    [Senate Hearing 112-899]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 112-899

      THE LOOMING STUDENT DEBT CRISIS: PROVIDING FAIRNESS FOR STRUGGLING
                                    STUDENTS

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

                                    HEARING

                                   before the

                         SUBCOMMITTEE ON ADMINISTRATIVE
                            OVERSIGHT AND THE COURTS

                                     of the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                          ONE HUNDRED TWELFTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 MARCH 20, 2012

                                   __________

                              Serial No. J-112-64

                                   __________

             Printed for the use of the Committee on the Judiciary

                                   ----------

                             U.S. GOVERNMENT PRINTING OFFICE

    89-723 PDF                       WASHINGTON : 2012

      For sale by the Superintendent of Documents, U.S. Government Printing
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                              Washington, DC 20402-0001

                           COMMITTEE ON THE JUDICIARY

                      PATRICK J. LEAHY, Vermont, Chairman
    HERB KOHL, Wisconsin                 CHUCK GRASSLEY, Iowa
    DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
    CHUCK SCHUMER, New York              JON KYL, Arizona
    DICK DURBIN, Illinois                JEFF SESSIONS, Alabama
    SHELDON WHITEHOUSE, Rhode Island     LINDSEY GRAHAM, South Carolina
    AMY KLOBUCHAR, Minnesota             JOHN CORNYN, Texas
    AL FRANKEN, Minnesota                MICHAEL S. LEE, Utah
    CHRISTOPHER A. COONS, Delaware       TOM COBURN, Oklahoma
    RICHARD BLUMENTHAL, Connecticut
                Bruce A. Cohen, Chief Counsel and Staff Director
            Kolan Davis, Republican Chief Counsel and Staff Director
                                     ------

            Subcommittee on Administrative Oversight and the Courts

                       AMY KLOBUCHAR, Minnesota, Chairman
    PATRICK J. LEAHY, Vermont            JEFF SESSIONS, Alabama
    HERB KOHL, Wisconsin                 CHUCK GRASSLEY, Iowa
    SHELDON WHITEHOUSE, Rhode Island     MICHAEL S. LEE, Utah
    CHRISTOPHER A. COONS, Delaware       TOM COBURN, Oklahoma
             Craig Kalcut, Democratic Chief Counsel/Staff Director
               Danielle Cutrona, Republican Acting Chief Counsel

                                C O N T E N T S

                                  ----------

                        STATEMENTS OF COMMITTEE MEMBERS

                                                                       Page

    Durbin, Hon. Dick, a U.S. Senator from the State of Ilinois......     1
    Grassley, Hon. Chuck, a U.S. Senator from the State of Iowa,
      prepared statement.............................................    34

                                   WITNESSES

    Witness List.....................................................    33
    Madigan, Lisa, Attorney General for the State of Illinois,
      Chicago, Illinois..............................................     4
        prepared statement...........................................    44
    Conway, Jack, Attorney General for the Commonwealth of Kentucky,
      Frankfort, Kentucky............................................     6
        prepared statement...........................................    36
    Jokela, Danielle, Chicago, Illinois..............................     8
        prepared statement...........................................    57
    Cole, G. Marcus, Professor of Law, Stanford University, Stanford,
      California.....................................................    10
        prepared statement...........................................    50
    McCluskey, Neal, Associate Director, Center for Educational
      Freedom, Cato Institute, Washington, DC........................    12
        prepared statement...........................................    76
    Loonin, Deanne, National Consumer Law Center, Boston,
      Massachusetts..................................................    14
        prepared statement...........................................    59

                                   QUESTIONS

    Questions submitted by Senator Durbin for G. Marcus Cole.........    82
    Questions submitted by Senator Durbin for Deanne Loonin..........    83
    Questions submitted by Senator Sessions for G. Marcus Cole.......    84
    Questions submitted by Senator Sessions for Neal McCluskey.......    85

                                    ANSWERS

    Responses of Deanne Loonin to questions submitted by Senator
      Durbin.........................................................    86
    Responses of Neal McCluskey to questions submitted by Senator
      Sessions.......................................................    93
    NOTE: At the time of printing, after several attempts to obtain
      responses to the written questions, the Committee had not
      received any communication from G. Marcus Cole.................    94

