown. Thank you Senator Corker.
    Senator Reed, any opening statement?
    Senator Reed. No, Mr. Chairman.
    Senator Brown. Senator Akaka, opening statements?

              STATEMENT OF SENATOR DANIEL K. AKAKA

    Senator Akaka. Thank you very much, Mr. Chairman.
    Good afternoon, panelists, and thank you for being here 
today, all of you.
    I am pleased that Congress is continuing to monitor leading 
practices regarding student loans. A quality education must 
include an understanding of economics and personal finance so 
that all Americans will be prepared to make sound financial 
decisions.
    I look forward to hearing an update from the Consumer 
Protection Bureau on the work that they have done to improve 
the consumer financial marketplace.
    Thank you all the panelists for your testimony today and I 
hope that your insights will help this Committee work toward 
ensuring that students have safe options for obtaining 
financial support for their college educations.
    Thank you much, Mr. Chairman.
    Senator Brown. Thank you, Senator Akaka.
    One point I wanted to make that the reason that this 
hearing, perhaps, Senator Corker, is a little narrower than you 
might want is that, one, as you know, we do not have 
jurisdiction over Federal loans the way we do private student 
loans. But, I am certainly willing to work with this whole, 
obviously this whole issue of student loan debt wherever it 
comes from. This is serious.
    I would like to introduce the first witness, Rohit Chopra, 
leads the office for students at the Consumer Financial 
Protection Bureau where he is designated by Secretary Geithner 
as the CFPB's student loan ombudsman.
    Immediately prior to the opening of the agency, he worked 
at the Department of Treasury on the CFPB implementation team. 
He holds a BA from Harvard and an MBA from Wharton at the 
University of Pennsylvania.
    Mr. Chopra, welcome.

