[Senate Hearing 112-754]
[From the U.S. Government Publishing Office]
S. Hrg. 112-754
PRIVATE STUDENT LOANS: PROVIDING FLEXIBILITY AND OPPORTUNITY TO
BORROWERS?
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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
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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.
______
______
______
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.
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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.
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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