                    MISCELLANEOUS SUBMISSIONS FOR THE RECORD

    American Association of University Women (AAUW), Lisa M. Maatz,
      Director, Public Policy and Government Relations, Washington,
      DC, March 19, 2012, letter.....................................    95
    Consumer Bankers Association, Washington, DC, statement..........    97
    Institute for College Access & Success, Pauline Abernathy, Vice
      President, Oakland, California, March 19, 2012, letter.........   108
    American Association of Collegiate Registrars and Admissions
      Officers; American Association of Community Colleges; American
      Association of State Colleges and Universities; American
      Association of University Women; American Council on Education;
      American Federation of Teachers; Americans for Financial
      Reform; Association of Public and Land-Grant Universities;
      Campus Progress Action; Consumer Action; Consumer Federation of
      America; Consumer Federation of California; Consumer Watchdog;
      Consumers Union; Demos: A Network for Ideas & Action; The
      Education Trust; Empire Justice Center; The Greenlining
      Institute; The Institute for College Access & Success and Its
      Project on Student Debt; National Association for College
      Admission Counseling; National Association for Equal
      Opportunity in Higher Education; National Association of
      Consumer Advocates; National Association of Consumer Bankruptcy
      Attorneys; National Association of Student Financial Aid
      Administrators; National Center for Public Policy and Higher
      Education; National Community Reinvestment Coalition; National
      Consumer Law Center (on behalf of its low income clients);
      National Consumers League; National Council of La Raza;
      National Education Association; Public Citizen; UNCF; U.S.
      PIRG; United States Student Association, and Young Invincibles,
      May 25, 2011, joint letter.....................................   109
    Consumer Action, Linda Sherry, Director, Washington, DC, March
      16, 2012, letter...............................................   111
    American Bankers Association, American Financial Services
      Association, Consumer Bankers Association, and The Financial
      Services Roundtable, March 20, 2012, joint letter..............   112
    Draeger, Justin, President, National Association of Student
      Financial Aid Administrators, Washington, DC, statement........   114
    National Council of Higher Education Loan Programs, Inc., Shelly
      Repp, President, Washington, DC, statement.....................   118
    ``How Much Ivory Does This Tower Need?'' October 27, 2011, report
      by Neal McCluskey..............................................   120
    ``Unbearable Burden? Living and Paying Student Loans as a First-
      Year Teacher,'' December 15, 2008, report by Neal McCluskey....   144
        ``Federal Higher Education Policy and the Profitable
          Nonprofits,'' June 15, 2011, report by Vance H. Fried......   168
    Education Finance Council, Washington, DC, statement.............   184

      THE LOOMING STUDENT DEBT CRISIS: PROVIDING FAIRNESS FOR STRUGGLING
                                    STUDENTS

                                  ----------

                            TUESDAY, MARCH 20, 2012

                                           U.S. Senate,
       Subcommittee on Administrative Oversight and the Courts,
                                    Committee on the Judiciary,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 10 a.m., in
    Room SD-226, Dirksen Senate Office Building, Hon. Richard J.
    Durbin, presiding.
        Present: Senators Durbin, Whitehouse, Franken, and
    Blumenthal.