  STATEMENT OF ROHIT CHOPRA, STUDENT LOAN OMBUDSMAN, CONSUMER 
                  FINANCIAL PROTECTION BUREAU

    Mr. Chopra. Thank you. Chairman Brown, Ranking Member 
Corker, and Members of the Subcommittee. Thank you for holding 
this hearing today.
    To prosper in today's global economy, our workforce needs 
skills to innovate in a highly competitive environment; but the 
rapid growth of student debt raises concerns that warrant the 
attention of policymakers. Student loan debt has now crossed 
the $1 trillion mark.
    Now, college is still a great investment. Graduates have 
lower unemployment rates and earn higher wages but there is 
another side to the story.
    Over the past decade, real wages for college graduates have 
declined. The growing college wage premium is largely explained 
by faster falling wages of non-degree holders.
    But, the cost of college has not been falling--rising 
faster than inflation, wage growth, and healthcare costs. 
Growing costs, declining wages and job market uncertainty have 
led to more debt and more risk. The stories of distressed 
borrowers reveal the impact of the financial crisis and the 
significant work that lies ahead.
    Prior to the crisis, private student lending rapidly 
increased. Like in the mortgage industry, lax lending practices 
are much less common today. Loans are cosigned and often have 
significant disclosure requirements.
    But like the mortgage markets, there are still 
opportunities to make improvements. Private loans often lack 
repayment flexibility. In 2007, Congress and President Bush 
enacted the College Cost Reduction and Access Act, which 
allowed student loan borrowers to remain current on a loan 
through the income-based repayment program, but this does not 
impact private student loans.
    Private loan borrowers experience challenges when 
attempting to restructure their loans due to capital markets 
conditions and an unusual status in the bankruptcy code. Even 
the most responsible borrowers have sought to better manage 
their debt burden. We see that many borrowers feel stuck with 
high monthly payments because they cannot easily refinance.
    In March, CFPB launched a student loan complaint system 
where many borrowers have sought and received help and lenders 
have learned more about their borrowers' experience.
    We also worked closely with the Department of Education on 
a Know-Before-You-Owe financial aid shopping sheet that we 
released this morning, and we have developed online tools used 
by tens of thousands of consumers on how to navigate their 
student loan repayment options, avoid default, and honor their 
commitments.
    The CFPB hopes to continue its work with other agencies 
that might play a critical role in addressing roadblocks to 
facilitating repayment flexibility and a robust refinance 
market.
    While student debt might not pose systemic risk to the 
banking system as we saw with mortgages, it would be imprudent 
to dismiss that growing indebtedness can act as a drag on 
economic recovery.
    Consider borrowers facing high rates and high payments who 
are dutifully meeting these obligations. Without a refinance 
option, they struggle to reduce their payments even though they 
have built a solid credit history.
    What might be the consequences of this? Take the housing 
market. First-time homebuyers are an important source of demand 
and data reveals that adults in prime homebuying age cohorts 
are living at home with their parents and seeing reductions in 
their own home ownership rates.
    In addition to home ownership, data also reveals low 
participation and contribution rates to employer retirement 
plans among young graduates, which can challenge their future 
retirement security.
    Congress and Federal agencies have taken steps to increase 
liquidity and the functioning of the credit markets in recent 
years, but the current conditions in student loan markets may 
have a long-term impact on the economic vitality of many 
borrowers today.
    Many borrowers are unable to secure adequate credit 
accommodations to manage their debt burden. Policymakers have 
paid significant attention to conditions in the mortgage 
market; but given the potential impact of student debt on the 
broader economy, the situation demonstrates the need for 
attention. The CFPB will continue its work to make the loan 
marketplace work better for borrowers, schools, and honest 
lenders.
    We look forward to working with Congress and policymakers 
to ensure that economic ability is still within the reach for 
those who borrowed to invest in an education.
    I look forward to your questions.
    Senator Brown. Thank you, Mr. Chopra.
    In your private student loan report, you note that the 
average interest rate in a December sample of private student 
loans was 7.8 percent. We know with the Federal Reserve 
monetary policy actions that interest rates in this country are 
pretty much at record lows.
    Talk to me about that differential, why it is so much 
higher for student loans, what does that mean in terms of 
students not being able to take advantage of those low rates. 
What, if anything, can we do about it?
    Mr. Chopra. So, one unique thing about student loans, 
particularly private student loans, is that once someone takes 
on that loan, let us say when they are 18 or a freshman in 
college, their credit profile can significantly change over 
time.
    As an 18-years-old, they might be considered high risk, but 
by the time they graduate and are gainfully employed and paying 
for a few years, they might be a much lower credit risk.
    What we see is not many refinancing opportunities to best 
allocate price to risk; and when markets are not appropriately 
allocating price to risk, we do not see a well functioning 
market. So, borrowers may be paying higher rates than what is 
justified by their risk profile.
    Senator Brown. So, why are there not these refinancing 
opportunities?
    Mr. Chopra. It is not clear exactly, but historically the 
market developed as a consolidation market. So, essentially 
multiple loans you could consolidate into a single payment. 
This had to do with the way the Federal Family Educational Loan 
Program was structured, but partially it is due to capital 
markets conditions, but we just simply do not see many lenders 
actively competing to find borrowers who may be able to 
refinance.
    Senator Brown. Is there a lack of knowledge on the 
borrowers' part to not think about the issues of refinance, are 
we not?
    Mr. Chopra. Yes, I think that is right.
    Senator Brown. If they were--answer that. And then if they 
were more knowledgeable, are you suggesting there would not be 
the opportunities to refinance because there are not enough 
opportunities in the market?
    Mr. Chopra. Yes, sir. You are right. I think many borrowers 
simply do not know that refinancing is an option, but we do 
hear that many of them are dutifully paying on time for months 
and years and unable to manage their debt better.
    Currently, there is not a large amount of marketing on 
options to refinance. It is generally marketed to people so 
that they can reduce the number of loans they have into a 
single payment, but not necessarily to compete down the price. 
A more competitive market amongst lenders would probably serve 
to benefit the entire marketplace.
    Senator Brown. Let me shift for a moment.
    Quoting your testimony, you note that Federal agencies have 
intervened in the private student loan market in recent years.
    Citing unusual and exigent circumstances, the Federal 
Reserve Board of Governors exercised its authority to establish 
the term asset backed securities loan facilities which 
facilitate the issuance of a wide range of ABS including those 
backed by private student loans.
    Is there a role for the Federal Reserve in providing relief 
for private student loan borrowers?
    Mr. Chopra. I think all Federal regulatory agencies, 
particularly ones that monitor the capital markets, have a role 
to play to make sure that the market is liquid and well 
functioning.
    I would not necessarily characterize it as relief, but 
characterize it in terms of increasing competition so that 
pricing is more fair and more connected to risk.
    We have seen in the mortgage space that the FHFA has sought 
to create the conditions for responsible mortgage borrowers to 
refinance. And, as I said before, many responsible student loan 
borrowers see their credit profile dramatically improve over 
time, but the market may simply not be liquid enough to 
appropriately price their risk and allow them to have a lower 
payment.
    So, we look forward to providing any expertise to the 
Federal Reserve Board of Governors and others as they monitor 
conditions.
    Senator Brown. Thank you, Mr. Chopra.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and thank you 
again for being here.
    You know well the relationship between the investment and 
higher education at the State level and how that has been 
diminishing in many cases, in most cases actually because of 
the tremendous burden of investing in Medicaid which, you know, 
we have made happen in a big way at the Federal level, but that 
has a direct relationship on what tuition levels are for 
students and that is one of the main drivers of why there is so 
much student debt, is it not?
    Mr. Chopra. So, it is certainly true that the constrained 
State budgets, many of which were badly battered starting in 
2008 due to declining tax revenues as well as other policy 
interventions, have led to cuts on a real basis to State higher 
education.
    Senator Corker. Yes.
    Mr. Chopra. So, we have to not just address the underlying 
costs of higher education, but also make sure that markets are 
working properly.
    Senator Corker. It is pretty fascinating. Here we are, we 
are dealing with an issue that over the last several years we 
have helped create and exacerbate and will continue to 
exacerbate over time. I just want to point that out.
    I understand that your agency, a new agency, is advocating 
that on the private side that students just have the ability to 
discharge their loan to bankruptcy, is that correct?
    Mr. Chopra. No. It is actually a little bit different than 
that. The report that the Secretary of Education and the 
Director of the Bureau presented to Congress on Friday analyzed 
about five million records of data starting from 2001 and going 
forward.
    We expected that the 2005 changes to the bankruptcy code 
would have led to lower prices and greater access; but 
immediately following the legislative change, we did not see a 
price decrease. We actually saw a price increase, and larger 
capital markets conditions we think largely explain volume and 
access to credit.
    So, the Director of the Bureau and the Secretary of 
Education asked Congress to take a second look, given that 
borrowers for private student loans may not be able to easily 
restructure their amortization schedule like in Federal loans.
    Senator Corker. So, you have asked Congress to take, one of 
the first actions of the consumer bureau is to ask Congress to 
look at allowing students of private loans, not the public 
loans, but only the private loans, to file bankruptcy as a way 
of getting out from under the terms and conditions of those 
private loans, is that correct?
    Mr. Chopra. Yes, we have asked Congress to take a second 
look. We are happy to provide technical expertise.
    Senator Corker. I understand what you are saying and I 
think we have read the report, and I just find it fascinating 
that one of the first things that you would do as a consumer 
protection agency is get us to consider letting students, again 
only on the 7 percent private loans, not the 93 percent public 
loans, to be able to file bankruptcy which is one of the most 
damaging things that a consumer can possibly do.
    I just would like for people to take note of that, and I 
think you understand that on the private side they do not have 
the flexibilities that you do on the public side, because on 
the private side, the prudential lenders will not allow them to 
do many of the things that happen on the public side.
    You are aware that, are you?
    Mr. Chopra. Yes. And, in fact, we have already been working 
closely with lenders to identify areas where certain prudential 
guidance, there can be win-win situations for both borrowers 
and lenders. Lenders have said they feel constrained by the 
guidance and we think there are opportunities for capital 
adequacy measures to be met while still allowing the 
marketplace to function.
    Senator Corker. I think you can see now why so many of us 
thought that was a really terrible idea to have the consumer 
agency separate from the prudential lenders, because they have 
this problem where basically you are giving guidance on the one 
hand that is very contrary to what the safety and sound 
regulators are saying on the other.
    And, it is this exact conflict, as a matter of fact again 
it is fascinating to me that in one of the very first things 
that would come out on a consumer agency, we see this conflict 
that on the private side the prudential regulators will not 
allow the private lenders to have the flexibility, give them 
the flexibilities to actually work through these issues. And so 
therefore, they have contrary guidance.
    And, I think it is pretty fascinating that we are having 
this hearing. I think it is fascinating that you are not 
advocating that on the public side students be able to file 
bankruptcy. I think this is, speaks to possibly some of the 
political nature of the consumer agency that so many of us were 
concerned about in the beginning.
    Mr. Chopra. On the Federal loan side, there actually is a 
Chapter 13-like option for borrowers, which avoids the damaging 
parts of going to court and hurting your credit history.
    So, a borrower who is unable to make their payments is able 
to elect the income-based repayment option which caps their 
payments as a percentage of their discretionary income. That is 
actually a great, low-cost model for borrowers that we think is 
a way to weather the unique circumstances of a student loan 
product, given labor market uncertainty.
    And, I would say that the relationship with the prudential 
regulators has been extremely productive. We have actually been 
able to find opportunities where we are identifying ways to 
promote innovation and ways that the whole financial system can 
actually prosper. I think our work on private student loans 
with the other prudential regulators is going to be seen by 
lenders as one that is a win-win for the whole marketplace.
    Senator Corker. I hope that is the case. I appreciate you 
very much being here. I look forward to hearing Sallie Mae's 
testimony in just a moment.
    Senator Brown. Senator Reed.
    Senator Reed. Thank you very much.
    The first thing I want to do is to commend you for 
connecting the dots, let me say, for not just this huge debt 
overhang but the effect it will have on buying a house for the 
first time, of being an entrepreneur and starting a business, 
of reserving money starting very early for retirement.
    This to me is one of the most daunting challenges that we 
have to face going forward. We could have a whole generation 
that just cannot get started until they are maybe in their mid-
30s doing things that we assume could and would be done in your 
mid-20s. So, I think that is an important point.
    Second, just jurisdictionally, your responsibility is, 
given the nature of the organization, is solely with respect to 
the private sector lenders, not the public domain, is that 
clear?
    Mr. Chopra. Yes. Our authority as the ombudsman and our 
rulemaking authority relates largely to private student loans, 
on the origination side.
    Senator Reed. Right. But it is sufficient to say that a lot 
of the insights that you have drawn could be applied to the 
public sector.
    Mr. Chopra. Yes. As Senator Corker said, it is very 
important for us to look at this holistically. In a recently 
released report, the Treasury's Office of Financial Research 
briefly discussed that student debt burdens could significantly 
depress demand for mortgage credit and dampen consumption, both 
of which may be critical drivers for the recovery.
    Again, looking at it holistically, one of our first actions 
was working with the Department of Education to actually 
improve the financial aid information and student loan 
information people find.
    We are asking schools, on a voluntary basis, to present a 
simple, one-page financial aid shopping sheet which gives them 
all of their loan options, as well as what their estimated 
payment might be after graduation. And, already so many schools 
across the country have embraced this. We are happy to enter 
this for the record.
    Senator Reed. Thank you. One of the major issues, of 
course, is the escalating cost of college education; and even 
though you focus in on the private lending sector, you have 
looked at both public and private institutions.
    There is acceleration in cost in private universities too I 
presume, correct?
    Mr. Chopra. Yes. There have been cost increases and 
increased debt burdens across institutional sectors.
    Senator Reed. And they are not responsible for public 
programs like Medicaid or anything else. What is driving the 
private institutions to increase their tuition so dramatically?
    Mr. Chopra. I am the wrong person to answer questions about 
the specific economics of college costs. We are a bit more 
focused on the financing. But generally speaking, we have seen 
over a period of many, many years escalating costs of college 
across sectors in excess of inflation.
    And, particularly we have seen debt burdens be very high in 
that for-profit college sector where utilization of private 
loans was particularly high.
    Senator Reed. That goes to just a quick technical question. 
I asked this because I do not know the answer. Are there 
prepayment penalties included in the language of some of these 
private loans?
    Mr. Chopra. The Truth-in-Lending Act actually bans 
repayment penalties for private student loans that one would 
anticipate would help facilitate a rather robust refinancing 
market since borrowers would not be penalized for trading one 
note for a less expensive note, but that has not bared fruit.
    Senator Reed. Thank you. That is a very helpful 
clarification.
    And then, the other issue, I think, or among several that I 
have but let me pose this one.
    Is there a correlation between the school and the number of 
private loans? I mean, one of the things that you have 
suggested, you have now a format where everyone can sort of 
check it out. Are essentially some schools steering students to 
these private loans and is there any kind of relationship 
between the school and the private lender?
    Mr. Chopra. In 2007 at the State level, State attorneys 
general identified certain unsavory relationships between 
schools and private lenders. But the 2008 Higher Education 
Opportunity Act has largely changed that and we see a much 
better relationship between schools and lenders.
    In fact, we believe that involving schools more in the 
process, by requiring certification of private student loans, 
would actually help schools better counsel their students on 
their full range of options.
    The only marketplace that remains where there are 
arrangements between private lenders and schools, which present 
some risk that is worthy of attention, is certain lending 
arrangements between the proprietary school sector that perhaps 