      OPENING STATEMENT OF HON. RICHARD J. DURBIN, A U.S. SENATOR
                       FROM THE STATE OF ILLINOIS

        Senator Durbin. Good morning. This hearing of the
    Subcommittee on Administrative Oversight and the Courts will
    come to order. The title of today's hearing is ``The Looming
    Student Debt Crisis: Providing Fairness for Struggling
    Students.'' I want to thank Chairman Leahy of the Judiciary
    Committee and Senator Klobuchar, Chair of this Subcommittee,
    for allowing me to convene this hearing where we will address
    the important issue of student loan debt and a bill which I
    have introduced, the Fairness for Struggling Students Act,
    which falls within the jurisdiction of this Subcommittee
    because it addresses the Bankruptcy Code. I am going to provide
    a few opening remarks, recognize the Ranking Member, Senator
    Sessions, who we hope will be returning from a press conference
    shortly, and then turn to our witnesses.
        Our Nation faces a serious problem with student loan debt.
    Last month, the National Association of Consumer Bankruptcy
    Attorneys issued an eye-opening report entitled, ``The Student
    Loan Debt Bomb.'' The report pointed out that American student
    borrowing exceeded $100 billion in 2010, and total outstanding
    student loans exceeded $1 trillion last year. There is now more
    student loan debt in this country than credit card debt.
        Of course, when used prudently, student loans can be
    valuable. In many instances, student loans help Americans get a
    quality education and job skills that they need to repay their
    loans and have a rewarding life. Unfortunately, it is clear
    that too many students have been steered into loan arrangements
    that they will not be able to repay and never be able to
    escape.
        According to an analysis by the Federal Reserve Bank of New
    York, 37 million Americans held outstanding student loan debt
    as of last year, the average balance $23,300. However, only 39
    percent of those student loan borrowers were paying down their
    balances last year. The New York Fed study found that 14
    percent of student loan borrowers--that would be 5.4 million
    Americans--were delinquent on paying their student loans while
    the remaining 47 percent of borrowers were either in
    forbearance or were still in school and adding to their debt.
        Last month, Standard & Poor's issued a report saying that
    ``Student loan debt has ballooned and may turn into a bubble.''
    And Moody's Analytics recently said, ``The long-run outlook for
    student lending and borrowers remains worrisome.''
        While the overall growth in student indebtedness is
    troubling, the most pressing concern are private student loans.
    According to the Project on Student Debt, the most recent
    national data shows that one-third of bachelor degree
    recipients graduated with private loans at an average loan
    amount of $12,550. These private student loans are a far
    riskier way to pay for an education than federal loans. Federal
    student loans have fixed, affordable interest rates. They have
    a variety of consumer protections built into them, such as
    forbearance in times of economic hardship. They offer
    manageable repayment options such as income-based payment
    plans.
        On the other hand, private student loans have high variable
    interest rates, often two or three times the interest rate that
    a student pays on the federal loan, hefty origination fees, and
    a lack of repayment options. And private lenders have targeted
    low-income borrowers with some of the riskiest, highest-cost
    loans. Once a student takes out a private loan, the student is
    at the mercy of the lender. Every week my office hears from
    students who say private lenders will not work with them to
    consolidate loans or work out any manageable repayment plan.
    And if the student falls behind on payments, private lenders
    are aggressive with collection efforts.
        In many respects, private student loans are just like
    credit cards, except unlike credit card debt, private student
    loan debt cannot be discharged in bankruptcy. In 2005, Congress
    changed the bankruptcy law and included a provision making
    private student loan debts non-dischargeable in bankruptcy
    except under very rare circumstances.
        I ask myself: How in the world did that provision get in
    the law, giving to these private loans the same status as a
    federal student loan or payments that are owed for taxes,
    alimony, and child support? It turns out it was a mystery