are driven to help with compliance with the Higher Education 
Act's 90-10 requirement.
    Senator Reed. If I may, just a clarification again. You 
point out that there is a quasi bankruptcy remedy under public 
lending which is to go in and make it income-based repayment. 
That does not exist on the private lending side.
    And, the issue here is not, and again I am asking the 
question so correct me. The issue is not that someone cannot 
file bankruptcy. It is that they cannot discharge the loan in 
bankruptcy, is that the technical issue in private lending?
    Mr. Chopra. Correct. The private loans are treated 
differently compared to credit card debt and others.
    Senator Reed. Because of Federal statutes?
    Mr. Chopra. Correct. The 2005 changes. But, private lenders 
have increasingly told us that they are looking for ways to 
offer more repayment flexibility, and we think that is a great 
opportunity, and again, we hope to engage with lenders and 
prudential regulators to find win-win solutions for capital 
adequacy, student loan borrowers and lenders themselves.
    Senator Reed. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Brown. Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Mr. Chopra, the testimony and report that you presented 
today suggests that these students have taken out too much debt 
through student loans because of predatory lending practices. 
You have also noted that students should consider taking out 
additional student loans in order to avoid excessive credit 
card debt.
    Can you please elaborate on the appropriate role of private 
student loans?
    Mr. Chopra. Sure. The total debt market has reached over $1 
trillion, but it is very important to note that education-
induced indebtedness is certainly far higher.
    Many families utilize home-equity lines of credit, credit 
cards, and other products to ensure that they can pay for the 
cost of college.
    Generally speaking, a student loan is going to be a safer 
way than, let us say, a credit card, which is going to have an 
immediate re-payment requirement that might be challenging for 
a full-time student.
    So, there is certainly a role for private credit in this 
market. But we do want people to make more optimal borrowing 
decisions overall. We think some of these steps to make the 
whole market more transparent, like with this shopping sheet, 
is a good first step.
    Senator Akaka. Thank you for that.
    I understand that CFPB often hears from students who are 
struggling to repair their student loan through its Student 
Loan Complaint System.
    Private student loans were initially developed to support 
and supplement Federal student loans. Since the market 
contracted in 2008, there have been fewer lenders offering 
private student loans and those that are offering the products 
often require cosigners.
    My question to you is: How Is CFPB helping students who are 
unable to access reasonable student loans?
    Mr. Chopra. In the report that we submitted, the Director 
recommended that the role of the financial aid office in 
lending decisions be substantially enhanced; and by having 
private student loans be certified, financial aid offices can 
be provided the opportunity to give the full range of financing 
options.
    Many times financial aid officers are able to use 
professional judgment to adjust loan amounts so that borrowers 
are able to meet their tuition obligations while still 
borrowing responsibly. You are right, that there are still ways 
to make sure that the private loan market can meet the demand 
at a fair price.
    Senator Akaka. I must commend you on your remarks that CFPB 
has been working together with the Department of Education. I 
wish that more departments and agencies would be working 
together on common goals as well.
    So, thank you so much for what you are doing, Mr. Chairman.
    Senator Brown. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman.
    And, Mr. Chopra, thank you for being here today and for 
what you do.
    On the report that CFPB recently released on the issue of 
the institutional loans made directly by the for-profit schools 
to the students, it is advertised as a way for students to fill 
the gap in their tuition after they have exhausted Federal 
loans or Pell Grant money.
    And then I think part of what I heard you say in answer to 
an earlier question had to do with the 90-10 rule also which we 
might ask you to elaborate on.
    But, many of these institutional loans offered by some of 
the largest for-profit institutions have interest rates as high 
as 18 percent.
    In addition to serving on this Committee, I serve on the 
Education Committee, and the Department of Ed and the Health 
Committee have looked at a number of the different for-profit 
schools and one in particular has an interest-rate student loan 
that is 15 percent but they also have a default rate of 80 
percent.
    Another school has an interest-rate, and these were in 2009 
and 2010 these interest-rate numbers, at 18 percent with a 
default rate of 55 percent.
    So, it looks like the for-profits are offering the student 
loans with high interest rates and yet a low expected repayment 
rate which I think speaks directly, in some cases, to the 
aggressive recruiting nature of some of these schools that they 
are really not that concerned because the default rate is so 
high as long as it means that that student is, in fact, 
enrolled and Federal dollars have been collected.
    Does the CFPB have plans to study these types of loans 
further and are there any recommendations that you can offer 
that will address the institutional loans made by the for-
profit colleges and universities?
    Mr. Chopra. In recent years, there has been financial 
reforms that have indicated a couple principles that might be 
worthwhile here to mention.
    One is skin in the game. The Dodd-Frank Act actually 
requires that lenders retain some interest even if they were to 
sell them into securitized pools of assets.
    Another is considering ability to repay. In the mortgage 
market, lenders will be required to consider whether a mortgage 
borrower can actually repay.
    Senator Hagan. That is a good idea.
    Mr. Chopra. And in general, when an entity is able to come 
out ahead even when they expect upfront that the customer will 
likely fail, that may be a sign that competitive market forces 
are not really working and that incentives are distorted.
    I think the Bureau has significant expertise in the area of 
institutional lending and the role that 90-10 might play. So, 
we will continue to monitor that market closely and, as you 
have mentioned before, we have also looked in this sector at 
the recruitment of veterans and service members as it relates 
to compliance with 90-10.
    My colleague Holly Petraeus has been quite outspoken about 
that and we look forward to continue working with other 
agencies to monitor this market.
    Senator Hagan. Speaking of that, of the 90-10 rule, the GI 
Bill is not included in the 90 percent. So, in most of those 
cases, the Federal part, the Federal loan position assistance 
is much higher than the 90 percent.
    Mr. Chopra. What you are saying is correct. We are 
currently experiencing a rapid increase in the number of 
veterans returning from foreign conflicts who are enrolling in 
higher education.
    So, it is in the interest of all of us to ensure that they 
continue to be an economic engine as they were after World War 
II, but also that they do not unnecessarily take on high-cost 
credit when they have benefits that they have earned.
    Senator Hagan. And especially when you look at the high 
expected default rate needs to be taken into consideration.
    Mr. Chopra. Yes. We closely monitor all aspects of how the 
marketplace works to ensure that the market is fully 
functioning and that there is compliance with consumer laws.
    Senator Hagan. One of the recommendations made in the 
recent report states that Congress should require the 
institutions of higher ed to work proactively to protect and 
inform the private student loan borrowers.
    What would this look like? Would it be like Know-Before-
You-Owe or should it be solely the responsibility of the school 
to protect and inform the borrower? Or should the lenders take 
some responsibility in ensuring that their borrowers have the 
clear, concise, and accurate information regarding their 
student loans?
    Mr. Chopra. Everyone has responsibility and borrowers 
certainly need to take responsibility for the commitments they 
take on, and they need clear information.
    But the point about financial aid offices is an important 
one. Currently, most lenders are requiring loans to be 
certified by the school; to simply verify that the student is 
actually enrolled, and that they have not already over 
borrowed. This is a very common sense underwriting principle 
that was certainly not well observed in the years prior to the 
financial crisis, where capital market conditions created the 
incentives for originators to make substantial fees without 
really needing the borrower to have the ability to repay.
    Senator Hagan. Thank you.
    Senator Brown. Thank you, Senator Hagan.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Chopra, how are you?
    Mr. Chopra. Good. How are you, sir?
    Senator Menendez. Very well.
    Let me ask you. I heard your response to a question with 
reference to borrowers who feel trapped in their present 
interest rate and are not able to refinance, in essence, at a 
lower rate. And, I think your answer to the question as a 
barrier is that there was not enough competition, is that 
correct?
    Mr. Chopra. There might also be issues in the servicing 
infrastructure where borrowers may not know that they are able 
to make certain changes to their loans. I think it is market 
conditions as well as financial education and the servicing 
infrastructure.
    Senator Menendez. Does the Bureau have any ideas or 
suggestions as to either how we create greater market 
competition or greater inflows of information for individuals 
so that they can exercise their rights?
    Mr. Chopra. Sure. We have a strong role to play in 
educating borrowers about what their options are when they may 
not be able to make their payments; and we have already 
released a number of Web tools and other products so that 
students know how to manage their debt better.
    But, one thing we do hear is that even if they want to 
refinance, there simply is not that much opportunity for them. 
It is something that many mortgage borrowers think about when 
they want to refinance but the current market conditions often 
constrained them and the processes to do so can be paralytic.
    Senator Menendez. Well, as someone who has been a strong 
advocate in a different context of being able to allow mortgage 
borrowers to refinance at historically lower levels, it seems 
to me that we should find the wherewithal to be able to achieve 
this, have responsible, continue to have people be responsible 
borrowers, be able to relieve some of their debt load at the 
end of the day.
    So, we would love to, maybe, pursue that a little bit more 
with you as well as how do we stimulate creating competition so 
that, in fact, that the marketplace itself would find itself 
more robustly engage in which rates would fall.
    How about the part of your report that noted that about 40 
percent of private student loan borrowers had not exhausted 
their Federal student loan limits?
    And, in that respect, obviously before you go and borrow in 
the private sector would it not be more desirable to maximize 
that which is available to you under Federal student loan 
limits because those are at lower rates than generally in the 
private marketplace?
    Mr. Chopra. Yes, and in fact, if you count people who do 
not even apply for Federal loans, that number goes north of 50 
percent I believe.
    One of the key issues, which we put forth in the report, is 
involving the financial aid office more in the process and 
giving much clearer information.
    There has been an abundance of fine print in quite small 
font that had invaded so many of our credit card agreements, 
mortgage agreements, and all other things.
    And, there is a lot of work that we try and do to simplify 
disclosures. We find that this actually is lower cost for 
smaller financial institutions to provide, and much more clear, 
to borrowers. You should not need an attorney and a magnifying 
glass to understand your obligations at age 18.
    Senator Menendez. So, the question is: Is there a way to 
enhance, I mean you mentioned some of the Web sites, are there 
other opportunities in which we can get, you know, financial 
aid departments to be more robustly engaged in saying here is 
the ability, if you qualify. Before you consider taking a 
private sector loan that will be more costly, you should 
consider the Federal loan limits.
    Mr. Chopra. Yes. In fact, most lenders will strongly agree 
that Federal loans should be looked at first and many of them 
communicate that to their borrowers.
    So, giving financial aid officers the opportunity to 
actually counsel the student before the consummation of a 
private student loan would help. We have heard broad support 
from lenders, schools, and consumer groups for this.
    Senator Menendez. Finally, I listened to my distinguished 
friend and colleague, Senator Corker, express his concerns 
about the interface between the Bureau and prudential 
regulators. And, I just wonder. In the process of doing this 
work, did you find that prudential regulators were doing the 
type of consumer information and advocacy that the Bureau has 
been doing in this particular regard?
    Mr. Chopra. We have a very explicit mission on financial 
education and also to assist borrowers with the completion of 
financial aid applications. Their primary role is, of course, 
to ensure the capital adequacy of the financial system and they 
do work with us on financial education work; but we have placed 
a major emphasis on that because we believe it can ensure a 
more robust marketplace across all consumer financial products.
    Senator Menendez. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Brown. Thank you, Senator Menendez.
    Senator Corker, has one more question and then we will move 
to the second panel.
    Thank you, Mr. Chopra.
    Senator Corker. First of all, you are obviously a very 
intelligent person. It sounds like you have done a lot of good 
work and I want to thank you for that.
    I, you know, meet with students who are 27-, 28-years-old 
or people who used to be students and have huge amounts of 
debt, and you look at the amount of money they are making and 
you just wonder when they ever are going to have a real life 
because they are working two and three jobs to pay these loans 
off.
    My frustration really is the hypocrisy around all of this. 
On the one hand, we hear, you know, especially during an 
election cycle, talk about student lending and student loans 
and I assure you my heart goes out to students who have huge 
amounts of loans that may never be repaid or may take 20 years. 
And yet, we advocate policies here that drive up tuition rates.
    On the private lender side, as Senator Menendez was just 
referring to, they are seeking flexibility but the prudential 
regulators are hesitant to give them the flexibilities that you 
have on the public side.
    So, you know, there is the hypocrisy that goes with this 
whole testimony today, not you, but the difference between the 
consumer agencies and the prudential. And then, we pass a law 
that says that student rates are going to be at 3.4 percent, 
just pull it out of the air.
    So, those loans are to all comers regardless of any kind of 
credit status, all comers, no collateral, no payments made for 
4 years.
    Is there anyway you, as an intelligent person, could 
possibly imagine that the Federal Government is going to come 
out on loans like that and are we not again demonstrating 
tremendous hypocrisy in that what we are really doing is piling 
up debt down the road that these same students are going to 
have to pay off?
    Is there any way that when an agency is taking all comers, 
there is no collateral being put out, no underwriting taking 
place, and no payments being made the entire time they are in 
college, is there any way the Federal Government could possibly 
come out to the good on 3.4 percent loans?
    Mr. Chopra. The rates set by Congress are a bit outside our 
jurisdiction, but I will say that the global competitive market 
is very, very fierce.
    And, across all indicators, having a highly skilled 
workforce, has very real economic growth potential and 
investing in a way that is strategic such that people who may 
not have means can access education, there is significant 
upside to that.
    Now, it is hard to underwrite that type of loan. In many 
cases, you cannot anticipate whether someone is going to be 
able to repay 5 years in advance. What if they entered in 2005, 
then the entire global capital markets collapse?
    It is a difficult problem, but ensuring that the workforce 
is built with skills is something that needs to be a priority 
as well. We have to balance all of these and it is a careful 
one and we look forward to working with the Senate.
    Senator Corker. I think your answer is ``no'' financially 
but there are other benefits.
    Mr. Chopra. No. It is an ``I do not know.''
    Senator Corker. Yeah. Thank you.
    Senator Brown. Thank you, Mr. Chopra, very much.
    I will call the second panel forward.
    I think Senator Corker, there is plenty of hypocrisy to go 
around when I see what State governments have done when we were 
in college and schools like Ohio State were considered State 
universities and now we consider them State-supported or even 
State assisted.
    We can blame it on Medicaid or we can talk about tax 
structure and a whole bunch of other issues. But that can come 
later.
    I will introduce the three members of the panel as they are 
beginning to be seated.
    Deanne Loonin is Staff Attorney with the National Consumer 
Law Center and the Director of NCLC, Student Loan Borrowers 
Assistance Project where she provides direct representation to 
low-income student loan borrowers.
    In her role, Ms. Loonin also assists attorneys representing 
low-income consumers and teaches consumer law to legal 
services, private consumer attorneys, and other advocates.
    Ms. Loonin received her B.A. from Harvard, Radcliffe 
College, and her J.D. from the University of California at 
Berkeley.
    Jennifer Mishory is a founding member and Deputy Director 
of Young Invincibles, a nonprofit, nonpartisan organization 
that represents the interest of 18- to 34-year-olds.
    As Deputy Director, Ms. Mishory directs policy research, 
communication, and outreach staff for the organization. She 
served as a consumer advocacy representative to the Department 
of Education's 2012 negotiated rulemaking on student loans.
    Ms. Mishory holds a B.A. from UCLA and a J.D. from 
Georgetown.
    Jack Remondi is President and Chief Operating Officer of 
Sallie Mae. In this role, he is responsible for the company's 
loan servicing information technology, credit and underwriting, 
and marketing and communications divisions.
    Prior to his current position, Mr. Remondi served as Vice 
Chair and Chief Financial Officer where he helped Sallie Mae 
navigate the financial challenges posed by the economic crisis.
    He received his Bachelor of Arts degree in economics from 
Connecticut College.
    Ms. Loonin, if you will begin.
    Thank you to all three of you for joining us and for your 
public service.

 STATEMENT OF DEANNE LOONIN, ATTORNEY AND DIRECTOR OF STUDENT 
 LOAN BORROWER ASSISTANCE PROJECT, NATIONAL CONSUMER LAW CENTER

    Ms. Loonin. Thank you, Senator, and thanks to all of you 
for inviting me to testify today.
    Again, my name is Deanne Loonin and I am here on behalf of 
the low-income clients that we represent and work with.
    It is important just from the outset that when we talk 
about the students who we work with, they are not just young 
people going to traditional colleges. It is a very important 
population but actually the face of higher education is much 
more diverse these days.
    And, we have clients who are what are really called sort of 
nontraditional students, meaning that they are older when they 
go back to school. In many cases, they have their own 
dependents. They are actually independent themselves and do not 
have parents or families to fall back on.
    So, we actually have clients who are still suffering under 
the burden of student loan debt throughout their lives having 
taken out the loans later in life or in some cases parents 
having cosigned for their children.
    Most of our clients have Federal student loans. But what we 
saw happen up to the credit crisis was that we were seeing a 
lot more of our low-income borrowers with private student 
loans.
    And, the market really that was sort of taking place prior 
to the credit crash essentially was the kind of subprime 
predatory market that, unfortunately, we saw in other credit 
markets as well.
    We wrote a report in 2008 where we went through some of the 
parallels to the mortgage market and I will not repeat all of 
those here but the main point was that a lot of the loans that 
were made at that time were, unfortunately, really destined to 
fail and they did fail.
    There were very high right-off rates and a lot of people 
who took out loans, they were never going to be able to pay 
back. I saw loans at that time for my clients with interest 
rates of upwards of 20 percent, 25 percent, and these were 
variable rate loans with very high origination fees as well.
    Some of the same sort of rationales for making those loans 
in the mortgage market we heard in the student loan market too 
that these would have benefits for low-income borrowers; and 
actually instead what we have was it was taking opportunity 
away from a lot of those borrowers, more sort of a reverse 
redlining situation in a push market.
    Fortunately, the market has changed. We do not see those 
third-party subprime loans for most of our clients anymore. 
There has been a correction because of the failure, really, of 
the market and that is why it is such an important time right 
now for policymakers.
    There are sort of two broad themes that I want to emphasize 
and there is more detail in my testimony about why this is such 
a critical time.
    The first theme is that the opportunity is now to shape the 
market that is going to reemerge. There are more responsible 
lending practices going on now and we are all very heartened to 
see that, but we want to make sure that the same things that 
happened before do not happen again even if that means that it 
is a smaller private student loan market; that is better for a 
lot of our clients if it means that they are not going to be 
stuck with these predatory loans, with these unaffordable 
loans.
    The second theme that we spend a lot of detail on in our 
testimony is that we need to figure out ways to provide relief 
for those who were harmed by the predatory practices of the 
past.
    The lenders, as we have seen and we will hear I am sure 
more from Sallie Mae today, have moved on for the most part but 
the borrowers have not been able to. Their futures are 
shattered in a lot of cases, these are my clients with both 
Federal and private loans but the difference that we find on 
the private loans side is that there is so little flexibility 
on the part of the lenders.
    We talk with the private lenders all the time. We try to 
negotiate modifications, income-based repayment, things like 
that; and generally, the relief that is available is very 
short-term relief.
    Unfortunately, it is short-term relief but these are long-
term structural problems. We understand that there are some 
barriers.
    Senator Corker mentioned, for example, that there are 
problems with the prudential regulators. That is what we hear. 
We do not know if that is really the problem that is preventing 
the lenders from offering broader relief; and if it is, then we 
want to hear more detail and find out ways to be flexible about 
those.
    In some ways, just like what is happening in the mortgage 
market and also heeding some of the lessons that we have 
learned from the modification programs in the mortgage market 
that these have to be flexible, affordable modifications and 
also some principal reduction because that is going to make it 
less likely that the borrowers will redefault.
    We also like to look at the possibility of cancellations in 
extreme situations like death and disability. Some lenders 
offer this at their discretion but the idea is to have a more 
standardized, transparent policy so borrowers can know what to 
expect in these extreme situations.
    Again, I have more detail in my testimony including policy 
prescriptions, and I am happy to take questions at the end 
about those.
    Senator Brown. Thank you very much, Ms. Loonin.
    Ms. Mishory, thank you for joining us.

     STATEMENT OF JENNIFER MISHORY, DEPUTY DIRECTOR, YOUNG 
                          INVINCIBLES

    Ms. Mishory. Thank you. Chairman Brown, Ranking Member 
Corker, and other Members of the Subcommittee, thank you for 
having me here. My name is Jennifer Mishory and I am the Deputy 
Director of Young Invincibles.
    Young Invincibles is a nonprofit, nonpartisan organization 
that seeks to represent the interests of 18- to 34-year-olds, 
making sure that our perspective is heard whenever decisions 
about our collective future are being made.
    This spring we released a report detailing the experiences 
of high-debt borrowers with private student loans. The report 
analyzed the subset of an online self-selected survey of about 
13,000 borrowers.
    Additionally, Young Invincibles just completed a 20-State, 
40-city national bus tour, talking to young people from all 
walks of life. Our interactions with young people make it 
clear. Borrowers are struggling, students are confused; and as 
the private loan market reemerges, future students need more 
guidance and more protection.
    As has been detailed already, the private loan market has 
shifted significantly in the past 10 years. Looser, more 
predatory lending led to a significant increase in the pre-
recession private market.
    After the credit market dried up, lending standards 
tightened and the market merged and consolidated. Recently, 
there have been signs that the private student loan market may 
again be on the rise.
    For example, Sallie Mae is expecting growth in new loans 
for the second consecutive year. Private lenders have also 
begun offering new fixed-rate loan options. As the student loan 
market expands and evolves again, stakeholders must assist 
struggling borrowers and set up the next generation of college 
goers for a better financial future.
    Borrowers have encountered an array of difficulties amidst 
this marketplace. While students do have a responsibility to do 
their homework, the sheer complexity of student loan terms and 
the fact that many young students are making their first major 
financial decision necessitates that key institutions involved 
take aggressive steps to ensure that students are informed.
    Unfortunately, this does not happen enough right now. For 
example, about two-thirds of private loan borrowers in our 
survey said that they did not understand the major differences 
between private and Federal loan options.
    This is problematic, given that Federal loans often have 
better rates, better repayment terms based on income, temporary 
relief when a borrower faces unemployment, and more 
standardized payment fee requirements.
    Current law requires disclosures regarding Federal options 
and about some private terms, but these are often too little 
and too late. At the same time, 80 percent of borrowers in the 
survey turned to their schools as trusted sources of 
information on these loans. Yet, those offices do not always 
have the right answers and they are not involved enough.
    Bus tour roundtable participants at the high school level 
also voiced similar problems. Career and college counseling in 
high schools are understaffed and often undertrained on these 
issues.
    We also hear frequently about significant problems after 
loans go into payment as borrowers attempt to navigate life 
crisis, customer service, repayment, and the loan terms.
    For example, Cassandra in Cleveland, Ohio, has about 
$90,000 in private loans. When she was struggling, she said 
that Sallie Mae did not process your request to make interest-
only payments and she was denied a deferment when her husband 
lost his job.
    Repayment terms are nearly impossible for inexperienced 
borrowers to anticipate on the front-end or to fight while in 
repayment.
    When another borrower, Bridget, went into the Peace Corps 
after graduation, she said that she was able to defer her 
Federal loans but not $46,000 in private loans.
    Her mother agreed to help make payments while she was gone. 
A few months before Bridget's return in 2009, her grandfather 
passed away. The turn of events that ensued led to one missed 
payment and then one more.
    After that second missed payment, she was told that the 
loan was charged off and the full amount came due. She said 
that she was told that the only way to move it back into 
regular repayment would be to pay 60 percent of the balance up 
front. That is over $27,000.
    Currently, she says she pays $300 in monthly payments and 
that nothing has been put in writing. She does not get a bill. 
She is unable to check her balance online and she continues to 
receive bullying calls from that bank.
    After 3 years of these monthly payments, she told us that 
all five separate loans still show up as delinquent every 
single month. So, her credit score has predictably plummeted.
    She tells us that she has no hope of coming up with the 
lump sum required to rebuild her financial future as none of 
her monthly payments can count toward that lump sum.
    In the wake of the Great Recession and as millions of 
borrowers struggle to deal with unemployment, delinquencies, 
defaults, and high debt, and millions more attempt to navigate 
the post recession private loan market, we must act.
    We must rethink the way we treat private loans in 
bankruptcy. The Department of Education should use its email 
system and online outreach to inform struggling borrowers about 
the new options in student loan complaints and send them up to 
the CFPB, which is a resource that we have sent many borrowers 
to already.
    We also must take aggressive action to protect future 
borrowers as they make their choices. Lenders should be 
required to obtain school certification of financial need 
before dispersing private student loans.
    Marketing materials should include clear explanations of 
repayment terms and be available earlier. We need to ease the 
application process of proving independence from parents so 
that borrowers receiving no help from their family can access a 
fuller set of Federal loans. And stakeholders must ensure that 
borrowers fully understand the difference between private and 
Federal loans--particularly with the new options on the table.
    For example, if a future teacher getting a master's degree 
is receiving a competitive interest rate on a fixed-rate 
private loan, he or she will often be better served taking out 
a Federal loan due to other terms such as flexible repayment or 
the ability to defer during times of unemployment.
    As the private loan market evolves and potentially 
reemerges, we must ensure that new borrowers are fully informed 
and have access to fair-lending terms and current borrowers 
find some relief and help.
    Thank you very much.
    Senator Brown. Thank you very much Ms. Mishory.
    Mr. Remondi, thank you for being with us.