    amendment. We cannot find out who offered it. We certainly know
    who benefited from it.
        While the volume of private student loans is down from its
    peak in 2007 when it accounted for 26 percent of all originated
    student loans, we know that private lending is still being
    aggressively promoted by the for-profit college industry, and
    you will hear from the witnesses about that industry,
    particularly the Attorneys General who are here.
        The Project on Student Debt reports that 42 percent of for-
    profit college students had private loans in 2008, up from 12
    percent in 2003. For-profit college students also graduate with
    more debt than other students who graduate from public and
    private nonprofit colleges. For-profit colleges have a business
    model of steering students into private student loans, even
    when they still have eligibility left under the federal student
    loan, which has a fraction of the interest payment. And as a
    result, many students are pushed into taking out private loans
    when they are still eligible for federal loans, even when the
    lenders know the students are likely to default.
        We need to take steps now to address this looming student
    problem. It is necessary to help struggling students and help
    our economy. We are going to have an opportunity come July. The
    interest rate on federal student loans will double without
    Congressional action. We cannot allow that to happen, but we
    need to not only use that as an opportunity to do the right
    thing for students in terms of interest rates, but also to
    address this looming crisis of student debt.
        I have introduced legislation, the Fairness for Struggling
    Students Act, to restore the pre-2005 bankruptcy treatment of
    private student loans. There is no reason why private student
    loans should get treated any differently than other private
    debts in bankruptcy. And it is especially egregious that these
    private loans are non-dischargeable in cases where the student
    was steered into a loan while they were still eligible for
    safer, lower-cost federal loans.
        I believe we should also require full private student loan
    certification to ensure that students take advantage of their
    federal student aid options before turning to private loans. We
    should push for meaningful accreditation for for-profit
    institutions. Wait until you hear the testimony, which I have
    read, about some of these for-profit schools, even in my State
    of Illinois, and what they are doing to these students. And we
    should encourage the Consumer Financial Protection Bureau,
    currently collecting data and complaints about private student
    loans, to use its authority to take corrective steps.
        Today we have a distinguished panel of witnesses who will
    discuss the problems that we face and ways to address them, and
    I look forward to their testimony.
        Senator Sessions has not arrived. We will give him a chance
    to make an opening statement when he does. But I am going to
    turn to our panel of witnesses for opening statements. Each
    will have five minutes for their opening statements, and their
    complete written statements will be included in the record.
        The tradition of the Judiciary Committee is to swear in the
    witnesses, and I would like to ask you all to please stand and
    raise your right hand. Do you affirm the testimony you are
    about to give before the Committee will be the truth, the whole
    truth, and nothing but the truth, so help you God?
        Ms. Madigan. I do.
        Mr. Conway. I do.
        Ms. Jokela. I do.
        Mr. Cole. I do.
        Mr. McCluskey. I do.
        Ms. Loonin. I do.
        Senator Durbin. Let the record reflect that all the
    witnesses have answered in the affirmative.
        Our first witness is a great friend and colleague from
    Illinois, Lisa Madigan, Attorney General of my State. In 2010,
    Attorney General Madigan was elected to her third term as
    Attorney General. Initially elected in 2002, she was the first
    woman elected to serve in this position and is now the
    seniormost female Attorney General in the country.
    Congratulations. Before her service as Attorney General, she
    served in the Illinois Senate and worked as a private attorney,
    a teacher, and community advocate. She earned her bachelor's
    degree from the highly regarded Georgetown University and her
    J.D. from Loyola University Chicago School of Law.
        Attorney General Madigan, thank you for coming here today.
    The floor is yours.