   STATEMENT OF JACK REMONDI, PRESIDENT AND CHIEF OPERATING 
                      OFFICER, SALLIE MAE

    Mr. Remondi. Good afternoon, Chairman Brown, Senator 
Corker, Members of the Subcommittee.
    My name is Jack Remondi. I am President and Chief Operating 
Officer of Sallie Mae and I thank you for the opportunity to 
testify today on the private education loan business.
    Private education loans help families fill the gap between 
their own resources, financial aid, grants, and the total cost 
of the college or university of their choice.
    They are not for everyone. They were never intended to 
replace Federal aid, and in fact, they were originally called 
supplemental loans indicating their stated purpose.
    In most cases, higher education is a family commitment 
which our private education loans are designed to support. Last 
year over 90 percent of our private education loans had a 
cosigner, typically the parent.
    Our loans provide important features and protections that 
benefit the family, including extensive disclosure, interest 
rate and repayment options, embedded tuition insurance and 
death and disability loan forgiveness.
    But, the best protections inherent in any loan, including 
private education or Federal student loans is quality 
underwriting and thoughtful planning before one borrows.
    Our free Education Investment Planner helps families know 
before they go by assisting them with the following important 
steps for turning access into success: pick the right school, 
and most important, consider lower-cost options; create a 
financial plan that covers the entire cost of completing a 
college degree, not just one semester; make loan payments to 
keep borrowing costs down; and graduate. Student loans without 
a degree mean loan payments without the higher earnings to 
support them.
    During the application process, we disclose monthly and 
total payment information and present customers with a side-by-
side choice of interest rate and payment options available to 
them.
    Customers receive multiple disclosures that quantify 
expected monthly payments and finance charges; highlight the 
availability of Federal loan programs; encourage the applicant 
to shop for lower-cost options; and outline the right to cancel 
the loan.
    After disbursement, our customers receive monthly 
statements that detail their loan balance and accruing 
interest. Customers who elect to defer payments while in school 
are reminded of the positive impact that in-school payments 
would have on the total loan costs.
    The most recent findings of our How America Pays for 
College study shows how effective these disclosures and 
reminders are. Of private education loans borrowers, 98 percent 
filled out a FAFSA, the first step for taking out a Federal 
student loan.
    Among all education loan borrowers surveyed, just 3 percent 
borrowed only private loans. Two-thirds of our customers are 
making payments while the student is in school--allowing them 
to save thousands of dollars in interest charges over the life 
of the loan.
    Sallie Mae has pioneered new products and procedures 
designed to help families make informed decisions. For example, 
we advocate school certification as an important safeguard. We 
will not disperse a loan until the school certifies it.
    Until recently, nearly all borrowers deferred loan payments 
while in school. In 2009, Sallie Mae became the first lender to 
encourage school payments because they save the borrower 
thousands of dollars in interest charges over the life of the 
loan. Our in-school customers who opt for either interest 
payments or a fixed payment of $25 a month can save an 
estimated 30 to 50 percent in total interest costs.
    The results are encouraging even in these tough times. The 
stories we heard today are certainly important to hear, but 
they are not the norm. Ninety percent of our loans in repayment 
are current, and the charge-off rates have dropped from a high 
of 6 percent to under 3 percent this year.
    Still, we recognize that the recession has posed real and 
significant challenges for many Americans including some of our 
customers--and because our success depends on our customers' 
success--we actively assist borrowers experiencing difficulty 
by understanding their individual circumstances.
    To customers who need help, we offer a mix of repayment 
products and counseling and collection programs that give them 
the best opportunity to manage their debt obligations. These 
options include reduced monthly payments, interest only 
payments, extended repayment terms, temporary interest rate 
reductions, and if appropriate, forbearance--all scaled to the 
customer's individual circumstances and ability.
    Since 2009, we have modified $1.1 billion in private 
education loans to help our customers. Nonetheless, loan 
modifications and other efforts are sometimes insufficient. For 
this reason, Sallie Mae supports bankruptcy reform that would 
require a period of good-faith payments, is prospective so as 
to not rewrite existing contracts with customers, and that 
applies to Federal and non-Federal education loans alike.
    We would also be interested in increasing the options 
available to defaulted borrowers, specifically the Federal 
rehabilitation program allows defaulted borrowers to cure their 
default and rebuild their credit. If a customer makes the 
required payments, his loan is rehabilitated and the default is 
removed from their credit history. For all other consumer 
loans, however, the Fair Credit Reporting Act does not allow 
for a second chance; and so, there is no provision to 
rehabilitate private student loans. For some time, we have been 
discussing the promise of providing this option to private 
education loan borrowers. We would certainly recommend that 
Congress consider it.
    In sum, market forces and legislative changes, some of 
which were developed here in this Committee, have combined to 
make private education lending better understood by students 
and families, better underwritten, and more targeted to provide 
the needed financing that can help American families achieve 
their education dreams and create the opportunity for a 
brighter future.
    Thank you. I would be pleased to answer any questions.
    Senator Brown. I want to interrupt this meeting just for a 
moment. On the Senate floor and the House floor and by the gate 
of the Capitol Senator McConnell and Senator Reid are marking 
the 14th anniversary of the murder of the two Capitol police 
officers.
    On July 24 at 3:40, Officer Jacob Chestnut and Detective 
John Gibson were shot in the line of duty, and if I could ask a 
moment of silence from the room.
    [Pause.]
    Senator Brown. Thank you all.
    Thanks to all three of you for your testimony. I want to 
start with Ms. Loonin. You made a rather telling statement. 
Predators have moved on, borrowers can not.
    Mr. Chopra's beginning comments on the first panel spoke 
about the difficulty of refinancing. It is partly the students, 
potential student, the borrowers know enough about those 
refinancing opportunities and it is also the paucity of 
refinancing opportunities, if you will.
    Do you see what types of relief or refinancing 
opportunities are currently available to private student loan 
borrowers?
    And I would like Ms. Loonin's answer but also the other two 
of you if you would briefly comment on sort of your insight 
there and at the same time as you answer this, elaborate on any 
sort of barriers or Federal rules that may impede the lender's 
ability to provide those relief options to those borrowers.
    Ms. Loonin. Thank you, Senator. Right now what we have been 
able to see mostly working with our clients is that there are 
very few private loan refinancing options even available.
    A lot of our clients have lower credit scores and so it may 
be because of that but we also hear from borrowers through our 
Web site and others who are looking, who are prime borrowers 
really and are having the same problems. So, I would say there 
are very few products and opportunities out there.
    As far as barriers, just one point that I wanted to make 
especially since the issue of the regulators has come up 
numerous times. I think it is very telling, as Mr. Remondi 
mentioned, the number of options that Sallie Mae, for example, 
is offering.
    So, clearly it is possible to offer some of these options 
and I would like to hear more if they are hearing from 
regulators that they can offer some things just not too much.
    But one of the problems that we find is that there is this 
haphazard nature to the options, that some of the lenders will, 
for example, offer or say that they have programs where they 
will offer cancellations for death or disability, and sometimes 
we will call on behalf of our clients and they will say that 
they have them and sometimes we will call the same lender and 
they will say that they do not.
    So, in terms of barriers it is a little bit harder for us 
to know exactly what those problems are because we all want to 
work together to figure those out.
    Senator Brown. Ms. Mishory, your comments.
    Ms. Mishory. I would say similarly the borrowers that have 
come to us have increasingly expressed frustration at the 
inability to work with their lender to find better terms and 
have not found other options in the marketplace.
    Mr. Chopra earlier mentioned educating borrowers as well; 
if there are options, then we also need to make sure that 
students and borrowers know about those.
    And so, that is another issue as well.
    Senator Brown. Mr. Remondi.
    Mr. Remondi. I think, as Rohit Chopra described in his 
comments, there are a couple of factors here. One is that these 
are principally, in Sallie Mae's case, family education loans; 
and the price that we charge or set for the interest rate to 
the borrowers is based on the highest credit score of both the 
parents and the student. So, to some extent, they are already 
gaining the benefit of the parental cosigning on that account 
based on the interest rate at the time.
    Second is that the loans are variable. Most refinancing 
options that we hear about are talking about fixed-rate loans 
made in a higher interest rate environment being refinanced 
into a lower interest rate environment.
    Very rarely do we see interest rates or loan products being 
refinanced because the credit profile of the obligor has 
changed in such a dramatic way as to change the overall 
interest rate structure.
    And, I think because of those two reasons you see a very 
limited marketplace for private education loan consolidation or 
refinancing activities.
    Senator Brown. What can we do about it?
    Mr. Remondi. Well, as I said, I think in most cases those 
loans would be offered at the same terms and conditions that 
they are offered at today because they are based on the parents 
credit worthiness and based on a variable interest rate.
    So, as interest rates have come down since 2008, all of the 
interest rates on our student loans have been coming down with 
that fall in the short-term interest rate market.
    Senator Brown. What steps do you take in your individual 
responsibilities or should we take in Congress to ensure 
students are aware of the differences between these loans and 
Federal loans, not just the initial interest rate but other 
kinds of terms of repayment and other problems that might arise 
during the repayment process?
    Ms. Loonin, why do you not start again?
    Ms. Loonin. So, there are some changes in the Truth-in-
Lending Act, as you know, so that the disclosures are more 
expansive than they have been in the past; and there were some 
very positive changes there.
    But, I think, we hope that Congress will take a look at the 
timing of some of the disclosures also as well so that 
borrowers get the terms of their actual loans earlier in the 
process not just a sample of what they may be getting because, 
as we know, the private loan products really vary quite a lot.
    The certification process that a number of people have 
alluded to here and Mr. Chopra talked about in his testimony as 
well, we think is another opportunity to make that a mandatory 
program. Some schools use that opportunity to counsel borrowers 
as well, and we think that that is an opportunity right then to 
give a lot of information before the student has actually 
signed on the dotted line.
    Senator Brown. Ms. Mishory, your thoughts about that.
    Ms. Mishory. I would also add in addition to the options 
that Ms. Loonin referenced, you know, on the bus tour we talked 
to a lot of high school juniors and seniors trying to figure 
out their next steps, and they were confused, and they did not 
have clear options on where to go.
    High school counselors often are not prepared to talk about 
differences in loans and how students can finance their college 
education. So, I think a lot needs to be done in college 
counseling offices. We need to be teaching financial literacy 
skills even earlier so that families can really prepare their 
education.
    Senator Brown. Mr. Remondi.
    Mr. Remondi. Well, I think, as we heard in the CFPB report, 
there is more disclosure today on private education loans than 
there is on any other consumer lending product out there, 
period.
    And, we do provide all of this information to the borrowers 
as they are going through the application process. So, they get 
an indicative rate and, once their credit is approved, they get 
their actual rate and they see their monthly payment. They have 
a 30-day term to accept the offer without any changes that we 
would make and then they also have 30 days after the loan has 
been funded to cancel the loan. Each time in that process they 
are encouraged to consider lower-cost Federal loans and to shop 
for lower-cost options.
    So, I think, on the one hand, we are providing an awful lot 
of good disclosure today. I think to the other participants 
comments here, one of the pieces that could improve 
dramatically is helping students and families know where they 
go. Figure out what they can afford to spend on a college 
education, pick the right school (that matches the financial 
abilities of the family along with the prospective earnings 
they can gain from that career) and think about the full cost 
of education.
    The number one reason students default on student loans, 
and this is true whether it is Federal loans or private 
education loans, is the kid does not graduate from school. They 
have the debt burden but they do not have the economic benefit 
of the education.
    If we can help families plan better through that process 
and be more prepared before they go, we would have a better 
educated consumer and I think better results in both the 
Federal program as well.
    Senator Brown. Do you agree with Mr. Chopra's statement 
that you should not need an attorney and a magnifying glass?
    Mr. Remondi. He made that statement on all loans, not just 
student loans; but in our disclosure statements, you are 
required to have a certain print font, size font on every 
disclosure statement, and we certainly meet or exceed all of 
those standards.
    He was referring, I think, to the credit card statement 
book that we get each, you know, when you get your new credit 
card that everyone throws away.
    Senator Brown. Are you referring to the 25-year-old eye or 
55-year-old eyes?
    [Laughter.]
    Mr. Remondi. I have my glasses on.
    Senator Brown. OK. Senator Corker.
    Thank you.
    Senator Corker. Thank you all for your testimony. I do 
appreciate that we have, you know, three folks of differing 
backgrounds that are trying to solve the problem, and again, I 
know all of us are concerned when we see people that are unable 
to make payments or paying for life for their education.
    Let me ask, Ms. Mishory, what are some of the predatory 
lending instances, if you will, that you are seeing out in the 
market place right now?
    Ms. Mishory. Sure. I mean, as I think was discussed, 
fortunately a lot of those instances have improved over the 
last couple of years. We certainly saw from 2005 to 2007 a lot 
of direct to consumer marketing and a lot of students taking on 
burdens that they did not need to.
    So, I think that we have seen a lot of improvements. I 
would say that we still see marketing materials that are 
unclear to students. We need to make sure that marketing 
materials show terms and they show those terms in a way that 
students who do not have the ability or experience with these 
products actually understand them.
    Senator Corker. So, it is more an issue of just people 
understanding what they are getting into and maybe it being 
explained in clear language. It is not necessarily that people 
are out there purposefully trying to take advantage of 
students.
    Ms. Mishory. I would say that again, as a lot of the 
panelists discussed, the market certainly has improved over the 
last couple of years, but that leaves us with the problem of 
folks who already have all of this debt that they took on.
    Senator Corker. Right.
    Ms. Mishory. And then also ensuring that going forward, as 
the market changes, we make sure that students know what they 
are getting.
    Senator Corker. Mr. Remondi, of all the loans that you all 
make, I am sure there has to be data that shows that people who 
go to certain colleges are more likely to pay back their loans 
than others.
    Are you all able to look out across our country and see 
certain outliers where people go to a particular institution 
and they have more difficulty paying back their loans than 
others?
    Mr. Remondi. Sure. We have over seven million borrowing 
customers. So we have a wealth of data that really goes across 
both Federal student loan programs and the private educational 
loan marketplace and there absolutely are differences in 
repayments, success rates, and therefore, the flip side of 
that, default rates.
    Senator Corker. Right.
    Mr. Remondi. Depending on where.
    Senator Corker. And, when people are making loans to 
students who attend these institutions, are they taking those 
kind of things into account?
    Mr. Remondi. I think what happened over the last couple of 
years is that people were not aware of some of the changes that 
were coming, firstly the economic environment. More recently, I 
think lenders are trying to take into consideration the overall 
success rate of students at a particular institution.
    We do not make private education loans to students at every 
school in the country. We have an approved school list that we 
use to determine whether or not the borrower is eligible to 
participate in our programs.
    Senator Corker. On the Federal side, we are making loans to 
students at every institution regardless, is that correct?
    Mr. Remondi. The Federal program also has a cutoff and it 
is based on the school's cohort default rate or CDR, but that 
is a very high default rate standard. I believe it is 25 
percent for a couple of years and it is only measuring the 
incidence of default in the first 2 years after repayment has 
begun.
    Senator Corker. But obviously the private lenders have to 
take things like that into account because unlike us, we just 
cannot make up the numbers and go ahead and kick the can down 
the road to future generations, is that correct?
    Mr. Remondi. No one else is writing us a check when the 
borrower defaults.
    Senator Corker. So, let me ask you this question. Is there 
any way, is it possibly fathomable that an institution like the 
Federal Government can make loans at 3.4 percent to all comers, 
no collateral, no credit checks, no payments made for years, 
and come out in a way that is net positive on the basis of the 
loan?
    Is that even within the realm of--and to any institution 
whether they actually have a lot of default rates or not or 
students attending those institutions, is that fathomable?
    Mr. Remondi. No.
    Senator Corker. It is not?
    Mr. Remondi. No.
    Senator Corker. So, I just want to say, and I know I have 
demonstrated a little bit of an attitude here, that the 
tremendous hypocrisy, the attitude is at us, it is at us, and 
that is that, you know, obviously, Ms. Loonin, great testimony 
and I appreciate your work in this regard and you were talking 
a little bit about how the private sector side has certain 
constraints, sometimes the prudential regulators place them on.
    Maybe some of them are not as tight as some of them 
advocate as you mentioned earlier. But, on the private side, 
they actually have to survive to the next year. I mean they 
actually have to make it in a solvency way.
    On the public side, and in an election year, we can just 
make things up and you can decide that we want to try to get 
votes from students and young people by doing things that we 
know make us even more insolvent as a country but we can just 
do that.
    And so, can you understand why there might be differences 
between what the private sector is doing that has to actually 
exist into the future and the public side which we can just 
print money and borrow money from other people and do things 
that make us more insolvent during the time of elections?
    Can you understand why you would have sort of different 
types of lending arrangements taking place?
    Ms. Loonin. I can understand but I should say that the 
loans that I saw during the heyday of the predatory lending 
were the worst products I have ever seen and I do not think 
there was any caution put into those when the private lenders 
were making those.
    They were lending to schools that they are talking about 
now with the bad outcomes. They were lending to students of 
those schools back then at rates that I have never seen before 
also, and those were some of the loans that failed at the 
highest rates.
    So, we are talking about it now because the market has 
changed because of the crash. So, you are right about that but 
that is actually still a problem, frankly, in the private 
sector.
    Senator Corker. And by the way, for any entity that is out 
there doing things like you just mentioned, we ought to do 
everything we can to put them out of business. I could not 
agree more.
    I am really just talking about really us, not you guys. I 
thank you for what you do. I just continue to be appalled at 
our ability to be a responsible.
    And, candidly, as I listen to Mr. Remondi, it sounds like 
that they are trying to be responsible. I do not know if you 
all would take any issue with some of the things that he just 
discussed regarding Sallie Mae's policies.
    Would you do that?
    Ms. Loonin. I mean, I can say that I agree that they are 
trying to be responsible now and that I do have very good 
working relationships with their customer advocate office at 
Sallie Mae. I think very respectful relationships.
    But, unfortunately, for a lot of our clients, they are 
still not able to offer anything but I do think that a lot of 
the products that they have created going forward do show much 
more responsible lending practices.
    Senator Corker. I thank you for your help as advocates in 
making that happen.
    Just in closing, Mr. Remondi, on the institutions, I know 
there was an effort by the Administration to make it so and it 
might have been a good policy so that, you know, if a private 
entity had students that were attending and they were borrowing 
money that there had to be certain outcomes there or they could 
no longer participate in certain governmental programs.
    It sounds like there may be a number of public institutions 
around the country that we may need to look at him that same 
way.
    Would you agree or disagree?
    Mr. Remondi. Yes. I mean, there are good schools and there 
are bad schools that are for-profit and not-for-profit in 
educational outcomes for their students.
    Senator Corker. And I guess, as far as consumers go, 
equally bad outcomes for students if they borrow money in a 
responsible way from a responsible entity whether it is public 
or private and end up attending one of these schools that 
really is not equipping them to perform in the 21st century, 
there is a consumer issue they are also, is that correct?
    Mr. Remondi. Yes.
    Senator Corker. Do you know of a way that we might be a 
with that?
    Mr. Remondi. Well, I think having information available to 
students, information about the school's graduation rates, 
information about the default rates of students who attend 
those schools is a good step in that direction.
    I would go back, though, to my earlier comment that says a 
lot of this is trying to address how to make a decision about 
the current semester. I have the tuition bill on the kitchen 
table, what do I do?
    And I think more students and families need to think about 
the total cost. How am I going to get from first year of 
college through to graduation so that I actually get the 
economic benefit from the money we are investing?
    Senator Corker. And for the people that you are dealing 
with, it is very important to you, as a lender, that they sit 
down at that kitchen table and try to think through the entire 
process through graduation because otherwise it is going to end 
up creating a loss for your institution, is that correct?
    Mr. Remondi. That is correct and that is why we offer our 
Education Investment Planner as a free Web site tool to 
customers and noncustomers alike.
    Senator Corker. Are we doing that with the Federal loan 
program, to your knowledge?
    Mr. Remondi. No, we are not.
    Senator Corker. So, we have a lot of students that are 
borrowing money from the Federal level and do not have this 
type of input at the Federal level, that do not have this kind 
of input on the front end and we, in essence, again us here, 
not you guys and not certainly any of the witnesses that are 
trying to overcome some of the predatory issues, we have a 
policy that may be, in fact, harming people throughout their 
lifetime, is that correct?
    Mr. Remondi. We are certainly not making the information 
available to those customers and all of the disclosure examples 
that were provided today certainly do not exist in the Federal 
student loan program.
    Senator Corker. Do you know why that would not be the case?
    Mr. Remondi. It is exempt from the Truth-in-Lending law.
    Senator Corker. Yeah. I think you can understand my 
frustration with the hypocrisy in this institution.
    Thank you.
    Senator Brown. I guess I share Senator Corker's views about 
hypocrisy but I look at many of these for-profit schools that 
the administration is trying to write some rules for and 
getting resistance from so many on that when we should know 
more about the student that you suggest, Mr. Remondi, that is 
coming for a student loan should know more about, as they look 
at the whole picture of education, what are the graduation 
rates of this school, a for-profit or not-for-profit, a 2-year 
or 4-year, public or private should let them know what 
placement rates, what kinds of placement counselors and job 
placement offices they have at these for-profit or not-for-
profit schools and what the rate of getting a job are, what the 
rates of job placement are.
    So, I think all of that should be in this picture so there 
is plenty to go around. Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman. I want to 
tell the panel that I really appreciate your presence and the 
sharing of your experiences in the student loan programs.
    We have heard from you today you information that included 
that expanding the role of colleges and universities in working 
with private lenders. However, since 2008, average tuition at 
private not-for-profit schools has gone up almost 10 percent 
and tuition at public 4-year schools has gone up 15 percent.
    These increases are surely leading students to look for and 
take out additional loans. Schools both determine tuition and 
help students find ways to pay their tuition.
    I would like to hear from the panel what can be done to 
ensure that schools continue to provide advice with the best 
interest of their students in mind and do you see a need for a 
mutual third party to offer advice to students?
    Ms. Loonin.
    Ms. Loonin. Thank you. The cost of college clearly has, as 
Mr. Chopra mentioned, gone up across all sectors and that is a 
huge problem; and unfortunately, there are a lot of students 
going to school who borrow more because obviously the cost is 
more and it is a complicated problem that is actually driving 
the costs.
    I mean, one thing that I think is important to look at is 
accountability, something that Senator Corker was just talking 
about, accountability across all sectors of higher education 
for outcomes, for completion, for job placement, because the 
ability to repay the loans frankly even at some of the higher 
cost institutions is very much dependent on what the outcome is 
on the education.
    If you succeed, and particularly in the Federal programs 
where there is a lot of flexibility and a lot of options, most 
likely it is going to be a situation where the borrower is 
going to come out ahead and, you know, it is good for the 
economy and all of that as well.
    As far as having a neutral third-party advisor, I am not 
sure at what point of the process that you are talking about 
specifically.
    I think it is always important for borrowers to get neutral 
advice. I think that the schools themselves sometimes do have 
conflicts of interest where they want the student to come to 
the school. They are selling their product in a lot of ways and 
it may be difficult in some schools to be able to give neutral 
advice.
    On the other hand, a lot of financial aid officers do a 
very good job now of providing that kind of advice.
    Something that Ms. Mishory mentioned is to get that kind of 
information out to people before they get into the school 
doors, and that could be in the schools with counselors and 
that should be as neutral and objective as possible.
    Senator Akaka. Ms. Mishory.
    Ms. Mishory. Yes, I mean, I would absolutely agree the cost 
of college is a huge issue. We hear about it from all the 
students that we talk with. Families are really struggling to 
figure out how to pay for college; and the issue of student 
debt is simply related and the cost of college is what is 
impacting this debt.
    I do think there are larger issues that we need to address, 
like State investment in our public institutions. Public 
institutions are no longer supportable like they used to be.
    Someone from my mom's generation paid a third of what I 
paid to go to a public institution. We need schools to be 
accountable for the money that they do receive and there are 
not that many ways in which we hold schools accountable like we 
should, and we need more information.
    We need kids to be able to go and look and say:

        OK, well, the school down the street has a lot of students 
        default on loans and a 50 percent unemployment rate for the 
        past two years' graduating class. But, if I go across the city, 
        kids 2 years out have an 80 percent employment rate. I am going 
        to go to that school across the city.

We do not have that information right now for students and they 
desperately need it.
    Senator Akaka. Mr. Remondi.
    Mr. Remondi. I would agree that the cost of college has 
risen dramatically. I think the sticker price though is 
sometimes a lot different than what the consumer pays and we 
have not seen debt burdens grow at a more rapid pace than 
tuition levels.
    So, the average student is graduating with about $26,000 
worth of debt which is about 2 percent more per year over the 
last 10 years.
    I think one of the challenges they face is that the 
economy, coming out of school today, it is very difficult for 
students to get a job either in their field or pay level that 
they were expecting maybe when they started, and that is 
creating some of the issues.
    But again, going back to this concept of know-before-you-
go, if students understand the dynamics, how much it is going 
to cost to complete their education, what the graduation rate 
is at that school, what the default rate is, they can make 
better, more informed decisions in that process.
    Senator Akaka. Let me ask a final question here, Mr. 
Remondi. Has the recent scandal over LIBOR had any effect on 
how Sallie Mae sets lending rates and have you thought about 
the possibility of using a different measure for rate setting?
    Mr. Remondi. Our interest rates are set using the LIBOR 
index. We have not seen any issues or problems with that. The 
allegations that have been made to date have said that LIBOR 
was set artificially low wage which, if that is true, would 
have been to the benefit of the borrowers.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Senator Brown. Thank you, Senator Akaka.
    Thank you each of you, Ms. Loonin, thank you, Ms. Mishory 
and Mr. Remondi thank you very much.
    If you have additional comments, you can submit them to the 
Committee within the next 7 days. Committee Members may also 
write questions to you, if you would get the answers to us 
promptly. So thank you very much for your testimony and your 
service.
    The Committee is adjourned. Thanks.
    [Whereupon, at 4:08 p.m., the Subcommittee was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                   PREPARED STATEMENT OF ROHIT CHOPRA
      Student Loan Ombudsman, Consumer Financial Protection Bureau
                             July 24, 2012
    Chairman Brown, Ranking Member Corker, and Members of the 
Subcommittee, thank you for holding this hearing today on an issue that 
touches so many American students, families, and our economy.
    A few days ago marked the 1-year anniversary of the opening of the 
Consumer Financial Protection Bureau. In this year, the CFPB has taken 
important steps to improve the consumer financial marketplace. The 
mortgage market, in particular, was especially bruised and battered 
during the financial crisis. We hope that the CFPB's measures to 
increase transparency and improve oversight will help restore 
confidence and heal this multi-trillion dollar market with broad impact 
for consumers and the economy.
    But we have also placed a great deal of attention on a growing 
market deeply connected to the American Dream--the student loan market. 
To prosper in today's global economy, our workforce needs skills to 
innovate in a highly competitive environment. For millions of 
Americans, student loans have opened doors to a college degree-offering 
new opportunities to create a better life. But the rapid growth of 
student debt raises concerns that warrant significant attention of 
policymakers and regulators.
    With outstanding student loan debt reaching the $1 trillion mark 
late last year,\1\ our economy has not just crossed a psychological 
threshold. Student loans are now the largest form of unsecured 
household debt, and the CFPB will play an active role in contributing 
to a properly functioning student loan marketplace.
---------------------------------------------------------------------------
    \1\ Consumer Financial Protection Bureau and U.S. Department of 
Education: Report on Private Student Loans (2012).
---------------------------------------------------------------------------
College is Still a Good Investment, But Not without Risk
    College is still a good investment, and higher education remains 
the surest path to a good career and job security. The unemployment 
rate for workers with college degrees is 4.1 percent, compared to 8.4 
percent for those with just a high school diploma.\2\ For younger 
workers, the unemployment rate for those with college degrees is 8.9 
percent compared to over 13 percent for those with just a high school 
diploma.\3\
---------------------------------------------------------------------------
    \2\ Bureau of Labor Statistics: Current Population Survey, 
Household Data, Table A-4, Employment status of the civilian population 
25 years and over by educational attainment (June 2012).
    \3\ Bureau of Labor Statistics: Current Population Survey, 
Household Data, Table A-16, Employment status of the civilian non-
institutional population 16 to 24 years of age by school enrollment, 
age, sex, race, Hispanic or Latino ethnicity, and educational 
attainment (June 2012).
---------------------------------------------------------------------------
    But there is another side to this story. Much attention has been 
paid to the growing ``college wage premium''--the difference between 
wages for those with a college degree versus those without.
    Over the past decade, wages for young college graduates have 
actually declined by 5.4 percent when adjusting for inflation.\4\ This 
growing ``premium'' is largely explained by declining wages for young 
people without a degree. Between 1990 and 2010, wages for workers with 
only a high school diploma declined by 12 percent, when adjusted for 
inflation.\5\ Put another way, the growing gap is not due to a college 
degree becoming more valuable--it's that the wages are of non-degree 
holders are falling.\6\
---------------------------------------------------------------------------
    \4\ Economic Policy Institute: The Class of 2012: Labor market for 
young graduates remains grim (2012).
    \5\ National Center of Education Statistics: Digest of Education 
Statistics, Table 395, Median annual earnings of year-round, full-time 
workers 25 years old and over, by highest level of educational 
attainment and sex: 1990 through 2010 (2011).
    \6\ National Center of Education Statistics: Digest of Education 
Statistics, Table 395, Median annual earnings of year-round, full-time 
workers 25 years old and over, by highest level of educational 
attainment and sex: 1990 through 2010 (2011).
---------------------------------------------------------------------------
    But the cost of attendance at our Nation's colleges and 
universities has not been falling. In the past decade, the cost of 
attendance at public schools increased 42 percent, and prices at 
private not-for-profit schools increased 31 percent, when adjusting for 
inflation.\7\ Tough economic times have led State governments to slash 
higher education budgets, exacerbating this trend. The cost of tuition 
and fees has risen more than tenfold since 1979, vastly outpacing 
inflation, wage growth and healthcare costs.\8\
---------------------------------------------------------------------------
    \7\ National Center of Education Statistics: Digest of Education 
Statistics, Chapter 3 (2011).
    \8\ Bureau of Labor Statistics, Consumer Price Index for All Urban 
Consumers (CPI-U), College tuition and fees, 1979-2011 (2012); Bureau 
of Labor Statistics, Consumer Price Index for All Urban Consumers (CPI-
U), All Items, 1979-2011 (2012); Bureau of Labor Statistics, Median 
usual weekly earnings, Employed full time, Wage and salary workers, 
1979-2011 (2012); Bureau of Labor Statistics, Consumer Price Index for 
All Urban Consumers (CPI-U), Medical Care, 1979-2011 (2012).
---------------------------------------------------------------------------
    Growing costs, declining real wages, and job market uncertainty 
have led to more debt and more risk. The consequences of this increased 
risk are real, as evidenced by troubling employment outcomes and 
student loan defaults, which are disproportionately felt in the for-
profit college sector. While perhaps fewer in number than the struggles 
of American homeowners, the stories of distressed young college 
graduates reveal the impact of the financial crisis and the significant 
work that lies ahead.
Private Student Loans Carry More Risk
    While seemingly quite different, dysfunction in the student loan 
market bears some remarkable similarities to the mortgage market in the 
years leading up to the financial crisis. High-credit-quality 
conforming mortgages and Federal student loans originated in this time 
period were rather ordinary.
    But, of course, not all mortgages were so ordinary, and phrases 
like ``no-doc'' and ``Alt-A'' were well-known in the subprime market. 
While student loans have been originated outside of the Federal loan 
programs for years, private student loans boomed in the years leading 
up to the crisis.\9\ From 2003 to 2007, the number of undergraduates 
who took out private student loans almost tripled.\10\
---------------------------------------------------------------------------
    \9\  Consumer Financial Protection Bureau and U.S. Department of 
Education: Report on Private Student Loans (2012).
    \10\ Ibid.
---------------------------------------------------------------------------
    Fueled by investor appetite for asset-backed securities, many 
private student lenders reduced their underwriting standards and 
marketed directly (and sometimes heavily) to students. Holders of these 
securities likely did not expect the levels of delinquency and default 
on these loans.\11\ Theoretically, the rating agencies who evaluated 
the securities would have served to police quality issues and align 
incentives of investors and issuers. That alignment appears, in 
retrospect, to have been imprecise.
---------------------------------------------------------------------------
    \11\ Ibid.
---------------------------------------------------------------------------
    Like the subprime mortgage industry, lax lending practices are far 
less common in the current environment. Most private student loans 
today are co-signed by creditworthy borrowers and have significant 
disclosure requirements.\12\ But like the mortgage market, there are 
still cracks in the system that need mending.
---------------------------------------------------------------------------
    \12\ Ibid.
---------------------------------------------------------------------------
    Private student loans often lack repayment flexibility \13\ when 
young graduates face a difficult labor market--a marked contrast to the 
Federal student loan program. In 2007, Congress and President Bush 
enacted the College Cost Reduction and Access Act, which recognized the 
need for student loan borrowers to have an option to service their debt 
as a portion of their income.\14\ The income-based repayment program 
allows a student loan borrower to remain current on a loan, so long as 
they are paying a fixed percentage of discretionary income; but this is 
generally not a feature offered to private student loan borrowers.
---------------------------------------------------------------------------
    \13\ Lenders have voiced that the offering of alternate repayment 
schedules is limited by prudential guidance, which might often require 
greater provisions for loan losses when granting modifications.
    \14\ P.L. 110-84.
---------------------------------------------------------------------------
    In addition, some for-profit colleges arrange institutional lending 
programs for students to borrow directly from the school or a school-
affiliated entity. These companies report that they anticipate high 
levels of default on these loan portfolios.
    Private student loan borrowers also experience significant 
challenges when attempting to restructure their loan obligations, due 
to an unusual status in the Federal bankruptcy code and a nearly 
nonexistent refinance market.
    Compared to other forms of consumer debt, like credit cards, 
private student loan debt is more difficult to restructure. In the 
bankruptcy code, distressed private student loan borrowers are put in 
the same category as those who cause injury when driving drunk, skip 
out on taxes, or avoid child support.\15\
---------------------------------------------------------------------------
    \15\ 11 U.S.C.  523 (a).
---------------------------------------------------------------------------
    Even some of the most responsible borrowers--those who may be 
making significant sacrifices to make payments on their private student 
loans--have sought help to better manage their debt burden. Despite a 
significant change in the interest rate environment, we see that many 
borrowers feel stuck in high interest rates and high monthly payments, 
because they cannot easily refinance.
Important Steps Forward in the CFPB's First Year
    The CFPB has already begun to act to address concerns in this 
market. In March, we launched a student loan complaint system where 
borrowers can get help. Any consumer with a student loan can come to 
our Web site (consumerfinance.gov) or call our toll-free call center to 
get help. For borrowers with private student loans, we receive 
complaints directly from borrowers and, through our Web-based portal, 
connect borrowers with their lender or servicer and work to resolve 
their complaints.
    In our monitoring of the student loan market, as well as through 
what we hear in complaints and other feedback from borrowers, we 
observe many issues similar to those experienced by consumers in the 
mortgage servicing industry. For example, borrowers have told us about 
problems in the crediting of payments and processing of paperwork, 
confusion when financial institutions buy and sell portfolios of loans, 
and difficulty getting clear guidance from student loan servicing 
personnel when facing financial hardship.
    Our complaint system has already helped many borrowers when faced 
with billing errors, lost paperwork, and other loan servicing issues. 
We will continue to monitor these servicing issues and plan to provide 
a report to Congress later this year.\16\
---------------------------------------------------------------------------
    \16\ This report is pursuant to Section 1035 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act of 2010.
---------------------------------------------------------------------------
    We also worked closely with the Department of Education on a Know 
Before You Owe ``financial aid shopping sheet'' to help schools provide 
better information on student loans and grants. And we've developed 
online tools, used by tens of thousands of consumers, on how to 
navigate their student loan repayment options, avoid default, and 
protect their credit history. We've also begun to supervise the 
Nation's largest banks, where much of today's private student loan 
origination takes place, for compliance with Federal consumer financial 
laws and to detect and assess risks to consumers.
    The CFPB hopes to continue and expand our work with other agencies 
that might play a critical role in addressing roadblocks to 
facilitating repayment flexibility and a robust refinancing market.\17\
---------------------------------------------------------------------------
    \17\ Consumer Financial Protection Bureau and U.S. Department of 
Education: Report on Private Student Loans (2012).
---------------------------------------------------------------------------
    Congress can also play a role. Last week, CFPB Director Richard 
Cordray and Secretary of Education Arne Duncan presented a report to 
Congress on the private student loan market. Both Director Cordray and 
Secretary Duncan provided recommendations on potential improvements to 
the marketplace. They each asked Congress to consider requiring school 
certification of loans, modifying the definition of a private student 
loan, and further investigating whether the 2005 change to the 
bankruptcy code met its intended goals.\18\
---------------------------------------------------------------------------
    \18\ Ibid.
---------------------------------------------------------------------------
Student Debt in the Broader Economic Puzzle
    Over the past year, the CFPB collected thousands of comments from 
individual student loan borrowers about their experiences with private 
student loans. A common theme in these stories was the impact of their 
debt on reaching economic milestones.
    Compared to mortgages, student debt does not pose the same sort of 
systemic risk to the banking system. While policymakers are highly 
focused on conditions in the labor and capital markets, it would be 
imprudent to dismiss that growing student indebtedness can act as a 
drag on economic recovery.
    Consider a private student loan borrower with a high interest rate 
(which could creep even higher given today's interest rates) on a large 
balance. Many borrowers are dutifully meeting these obligations. But 
without a robust refinancing market, they struggle to reduce their 
monthly payments, even though they might have built a solid credit 
history since their early days of college. Will these honest borrowers 
be precluded from reaching the economic milestones familiar to American 
life? And if so, what might be the broader consequences?
    Take the housing market: first-time homebuyers are typically an 
important source of demand and help facilitate move-up purchases from 
existing buyers. Census data reveals that 6 million Americans ages 25-
34 lived with their parents in 2011, a sharp increase from just a few 
years ago.\19\ The 25-29 year old age cohort has experienced 
significant reduction in homeownership rates since the financial 
crisis.\20\ The National Association of Realtors estimates that people 
aged 25-34 made up 27 percent of all home buyers in 2011, the lowest 
share in the past decade.\21\
---------------------------------------------------------------------------
    \19\ U.S. Census Bureau: Families and Living Arrangements, Table 
AD-1, Young Adults Living at Home: 1960 to Present (2010).
    \20\ U.S. Census Bureau: Housing Vacancies and Homeownership (CPS/
HVS), Table 15, Housing Inventory Estimates by Age of Householder and 
by Family Status: 1982 to Present (2011).
    \21\ National Association of Realtors: Profile of Homebuyers and 
Sellers (2011).
---------------------------------------------------------------------------
    A recent Federal Reserve Study shows the share of individuals age 
29-34 getting a first-time mortgage dropped significantly in the past 
decade.\22\ According to Chairman Ben Bernanke, ``Lending to first-time 
homebuyers has dropped precipitously, even in parts of the country 
where unemployment rates and housing conditions are better than the 
national average.''\23\
---------------------------------------------------------------------------
    \22\ Board of Governors of the Federal Reserve System: US Housing 
Market: Current Conditions and Policy Considerations (2012).
    \23\ Speech to the 2012 National Association of Homebuilders 
International Builders' Show (February 10, 2012).
---------------------------------------------------------------------------
    It is not just the goal of homeownership that seems further out of 
reach. A recent report revealed that just 50 percent of workers under 
the age of 30 have enrolled in their employer's 401(k) plan.\24\ Forty-
three percent of young workers do not save enough to receive a full 
employer match,\25\ and are more likely to cash out their plans when 
changing jobs.\26\ The inability to afford making contributions to 
these employer plans can lead to significant reductions in future nest 
eggs, calling into question whether young, debt-burdened graduates will 
enjoy a retirement like previous generations of Americans.
---------------------------------------------------------------------------
    \24\ Northern Trust: Line of Sight: The Path Forward--Engaging the 
Younger Employee in DC Plan Participation (2011).
    \25\ Aon Hewitt: Navigating the Path to Retirement: 2011 Universe 
Benchmarks Highlights (2011).
    \26\ Northern Trust: Line of Sight: The Path Forward--Engaging the 
Younger Employee in DC Plan Participation (2011).
---------------------------------------------------------------------------
    While there are certainly many factors that could explain these 
trends, we might find continued economic stress for young graduates due 
to high debt levels--even if the broader labor and capital markets 
improve significantly.
    Congress \27\ and Federal agencies have taken steps to increase 
liquidity and the functioning of the credit markets in recent years, 
but the current conditions in the student loan market may have a long-
term impact on the economic vitality of many student loan 
borrowers.\28\ Many student loan borrowers today--even those who are 
making large monthly payments on-time--are unable to secure adequate 
credit accommodations to refinance or modify their debt burden, despite 
today's historically low interest rate environment.
---------------------------------------------------------------------------
    \27\ In 2008, Congress enacted the Ensuring Continued Access to 
Student Loans Act, which gave the Department of Education the authority 
to provide liquidity to financial institutions originating student 
loans through the Federal Family Educational Loan Program. The 
Department of Education established programs, including a buyer-of-
last-resort supported asset-backed commercial paper conduit, which 
purchased in excess of $100 billion in student loans.
    \28\ It is worth noting that Federal agencies have intervened in 
the private student loan market in recent years. Citing ``unusual and 
exigent circumstances,'' the Federal Reserve Board of Governors 
exercised its authority pursuant to Section 13(3) of the Federal 
Reserve Act to establish the Term Asset-Backed Securities Loan Facility 
(TALF), which facilitated the issuance of a wide range of ABS, 
including those backed by private student loans.
---------------------------------------------------------------------------
    Policy makers have paid significant attention to the refinancing 
and modification conditions in the mortgage market. But given the 
potential impact of student debt on the broader economy, the situation 
is rapidly demonstrating the need for attention to determine whether 
action is required.
    The CFPB will continue its work to make the private student loan 
marketplace work better for borrowers, schools, and honest lenders. We 
look forward to working with Congress and policymakers to address risks 
in the marketplace and identify ways to ensure that economic mobility 
is still within reach for those who borrowed to invest in an education.


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                                 ______
                                 
                   PREPARED STATEMENT OF JACK REMONDI
           President and Chief Operating Officer, Sallie Mae
                             July 24, 2012
    Good afternoon Chairman Brown, Senator Corker and Members of the 
Subcommittee. My name is Jack Remondi. I am the President and Chief 
Operating Officer of Sallie Mae. I thank you for the opportunity to 
testify on the private education loan marketplace, which has witnessed 
a significant transformation in recent years. More than ever, a college 
degree provides a pathway to a lifetime of higher income and 
employment. Yet, with today's cost, most families find they need to 
finance a portion of the total cost. Private education loans provide a 
small, but important, supplement for students and families that can 
help them access a higher education. In our 40 years, Sallie Mae has 
helped more than 31 million Americans achieve their college dream. As a 
result of our experience, Sallie Mae understands the importance of 
education, and how it can drive positive economic change for 
individuals and families across the economic spectrum. We take 
seriously our role of providing responsible private education loans to 
those who rely on them when making the college investment.
    As the country's leading saving-, planning- and paying-for-college 
company, with the mission of helping make higher education accessible 
and affordable for American families, Sallie Mae is grateful for this 
opportunity to share our perspective in this discussion.
Overview
    The market for private education loans is a small, but important, 
source of funding that helps students and families responsibly fill the 
gap between their own income and savings, financial aid, grants, 
Federal loans, and the total cost of their chosen college or 
university. Created decades ago, at a time when available aid was not 
enough to meet the full cost of education, private education loans were 
introduced to support families in meeting remaining costs after other 
resources and were never intended to replace Federal aid. In fact, they 
were originally called ``supplemental'' loans, indicating their stated 
purpose. We recommend that the Committee consider today's market in 
terms of size and providers, and its limited, but important, 
supplemental role in financing higher education.
    In academic year 2007-08, students and families borrowed $23.2 
billion in ``non-Federal,'' or private education loans, representing 
about 6 percent of all spending on higher education. With increases in 
Federal loan limits, more robust underwriting standards and a very 
difficult economic environment, 3 years later, in academic year 2010-
11, students and families borrowed less than $8 billion in non-Federal 
education loans, representing about 1 percent of total spending on 
higher education.\1\
---------------------------------------------------------------------------
    \1\ College Board, ``2011 Trends in Student Aid'', McKinsey & 
Company.
---------------------------------------------------------------------------
    Over the same period, however, the Federal loan program grew by 50 
percent, from $69 billion to $104 billion.\2\ Today, Federal loan 
originations are 13 times that of private education loans.
---------------------------------------------------------------------------
    \2\ College Board, ``2011 Trends in Student Aid''.
---------------------------------------------------------------------------
    We believe that education loans are not meant to be the sole source 
of higher education funding. In fact, we administer 529 college savings 
plans and interest-free tuition installment plans for millions of 
families. When those and other aid are not enough, families consider 
borrowing, and when they do, as with any loan, education loans should 
be taken out with care. Students and their families need to assess the 
total cost of education, not just the bill for the current semester, 
and be sure that what they borrow is what they can afford based on 
current and projected financial resources.
    As a means for achieving economic success in America, a higher 
education is more valuable than ever. Various studies have estimated 
that college graduates will earn, on average, between $650,000 and 
$1,000,000 more over the course of their careers than those with only 
high school diplomas.\3\ In addition to increased earnings potential, a 
higher education results in lower unemployment rates. National 
unemployment figures for June were at 8.2 percent; however, Americans 
with a bachelor's degree or higher had a jobless rate of just 4.1 
percent. The benefits of employment extend to new college graduates, as 
well. The unemployment rate of new graduates is 9.8 percent compared to 
20.6 percent for their same-age peers with no post-secondary 
education.\4\
---------------------------------------------------------------------------
    \3\ Georgetown University Center on Education and the Workforce, 
August 2011.
    \4\ Bureau of Labor Statistics, Current Population Survey, June 
2012.
---------------------------------------------------------------------------
     Higher education is a major lifetime investment and helping 
college-bound students and their families responsibly make this 
investment is Sallie Mae's top priority. Experience has taught us that 
a one-size-fits-all approach does not work. That is why we have 
developed a suite of tools and products that help students and families 
build plans that are right for their situations and that will assist 
them whether college is a long way off or right around the corner.
    Our goal is to educate families up front about the entirety of the 
education finance process, and to make sure that access yields success. 
Families will be their own best defense against over-borrowing if they 
keep these basic principles in mind:

    Choose a school that is within financial reach.