    STATEMENT OF HON. LISA MADIGAN, ATTORNEY GENERAL FOR THE STATE
                     OF ILLINOIS, CHICAGO, ILLINOIS

        Ms. Madigan. Thank you very much, Senator Durbin, and let
    me thank the Committee for allowing me to testify on this very
    important issue of growing student loan debt.
        As the Senator mentioned, I am currently serving my third
    term as Illinois Attorney General, and since the beginning, my
    focus has had to be fighting predatory lending in all sectors
    of the market--mortgage lending, auto lending, payday, and now
    student loans.
        I have a wealth of experience with unfair and deceptive
    mortgage lending practices, having sued Ameriquest,
    Countrywide, and Wells Fargo. And recently I filed a lawsuit
    against Westwood College, a for-profit school operating in
    Illinois, for deceptive marketing and lending practices in its
    criminal justice program.
        At the same time mortgage lenders were making unaffordable
    loans to homeowners, other private lenders were making
    unaffordable loans to students. After the financial crisis of
    2008, third-party lenders stopped offering subprime loans to
    students, but another troubling trend emerged. For-profit
    schools expanded their high interest rate institutional loans.
    These loans pose a new threat to students, young and old, who
    are looking to gain skills and degrees to get ahead in this
    economy.
        One reason for-profit schools offer private loans is that
    they have to comply with the federal 90/10 rule, which requires
    10 percent of education funding to come from sources other than
    Title IV Government funds. These private institutional lending
    programs are either self-funded by the schools or funded by
    investors with a guarantee to repurchase by the schools.
        To give you an idea of how exorbitant for-profit tuition
    costs can be, the criminal justice program at Westwood costs a
    student over $70,000. However, criminal justice programs at any
    number of Illinois community colleges cost a tenth as much.
    Prairie State costs $6,344; Joliet Junior College, $6,901;
    College of DuPage, $8,448.
        I know we are not here to discuss why a student would
    enroll in a private, for-profit program that costs 10 times as
    much as a public one, but it will come as no surprise that we
    learned during our investigation of Westwood that in order for
    a student to pay for such an expensive program, students
    receive not only Government grants and loans, but Westwood
    signs students up for private institutional loans called ``APEX
    loans,'' which the student piled on top of loans from Sallie
    Mae and government sources.
        APEX loans carry whopping interest rates of up to 18
    percent and require students to make monthly payments while
    still in school. Compare that with a Government loan with a
    rate of up to 6.8 percent or a bank loan with rates between 9
    and 11 percent.
        Our investigations also found that students were completely
    confused about the purpose and the amount of these loans. Most
    had no idea what the interest rate was. Some thought the APEX
    loan was paying off their Sallie Mae loan. And some had no idea
    that they had even taken out an APEX loan.
        In the end, Westwood graduates are left with tremendous
    debt for a virtually worthless criminal justice degree because
    Westwood did not and still does not have regional accreditation
    for its criminal justice program.
        A regionally accredited degree is what most law enforcement
    agencies require for job eligibility. Yet Westwood graduates
    who had dreamed of becoming police officers learned from police
    departments that they could not apply because Westwood did not
    have the proper accreditation. So instead of starting the
    careers of their dreams, most Westwood graduates are saddled
    with over $70,000 of debt, and over 1,000 such people have
    contacted my office since we filed our lawsuit two months ago.
        To top it off, because Westwood is not regionally
    accredited, almost none of the students' Westwood credits will
    transfer to another school. These abuses have convinced me that
    ongoing investigations of for-profit schools' unfair and
    deceptive practices is absolutely necessary, and I continue to
    pursue investigations in Illinois.
        If the abuses we have uncovered continue, students should
    not be forced to pay for worthless degrees they cannot afford
    because of expensive tuitions, high interest rates, and
    inability to obtain jobs in their fields.
        In addition, I support Senator Durbin's bill to allow
    private student loans to be discharged in bankruptcy primarily
    because private loans carry none of the protections afforded to
    students who take out federal loans, such as interest rate
    caps, loan limits, income-based repayment plans, deferment
    plans, and cancellation rights.
        Again, I thank the Committee, in particular the Senator,
    for your interest in this issue, and I appreciate the
    opportunity to testify today.
        [The prepared statement of Ms. Madigan appears as a
    submission for the record.]
        Senator Durbin. Thank you, Attorney General Madigan.
        Our next witness is Jack Conway, Attorney General of the
    Commonwealth of Kentucky. He was re-elected last November to
    serve a second term as the 49th Attorney General of the
    Commonwealth. Prior to his service as Attorney General, he
    worked as a private attorney and in senior-level Cabinet
    positions in the administration of former Kentucky Governor
    Paul Patton. He is a graduate of Duke University, the National
    Law Center at George Washington University, and he has been
    actively involved in looking at for-profit schools in the
    Commonwealth of Kentucky.
        We are glad you are here today, and please proceed.