    Create a financial plan that goes beyond the first year and 
        includes all the expected costs through graduation.

    Consider career plans and likely starting salary in the 
        borrowing decision.

    Remember that loans require repayment.

    Explore Federal loans first.

    Keep balances down by doing whatever can be done to make 
        loan payments while in school.

    Make loan payments, even partial ones, if at all possible 
        when out of school to keep balances from growing out of 
        control. Deferring payment is the same as borrowing more--the 
        loan balance grows every day.

    Perhaps most important of all, graduate. Nobody wins when 
        debt is incurred for a degree that does not materialize. 
        Student loans without a degree mean loan payments without the 
        increased employment prospects and higher earnings to support 
        them.

    Sallie Mae has a long-standing practice of advising a ``1-2-3 
approach'' to paying for college to empower families to make informed 
decisions. Specifically, we recommend that families do the following:

  1.  Use scholarships, grants, savings and income.

  2.  Explore Federal loans.

  3.  Consider an affordable, responsible private education loan to 
        fill any remaining gap.

    The Administration's recent report on private education loans 
stated, ``Students and their families would be better served by having 
access to all pertinent financial information concerning the college 
decision prior to deciding which college to enroll at and how much debt 
to incur.''\5\ Sallie Mae couldn't agree more. Although applying for 
financial aid is an annual exercise, we encourage families to plan for 
the multi-year commitment required to fund a college degree. In fact, 
we design our planning tools to assist families in determining how to 
meet the full costs of a college education. A 1-year snapshot is simply 
not enough.
---------------------------------------------------------------------------
    \5\ Consumer Financial Protection Bureau and Department of 
Education, ``Private Student Loans,'' July 2012.
---------------------------------------------------------------------------
    Our free Education Investment Planner gives families the tools and 
information they need to become educated planners and savers. The free 
tool helps users ``know what they will owe'' over the entire course of 
completing their college degree, and assess before borrowing whether 
that amount will be manageable given their current and expected future 
income.
    In most cases, higher education is a family commitment. Sallie 
Mae's How America Pays for College research found that three out of 
four families believe parents and students should share the 
responsibility for paying for college. In practice, six out of 10 
parents contribute, either through savings or borrowing, to fund their 
children's educations. Our private education loans are designed to 
support that shared responsibility and commitment. Last year, over 90 
percent of our new private education loans had a cosigner, usually a 
parent.
    At Sallie Mae, efforts to inform students and families about their 
loans begin at loan application and continue until the loan is paid in 
full. During the application process, students and their cosigners view 
monthly and total payment information customized to their borrowing 
amount and qualifying interest rate. Applicants are presented with a 
choice of interest rate structure, variable or fixed, and a choice of 
repayment options that include in-school payments of interest, nominal 
payments of $25 a month or deferred payments.
    Once approved, customers receive multiple disclosures with detailed 
loan information. These communications clearly highlight the 
availability of Federal loan programs, quantify expected monthly 
payments and finance charges, encourage the applicant to shop around, 
and outline the right to cancel the loan after disbursement.
    The education process continues after loan proceeds are disbursed. 
Our private education loan customers receive statements monthly that 
detail their loan balance and accruing interest. Customers who elected 
to defer payment while in school are reminded of the effect that making 
in-school payments would have on their total loan costs. This 
continuing education has been successful, and we are pleased that so 
many of our customers have benefited from this cost-saving practice.
    Sallie Mae's private loan portfolio is strong, and our underwriting 
is sound. Even in these tough times, the vast majority of our customers 
are successfully making on-time payments. In fact, 90 percent of our 
loans in repayment are current. Our private loan delinquencies have 
steadily declined since the peak of the recession, and charge-offs have 
dropped from a high of 6 percent of loans in repayment to 3 percent 
this year.
    Still, we recognize that the economic recession has posed real and 
significant challenges for some of our customers. Our success depends 
on our customers' success, and therefore, we are committed to working 
with customers to help them navigate difficult financial circumstances 
and preserve their good credit standing. To assist borrowers with past 
due loans, we reach out to gain an understanding of the individual 
circumstances they face. To customers who have exhausted traditional 
repayment options and are demonstrating a reduced ability to pay, we 
offer a mix of repayment products, counseling and collection programs 
that give them the best opportunity to manage their debt obligations 
and succeed. These options include reduced monthly payments, interest-
only payments, extended repayment schedules, and temporary interest 
rate reductions, all scaled to a customer's individual circumstances 
and ability to make manageable payments. Since 2009, we have modified 
$1.1 billion in loans to help our customers manage their loans.
    Nonetheless, in some cases, loan modifications and other efforts 
are insufficient and bankruptcy may be the only path. Sallie Mae 
supports reasonable reform to bankruptcy laws that would allow 
borrowers to discharge their education loans--both private and 
Federal--after a good faith period of attempting to repay. Any reform 
must recognize that education loans have unique characteristics and 
benefits. They are unsecured credit extended to borrowers whose assets 
are initially limited, but can be expected to grow over a lifetime of 
greater earnings power attributable to the value provided by the 
education obtained through these loans. Consequently, given the 
lifelong nature of this ``collateral,'' Congress saw fit that neither 
private nor Federal loans be easily dischargeable in bankruptcy. This 
has been the case for Federal loans since the late 1970s. Private 
education loan rules, which had mixed treatment depending on the 
lender/guarantor, were standardized with the same protection in 2005.
    Recent graduates with sizable education loans and relatively few 
assets, a common combination in education lending, create a moral 
hazard that drove the creation of these bankruptcy protections. ``Many 
Students Avoiding Payment of Loans by Filing for Bankruptcy'' was a 
1976 New York Times headline about this unique problem. As graduates 
become employed, increase their earnings and assets and recognize the 
value of establishing good credit, this hazard diminishes. Sallie Mae 
supports bankruptcy reform that would require a period of good faith 
payments, that is prospective so as not to rewrite existing contracts, 
and that applies to Federal and non-Federal education loans alike.
    Education loans are an important financial tool for responsible 
borrowers. They help provide access to a brighter future. Responsible 
lending standards, clear information and consistent laws are good for 
borrowers and lenders alike. We take this point seriously. Sallie Mae 
is ever mindful that our success is tied directly to the financial 
success of our customers, and our products and practices reflect that 
reality.
    Our loans provide important protections for the family, including 
tuition insurance, and death and disability loan forgiveness. But the 
best protection inherent to any loan, including a private education 
loan, is the underwriting of the loan itself. Further, we all have a 
role to play in preventing over borrowing and working to assure as many 
students graduate as possible.
    In the last 5 years, the private education loan marketplace has 
undergone significant change. Driven by the credit market crisis and 
changes at the State and Federal levels--including changes developed by 
Congress--today's smaller private education loan marketplace provides 
extensive disclosures, adherence to new rules for financial aid 
offices, and tightened underwriting standards that better match loans 
with a family's ability to repay.
    As you examine the private education loan marketplace, we hope 
Congress will recognize the comprehensive series of legislative and 
marketplace changes implemented in recent years that strengthened 
consumer protections and witnessed product innovations that have 
reduced costs for borrowers.
    It is a mistake to believe ``private'' or ``non-Federal'' is 
synonymous with ``un-regulated.'' The private education loan 
marketplace is extensively regulated. The vast majority of private 
education loans are made through highly regulated traditional banking 
channels, to borrowers protected by numerous State and Federal consumer 
lending laws. As the Consumer Financial Protection Bureau and U.S. 
Department of Education noted in their report:

        Private Student Loan borrowers have significant protections 
        under the Truth-in-Lending Act (TILA), the Equal Credit 
        Opportunity Act (ECOA), the Fair Credit Reporting Act (FCRA), 
        the Fair Debt Collection Practices Act (FDCPA), the Federal 
        Trade Commission Act (FTCA), and the Consumer Financial 
        Protection Act. (p. 67)

    The Higher Education Opportunity Act of 2008 amended the Federal 
Truth-in-Lending Act to establish a series of extensive, modernized 
disclosures to provide private education loan borrowers clear, 
consistent, and easy-to-compare information about private loans. 
Quoting again from the report:

        The new Truth in Lending Act (TILA) disclosures for Private 
        Student Loans are unique to that product. No other installment 
        loan is subject to quite so much disclosure. (p. 68)

    Also, the private education loan marketplace operates in accordance 
with important common safeguards to private education loans that were 
developed by Congress and passed as part of the Higher Education 
Opportunity Act of 2008. The HEOA established borrower protections such 
as a guaranteed 30-day window to accept the loan without term changes 
and the right to cancel loans after approval; it limited certain 
practices, such as school co-branding; it regulated campus lender 
lists; and it required borrowers to self-certify their costs of 
education and to confirm they are aware of the availability of Federal 
loans before completing their private education loan applications.
    As a result of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, rulemaking authority under many of these laws and 
regulations has been transferred to the Consumer Financial Protection 
Bureau. We have been working with the CFPB, including participating in 
their recent study, to ensure that consumers have access to responsible 
education loan products that not only help provide access to higher 
education, but also are designed to help produce success.
    At Sallie Mae, our disclosures provide borrowers clear, consistent, 
and easy-to-compare information about private education loans.\6\ These 
disclosures inform borrowers of the potential life-of-loan costs and 
provide multiple reminders to explore the availability of lower-cost 
options, including Federal loans. In the most recent findings of our 
How America Pays for College study, we found how effective these 
reminders are:
---------------------------------------------------------------------------
    \6\ Examples of these disclosures are available at 
www.SallieMae.com/primer.

    Of private education loan borrowers, 98 percent filled out 
        the Free Application for Federal Student Aid form, or FAFSA, 
---------------------------------------------------------------------------
        which is the first step toward taking out a Federal loan.

    Last year, 25 percent of students borrowed Federal loans 
        only, 9 percent used a mix of Federal and private loans, and 1 
        percent tapped private loans only.

     We believe that these significant results are directly related to 
the increased disclosures provided to consumers. In addition, Sallie 
Mae has pioneered new products and procedures designed to further help 
families make more informed, affordable choices.
    Today, most private education loans are certified by the school. 
Sallie Mae advocates school certification as an important safeguard 
against over-borrowing; we will not disburse a private education loan 
until the school financial aid office certifies the need for and the 
amount of a loan. This is not because we are required to--we are not--
but because it is an important check against over-borrowing.
    Until 3 years ago, nearly all borrowers deferred loan payments 
while in school. In 2009, Sallie Mae became the first national lender 
to encourage payments while in school. In addition, we designed shorter 
repayment periods based on loan amounts, which, combined with in-school 
payments, dramatically reduce finance charges.
    We encourage payments before graduation because it saves thousands 
of dollars over the life of the loan, and we reward customers who elect 
an in-school payment option with lower interest rates. Our in-school 
customers who opt for either the interest payment plan or the fixed $25 
per month plan can save an estimated 30 to 50 percent in total interest 
costs.
    In academic year 2011-12, when offered the choice of three 
repayment options, including no payments while in-school, 63 percent of 
Sallie Mae in-school customer families choose to lower their costs of 
borrowing by making payments. This compares to just 5 percent of 
customers who made in-school payments before we introduced the practice 
of encouraging them.
    One area where we are anxious to see some change is in the area of 
working with defaulted borrowers. For those who have defaulted on their 
Federal loans, the Federal rehabilitation program provides a powerful 
incentive to borrowers to return to regular repayment and rebuild their 
credit. Under this program, if a customer makes a specified number of 
timely payments, his loan is ``rehabilitated'' and, by law, the default 
must be removed from his credit history. The statute requires the 
lender to report this change to the credit history. For all other 
consumer credit, however, the Fair Credit Reporting Act does not allow 
such a ``second chance.'' There is no provision for lenders to 
rehabilitate defaulted private loans and then request the removal of a 
default that did, in fact, occur. For some time, we have identified the 
need for a similar rehabilitation solution. We believe it is 
appropriate for Congress to consider legislative changes that could 
provide this option to private education loan borrowers.
Conclusion
    Higher education is an American priority, and how to pay for 
college is a family decision. Families will maximize the return on 
their investment when students graduate; thus, they should approach 
paying for college as they would any other serious investment: by 
understanding the full cost and the expected return.
    Sallie Mae has long recommended that students and their families 
finance higher education from savings, scholarships, grants, Federal 
student loans, and, if necessary, a responsible private education loan.
    Private education loans are a small but critical component of how 
families pay for college. Used by just 10 percent of families, private 
education loans help families cover the gap between other financial aid 
and their chosen school's cost of attendance.
    Legislative changes and market forces have combined to make private 
education lending better understood by families, better underwritten, 
and more targeted to provide the needed financing that can be the 
difference between achieving an academic goal and failing to do so.
    Sallie Mae is proud to have helped more than 31 million Americans 
achieve their dream of a higher education. We pledge to continue 
responsible lending practices and to work with policymakers where there 
are opportunities to make further improvements.
    Thank you. I would be pleased to answer any questions you may have.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM ROHIT CHOPRA

Q.1. Are we seeing some signs of renewed growth in volume for 
private student loans? What steps should we take now to prevent 
a return to the lax underwriting and predatory lending that we 
saw between 2001 and 2008?