        STATEMENT OF HON. JACK CONWAY, ATTORNEY GENERAL FOR THE
             COMMONWEALTH OF KENTUCKY, FRANKFORT, KENTUCKY

        Mr. Conway. Well, thank you, Senator Durbin. I want to go
    ahead and thank Ranking Member Sessions. Thank you for being
    here, Senator Franken. And, General Blumenthal, good to see you
    again. I hope you do not mind I still call you ``General.'' I
    appreciate the opportunity to testify before you here at the
    hearing.
        As you mentioned, Senator Durbin, we now have student loans
    outnumbering credit card debt in this country. The amount of
    loans taken out by parents for the education of their children
    has tripled in the last 20 years. Private student loan volume
    has tripled in the last six years. And you talked a little bit
    about the 2005 amendment making it so that private loans could
    not be discharged in bankruptcy. You called it ``a mystery
    amendment.'' What I say is that it was actually a solution in
    search of a problem since we know from the data that far less
    than one percent of student loans are ever discharged in
    bankruptcy to begin with. The rationale has always been maybe
    the students will take out the loans and then default. But I
    can assure you the young people or anyone just finishing an
    education that I have talked to do not want to hurry into a
    bankruptcy court for some sanctions that could really damage
    them in the future.
        As Attorney General of the Commonwealth of Kentucky, this
    issue of discharging private loans is linked to our
    investigation of the for-profit colleges.
        I first became aware of the tremendous debt burden carried
    by some students at some proprietary colleges through an
    investigation of Decker College and the American Justice School
    of Law, a for-profit law school in Paducah, Kentucky.
        Decker College was closed and forced into bankruptcy in
    2005 following its loss of accreditation and its eligibility to
    receive Title IV funds. The students were left in a horrible,
    horrible situation. They had incurred thousands of dollars in
    debt to pay for certifications as heating and air conditioning
    technicians, electricians, and plumbers. This was an education
    promised to secure a higher-paying job, but the school closed
    before the training was complete. And to add insult to injury,
    the credits they had earned and paid for did not transfer to
    another school.
        The American Justice School of Law and its successor, the
    Barkley School of Law, also closed and filed for bankruptcy.
    Most students in that institution had not completed their
    education when the school closed.
        Students with federal student loans who are unable to
    complete their degree because a school closes are entitled to
    have those federal loans discharged. However, the same
    protection is not available for private institutional loans or
    loans from other private lenders. Both Decker and Barkley
    students had millions of dollars in those institutional and
    private student loans that were not dischargeable in bankruptcy
    under the closed school discharge rule.
        The trustees in the Decker and Barkley bankruptcies began
    efforts to collect on those private loans that the schools had
    extended to their students. Ironically, these were students who
    were living on the financial edge, saddled with tens of
    thousands of dollars in student loans that they likely could
    not discharge in personal bankruptcy.
        In both instances, my office stepped in and was able to
    complete some successful work with the trustees to discharge
    loans that were owed directly to the schools. In the case of
    Decker College, we got about $4.5 million in relief for 2,200
    students. Likewise, in Barkley, after being contacted by our
    office, the trustee released the student debts to the school.
    In that particular institution, we found that the predecessor
    to Barkley School of Law had a preferred lending arrangement
    and a questionable relationship with a company called SLX. We
    were able to put pressure on that particular company and get
    about $3.5 million in debt reduction on loan obligations. The
    average loan reduction in that case was about $25,000 per
    student.
        But we continue to this day to get calls from students from
    Decker and from the Barkley school of law to help deal with
    their struggles to pay those student loans. And I ask this
    Committee: Do we understand, do we really understand how close
    to the line some of these borrowers are living? That working
    car means the difference between being able to get to work and
    keeping a job or losing a job. And that apartment that they may
    have to give up means safety and security for a family.
        There are material differences between private loans and
    federal loans. Attorney General Madigan has pointed out the
    protections that are in federal loans, and certainly those
    protections do not extend to the private student loans.
        After studying the cases of Decker College and the Barkley
    School of Law, I launched an investigation into seven other
    for-profit colleges in the Commonwealth of Kentucky. The
    students enrolled in most of these career schools are some of
    our most financially vulnerable students. They get Pell Grants,
    and they rely heavily on student loans.
        According to most recent data available from the Project on
    Student Debt, an estimated 96 percent of graduates from
    proprietary schools have loans. That compares to 14 percent--
    excuse me, 42 percent of those students also have private
    loans. That compares to 14 percent at four-year public
    institutions and just four percent at public two-year
    institutions.
        More troubling is that the Senate HELP Committee recently
    found that the for-profit schools account for 10 percent of the
    higher education body, but they account for about half of all
    defaults.
        I would like to say that I have been working on this issue
    also with Holly Petraeus from the Consumer Financial Protection
    Bureau. We have found some troubling instances regarding
    recruitment at some of our bases, particularly Fort Campbell
    and Fort Knox in the Commonwealth of Kentucky. General Madigan
    mentioned the 90/10 rule. Because the 90/10 rule only applies
    to Title IV funds, we are seeing extraordinary pressure put on
    post on some of the veterans coming back from Iraq and
    Afghanistan. And, in fact, the Army Times reports that for-
    profit schools last year received about 37 percent of the cost
    for the GI bill--37 percent--and almost 50 percent of the $563
    million spent last year by the Defense Department on tuition
    assistance for active-duty troops went to the for-profit
    schools. This is an issue that needs to be examined to do right
    by the people who are coming back from these two wars abroad.
        As I see, I am out of time, and I am actually over by about
    50 seconds. I have two more pages of testimony that has already
    been entered into the record, but I will be happy to take any
    questions later on.
        [The prepared statement of Mr. Conway appears as a
    submission for the record.]
        Senator Durbin. Thanks. Thank you, Attorney General Conway.
        The next witness, Danielle Jokela--did I pronounce that
    correctly?
        Ms. Jokela. Yes.
        Senator Durbin. Ms. Jokela was raised in a working family
    in Minnesota, then relocated to Chicago, where she lives today
    with her husband. In 2007, she received a BFA in interior
    design from Harrington College of Design, which is a Career
    Education Corporation for-profit college located in Chicago.
    Throughout her life, Ms. Jokela has worked tirelessly to
    establish a productive and fulfilling career. However, like so
    many other American students, she has been burdened with
    tremendous student loan debt. Ms. Jokela reached out to me
    through my official Web site, where I have invited students and
    their families from across the United States to share their
    student loan stories.
        Ms. Jokela, thank you for coming today to tell this painful
    story, but it is important that the people who are here and all
    who follow the business of Congress understand what you are
    going through. Please proceed.

            STATEMENT OF DANIELLE JOKELA, CHICAGO, ILLINOIS

        Ms. Jokela. First, I would like to thank Senator Durbin for
    inviting me to speak today and thank the Members of the
    Committee for your time and patience while I tell you my story.
    It is my hope that through coming here today, I can serve as a
    voice for the countless students that find themselves in a
    situation similar to my own.
        Both of my parents were high school dropouts. Of the five
    children that I grew up with, I am the only one who graduated
    from high school on a somewhat traditional path. I say
    ``somewhat'' because although I did graduate from a traditional
    public high school, when I was a junior, my mom told me that
    she could not afford to support me and I was out on my own. I
    finished my last year of high school living on my own, working
    a fast-food job that paid my rent and virtually nothing else.
    The odds were against me, but because of the personal value I
    have for education and my strong work ethic, I pushed through
    and managed to graduate in the top third of my class.
        In 2004, I relocated from Minnesota to Chicago to attend
    Harrington College of Design, a Career Education Corporation
    school. With my background, I could not rely on my family for
    financial support or guidance. As a result, I fully trusted the
    staff at Harrington to give me the guidance I needed and to
    work in my best interests. They helped fill out the financial
    aid paperwork for my loans, made phone calls on my behalf, and
    worked diligently to ensure I had the funds I needed to pay for
    school. There was no discussion about what my interest rates
    were or what my actual debt load looked like. We never talked
    about what my monthly payments would be once I graduated.
    Compound interest was a concept I had never heard of, and of
    course, it was never explained to me. I had no clue what sort
    of salary I could expect to earn upon graduation, and while my
    school claimed a very high job placement rate, nobody told me
    what percentage of graduates actually were working in their
    chosen field or what their starting wages were.
        In 2007, I graduated with highest honors and received my
    BFA in interior design. I could not have been more proud of my
    achievements. My pride soon became dismay when I struggled to
    find work as a designer and accepted a position doing admin
    work for a flooring contractor.
        Six months after graduation, all pride was gone when I
    began repayment on my student loans. I realized then that I had
    graduated with $37,625 in federal loans and $40,925 in private
    loans for a combined total of nearly $79,000 that had ballooned
    to more than $100,000 after interest and fees. My minimum
    monthly payment was more than half of my income. I took a six-
    month forbearance and stretched the payback period from 15 to
    30 years to make the payments more manageable. After the
    forbearance, I resumed paying my loans until 2009, when I found
    myself looking for work. When I did find work, it was as an
    independent contractor doing admin work, making far less than
    my previous salary. At that time I took a second six-month
    forbearance until I could get things stabilized. When I resumed
    payments, all progress I had made in the two years prior had
    been erased. Fees were assessed and added to my balance so that
    I could take the forbearance, and compound interest kept
    accumulating, despite my financial hardship. This pushed my
    balance back up to $100,000.
        Today, five years after graduation, I have still not found
    work as a designer, and I still owe more than $98,000 in
    student loans. I have 16 separate private and federal loans
    with Sallie Mae. Sallie Mae will not allow me to consolidate my
    private loans. I make one combined payment each month of
    approximately $830. Nearly 28 percent of my current income goes
    toward student loan debt. Almost all of my loans have variable
    interest rates. The low interest on my federal loans makes them
    manageable, but my private student loans have interest rates
    ranging from 8 percent to 11 percent. If interest rates rise,
    so does my monthly payment and the total amount that I will
    have paid back over the lifetime of the loans. Twenty-five
    years from now, if interest rates hold, when I am finally done
    paying for my student loans, I will have paid nearly $56,000
    for my federal loans and nearly $155,000 for my private loans.
    That is approximately $211,000 toward a $79,000 debt, a
    staggering 264 percent.
        I am out of options. I cannot file bankruptcy because the
    vast majority of my debt is student loan and mortgage debt. I
    cannot negotiate a settlement with Sallie Mae, and I cannot
    stop paying my student loans. I do not want to destroy my
    credit. I do not want to have my wages garnished. Even more, I
    do not want to add more fees, interest, and other costs to a
    debt that is already a burden I cannot bear. My only option is
    to give up my home. I am literally losing my home so that I can
    continue to pay my student loans and other monthly bills. It is
    the only option I have.
        I am here today to advocate on behalf of myself and the
    rest of the students who are trapped in the same situation,
    carrying an unreasonable debt load for the opportunity to try
    to improve our lives. I am asking you to create legislation
    that will empower us to overcome this burden and prevent future
    students from falling into the same trap. I ask that private
    student loans once again be dischargeable in bankruptcy and
    that all schools be required to provide clear and full
    disclosure to students regarding the amount of their loans,
    interest rates, and expected payments.
        Thank you.
        [The prepared statement of Ms. Jokela appears as a
    submission for the record.]
        Senator Durbin. Thank you so much for your testimony.
        Our next witness is Professor Marcus Cole, William Benjamin
    Scott and Luna M. Scott Professor of Law at Stanford Law
    School. Professor Cole is a scholar of the law of bankruptcy,
    corporate reorganization, and venture capital. He has been a
    national fellow at the Hoover Institution. Before joining
    Stanford Law faculty, Professor Cole worked at the law firm of
    Mayer, Brown & Platt, and clerked for Judge Morris Sheppard
    Arnold of the Eighth Circuit Court of Appeals. He graduated
    from Cornell University and the Northwestern University School
    of Law.
        Professor Cole, thanks for being here today, and please
    proceed.