A.1. Since 2008, origination of private student loans has 
grown, but has not reached the level seen prior to the 
financial crisis. In the Report on Private Student Loans 
submitted by the Director of the Consumer Financial Protection 
Bureau (CFPB) and the Secretary of Education, CFPB Director 
Richard Cordray and Education Secretary Arne Duncan each 
recommended that Congress consider requiring all private 
student loans to be ``certified'' by the school's financial aid 
office. This step could help students to avoid overborrowing 
and help to ensure that schools have the opportunity to counsel 
students about potentially lower-cost loan options before 
students take out private student loans.

Q.2. Are you seeing patterns of complaints from borrowers? What 
are some of the more frequent complaints? How have they been 
resolved?

A.2. Since launching our consumer response function for student 
loan complaints in March of this year, we've received over 
2,500 complaints from borrowers experiencing difficulties with 
their private student loans. Prior to the establishment of the 
CFPB and the ombudsman function for private student loans, 
there was no single point of contact for consumers to file 
complaints about private student loans.
    The most notable subset of these complaints involves 
borrowers seeking loan modifications due to difficulty securing 
adequate employment. A significant number of borrowers are 
experiencing general servicing problems, ranging from billing 
disputes and lost paperwork to difficulties obtaining 
alternative payment plans advertised by lenders and servicers.
    We are pleased that many of these complaints have been 
favorably resolved by lenders and servicers. Borrowers have 
been able to enroll in new payment plans and have received 
refunds for errors by lenders and servicers. Pursuant to 
Section 1035 of the Dodd-Frank Act, we will provide a report to 
Congress later this year providing further details on the 
student loan complaints we have received.

Q.3. In the private student loan report that the CFPB and the 
Department of Education submitted to Congress last week, it was 
noted that in the wake of the student loan boom and bust there 
is more than $8 billion in defaulted private student loans. 
What steps can lenders take to assist borrowers who are in 
default on their private student loans? Are there examples of 
lenders that have made significant efforts in this regard?

A.3. Unlike many other consumer financial products, such as 
auto loans and mortgages, student loans are not secured by 
collateral and very difficult to restructure in bankruptcy. 
These attributes might reduce the incentive of lenders to 
employ typical loss mitigation interventions. It is also very 
difficult to restructure private student loans in bankruptcy 
proceedings, further diminishing lenders' incentives to offer 
loan modifications.
    To our knowledge, there have not been examples of 
successful large-scale efforts by lenders to modify private 
student loans in default. Generally speaking, defaulted loans 
are charged off and lenders often take legal action or utilize 
third-party debt collectors to make recoveries.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM DEANNE 
                             LOONIN

Q.1. How much responsibility do institutions of higher 
education bear in the private student loan boom and bust 
described in the CFPB report? What should their 
responsibilities be going forward?

A.1. There are many ways in which institutions of higher 
education bear some responsibility for the boom and bust cycle 
and the resulting harm to student borrowers. The clearest 
example is the cost of higher education. There are many reasons 
why costs have skyrocketed and schools are not fully to blame, 
but they do share some of the blame and responsibility to help 
curb costs and therefore reduce student borrowing.
    In addition, particularly prior to the credit crisis, many 
schools engaged in practices that created conflicts of 
interest, including promoting certain lenders, marketing lender 
products at schools, and referring students to particular 
lenders. Schools bear the responsibility of ensuring that they 
are acting in the best interests of students, not lenders.
    Some schools bear direct responsibility for the boom and 
bust cycle due to irresponsible institutional lending 
practices. These practices are documented in detail in the CFPB 
report and in NCLC's January 2011 report, ``Piling It On.''
    Going forward, schools can help prevent harm to students by 
establishing effective counseling and loan certification 
programs. They can also provide transparent information about 
financial aid packages, clearly delineating grants vs. loans 
and Federal loans vs. private loans.
    Schools should work only with lenders that include FTC 
Holder notices in their loan agreements. In addition, schools 
that refer students to particular lenders should provide as 
much information as possible to students about these products. 
Schools should investigate lender practices and take steps to 
work only with lenders that meet minimum standards and do not 
engage in deceptive and abusive practices.

Q.2. The CFPB and the Department of Education recently made 
recommendations regarding improvements to private student loans 
to Congress. What are your thoughts on these recommendations? 
What additional recommendations to Congress would you suggest?

A.2. We support the recommendations in the July 2012 CFPB 
report. However, we believe even stronger action is needed. Our 
additional points below focus on recommendations to Congress:

  a. LBankruptcy reform. The CFPB and Department of Education 
        recommend investigating whether changes are needed to 
        the treatment of privateloans in bankruptcy. Although 
        further investigation may be helpful, we believe that 
        Congress has sufficient information to restore 
        bankruptcy rights to these borrowers. There was no 
        valid reason to eliminate these rights for private 
        student loan borrowers in 2005. Congress should act 
        quickly and restore bankruptcy rights for struggling 
        borrowers.

  b. LNon-bankruptcy relief for private student loan borrowers. 
        The report notes that private student loans do not 
        offer any of the debt management or mitigation options 
        enjoyed by Federal loan borrowers. We agree with the 
        conclusion that Congress should work with the CFPB and 
        Department of Education to investigate this issue 
        further. However, this is not enough. We recommend 
        additional action, including:

     LInvestigating any regulatory barriers to private 
        student loan relief and working with regulators to 
        amend guidance as necessary to ensure that private 
        lenders have flexibility to offer meaningful relief to 
        distressed student loan borrowers.

     LRequire that private lenders offer a standardized 
        set of loss mitigation relief prior to acceleration of 
        debts.

     LCreate a mandatory, standard loan modification 
        program for distressed borrowers.

     LRequire private student lenders to offer death 
        and disability discharges and investigate the current 
        discretionary death and disability private loan 
        discharge programs to determine whether lenders are 
        offering accurate information about these options.

  c. LBan mandatory arbitration clauses in private student loan 
        agreements.

    We also urge Congress and the Federal agencies to 
investigate servicing practices in the private student loan 
industry. Ultimately, we recommend creation of national 
servicing standards that will establish minimum protections 
that must be offered to borrowers. This may also require 
amendments to ensure that the Fair Credit Billing Act applies 
to private student loans.
    Thank you for holding this hearing and soliciting 
additional input.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM JACK REMONDI

Q.1. In the Consumer Financial Protection Bureau's report to 
Congress, it was noted that there was approximately $8 billion 
in default from 850,000 distinct private student loans that 
were made prior to the credit crisis in 2008. What percentage 
of these loans are Sallie Mae loans?

A.1. Sallie Mae and eight other lenders provided a dataset 
comprised of loans originated between 2005 and 2011. As CFPB 
stated in their report, this information was provided under a 
non-disclosure agreement and is protected under various Federal 
laws as proprietary and confidential business information (see 
footnote 3 on page 109 of CFPB's Report on Private Education 
Loans).
    Sallie Mae does provide a significant amount of public data 
and information on the performance of its private education 
loan portfolio, every quarter, through its investor releases 
and its submissions to the Securities and Exchange Commission. 
In terms of defaults, Sallie Mae reports the amount of loans 
that have been charged off, meaning the amount that has failed 
to make a payment for 212 days. With the credit crisis and the 
onset of the recession, Sallie Mae experienced an increase in 
private education loan defaults, i.e., charge-offs. Annual 
charge-offs peaked in 2009 at $1.3 billion and have since 
declined steadily since. For the first half of 2012, private 
education loan charge-offs were $459 million.

Q.2. In your testimony, you state that since 2009 Sallie Mae 
has modified $1.1 billion in loans to help your customers. 
Please provide a breakdown of the types of modifications 
offered, broken down by the number of borrowers, the dollar 
value of the modification provided, and the percentage of 
modified loans that are currently in good standing.

A.2. During 2009, we instituted an interest rate reduction 
program to assist customers in repaying their private education 
loans through reduced payments, while continuing to reduce 
their outstanding principal balance. This program is offered in 
situations where the potential for principal recovery, through 
a modification of the monthly payment amount, is better than 
other alternatives available. Along with demonstrating the 
ability and willingness to pay, the customer must make three 
consecutive monthly payments at the reduced rate to qualify for 
the program. Once the customer has made the initial three 
payments, the loans status is returned to current and the 
interest rate is reduced for the successive 12-month period.
    Since the inception of the rate reduction program, we have 
cured over 32,000 unique borrowers for $1.3 billion in 
outstanding loans. All of the borrowers in the program have 
their interest rates reduced to a level where they can manage 
to keep up with timely monthly payments. Roughly 50 percent of 
the customers in the rate reduction program have their interest 
rate lowered to 1 percent interest rate during the program 
period. Currently we are experiencing a 78 percent success 
rate, as defined by borrowers remaining current and completing 
their 12-month program.

Q.3. When is a Sallie Mae private loan determined to be in 
default? Please describe any programs or procedures that Sallie 
Mae has in place to prevent borrowers from defaulting on their 
loans.

A.3. At Sallie Mae, we charge off the estimated loss of a 
defaulted loan balance, at the end of each month, for loans 
that are 212 days past due. Other lender's policies may vary, 
since each lender makes this determination as a result of 
guidance from their respective Federal banking regulator. In 
the Federal programs, a borrower is considered in default if 
they have not made a payment in over 271 days.
    It is important to recognize that the vast majority of our 
private loan customers manage their payments successfully. In 
our most recent quarter, our annualized private loan charge-off 
rate was 3.1 percent, down from 5.4 percent in 2009, a 
remarkable decline particularly in light of the current raised 
levels of unemployment.
    The first step in preventing defaults is the loan 
underwriting process, which assesses a borrower's ability and 
willingness to repay the loan. In most instances, our private 
education loans are made to the family where a parent and 
student borrower share the responsibility of evaluating loan 
choices and in making decisions about loan amounts required to 
supplement other resources and fill the financing gap.
    One vital component of reducing defaults is early education 
for borrowers on the value and costs associated with higher 
education. That is why we provide tools, such as our Education 
Investment Planner, to make sure that students and families can 
plan for the full cost of attaining a degree.
    We find that customers who make in-school payments have 
lower delinquency rates when commencing full payment because 
they have already developed good payment habits and have kept 
the amount due lower. That is why we design our loan products 
to encourage in school payments, providing financial incentives 
to make payments in school to keep borrowing costs low. We go 
beyond the mandatory Truth-in-Lending disclosures, to show our 
customers the choices that they have in products and the long-
term costs/savings of those choices. We provide monthly 
statements to all private education loan customers in school. 
Even for the one-third of our customers who chose to defer 
payments while in school, we provide them monthly statements 
and encourage them to make any payments to defray the long-term 
costs of their loans.
    We also encourage customers to enroll to make payments via 
auto debit, which results in significantly lower rates of 
delinquency. To incent them to enroll in this program, we 
typically offer a 0.25 percentage point interest rate 
reduction.
    Loan repayment and default prevention programs should be 
part of a thoughtful strategy that (1) reduces the likelihood 
of default over the life of the loan and related impacts to a 
consumer's credit, (2) makes the payment amount manageable 
given income and necessary expenses, and (3) manages and 
reduces the overall and lifetime cost of borrowing. Sallie 
Mae's position is that repayment plans and strategies that 
ignore any of these components are likely to yield unintended 
consequences in the long term.
    Some of the repayment plans that Sallie Mae offers to 
distressed borrowers include: tiered monthly payment options, 
interest-only payment periods, extensions of loan terms, and 
forbearances. In additional to the traditional programs, Sallie 
Mae developed the rate reduction program described in the 
previous response. Critical to the success of any of these 
tools is the process that we undertake with the customer to 
make sure that the program will work. We work with the customer 
to assess their overall financial situation. With the customer, 
we assess their current private loan obligations, Federal 
student loan payments, other consumer debts, income, and 
discretionary and essential spending in order to put together a 
comprehensive view of their personal budgets. We use this view 
to help identify repayment options to best meet their 
individual situations and ability to pay. However, in all 
cases, we make clear to the borrower that alternative payment 
schedules will increase the overall cost of the loan.
    We have modified loans for tens of thousands of borrowers, 
and continue to make these modifications based on the 
borrowers' personal situations. The great majority of these 
consumers have successfully kept their loans from returning to 
delinquency or defaulting.

Q.4. For loans made between 2004 and 2008, what percentage are 
in default? What is the dollar value of these defaulted loans?

A.4. Response: As part of our public disclosures, we provide 
detailed default information. The vast majority of defaults 
occur within 3 years of entering repayment. As a result, the 
vast majority of our charge-offs since 2008 have been 
associated with our older loans. Our charge-offs are reported 
in our quarterly investor disclosures that we file with the 
Security and Exchange Commission, which we discuss in our 
response to the first question. As part of our public investor 
information, we do provide default information on certain 
private education loans, which are eligible for securitization 
trusts, by year of entering repayment and year of default. A 
sample table showing this information is included below. The 
most recent public release was in our Q2 2012 Investor 
Presentation, which can be found at https://www1.salliemae.com/
about/investors/webcasts/



Q.5. For loans made after 2008, what percentage are in default? 
What is the dollar value of these defaulted loans?

A.5. See previous answer.

Q.6. How has Sallie Mae's private student loan underwriting 
changed since 2008?

A.6. In 2008, we tightened our underwriting requirements and 
applications with coborrowers increased. Our proprietary 
underwriting model uses multiple factors to assess ability, 
stability, and willingness to repay. To determine the ability 
to repay we look at such factors as a family's debt-to-income 
ratio and cash-flow available to manage outstanding debt. We 
assess the willingness to pay by looking at credit scores and 
prior payment history. Today, our loan originations have high 
levels of cosigners (currently about 90 percent for 
undergraduate loans). Our private education loans are designed 
to support that shared responsibility and family commitment. In 
fact, in the majority of cases, a creditworthy cosigner helps 
applicants receive a lower interest rate offer than they would 
otherwise and serves as a vital influence on the student's 
borrowing experience.
    Since 2008, both the average FICO on new private education 
loans and the percentage of loans that are cosigned have 
steadily increased, as shown below:

   L2007: average winning FICO of 709 and 55 percent 
        were cosigned.

   L2008: average winning FICO of 726 and 65 percent 
        were cosigned.

   L2009: average winning FICO of 745 and 83 percent 
        were cosigned

   L2010: average winning FICO of 739 and 89 percent 
        were cosigned.

   L2011: average winning FICO of 748 and 91 percent 
        were cosigned.

              Additional Material Supplied for the Record
















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