        STATEMENT OF G. MARCUS COLE, PROFESSOR OF LAW, STANFORD
                    UNIVERSITY, STANFORD, CALIFORNIA

        Mr. Cole. Thank you, Senator Durbin, for inviting me. Thank
    you, Senators, ladies and gentlemen.
        As Senator Durbin said, I teach bankruptcy law at Stanford
    University, and I have been asked to comment on the proposed
    changes to the Bankruptcy Code with respect to the
    dischargeability of student loans.
        While I, like most other Americans, am sympathetic to the
    heart-wrenching stories of student borrowers who are in a
    situation now that seems hopeless, I am very concerned with the
    effects of the amendment that is proposed. And I think that
    what I would like to do is raise for your consideration what I
    think are the likely and undesirable consequences of the
    removal of the exemption from discharge for student loans
    because I think it is a blunt instrument, and I also think it
    is an unnecessary instrument to get at the problem that you are
    trying to address.
        So to do this, I want to do three things. First, I want to
    explain why student loans are fundamentally different than any
    other kind of borrowing that takes place in our society.
    Second, I want to explain why I think the changes to the
    Bankruptcy Code making student loans dischargeable in
    bankruptcy would, in effect, raise the cost of student
    borrowing for all student loans and in the end would
    essentially dry up the entire student loan market and the
    availability of higher education for those who cannot afford it
    without student loans. And then if we have time or in the
    question-and-answer session, I would be happy to talk about
    more narrowly tailored alternatives to this amendment that
    might get at the problem. So, first, let me explain why student
    loans are fundamentally different.
        In our society, we have essentially two types of borrowing:
    We have unsecured borrowing--credit card debt is an example of
    that--and we also have secured borrowing. A car note that
    someone takes out or a mortgage on a home is a secured
    obligation.
        Now, these are two very different things in the sense that
    creditors who lend on an unsecured basis are lending against a
    borrower's ability to repay currently from their income, but
    also based on their current assets. A secured creditor does not
    want to take the chance that there are not going to be assets
    there or income coming in, so they want an asset that they can
    look to as collateral for their loan.
        Student loans are fundamentally different than these other
    two because unsecured loans, credit cards included, look to the
    existence of a borrower's current assets and their current
    income to repay the loan. Secured credit looks to a particular
    asset. But student loans are a situation where the person is
    borrowing against their future income, and that future income
    is based on the human capital that the student loan makes
    possible.
        Now, if you take away the exemption from discharge for
    student loans, you are essentially saying to the lender that
    they cannot look to that future income for sure because there
    is the possibility that this obligation could be discharged. In
    essence, you are saying to someone who has no assets and no
    current income because they are a student that they cannot
    credibly commit to a lender that they are going to repay this
    loan in the future. And because of that, that increases the
    risk premium that has to be charged by the lender across all
    loans, and that is going to increase the cost of student loans
    for everyone.
        Now, a private market for student loans exists because the
    federal programs simply do not cover all of the demand that is
    out there for student borrowing.
        Now, there are other ways to look at this. If the problem
    is private colleges taking advantage of people when they are
    not really building up human capital, well, that is a lot like
    a doctor writing a prescription and then selling the
    prescription drugs, and they are essentially profiting from the
    prescription that they are writing. Well, we do not ban
    prescription drugs because we do not like doctors benefiting
    from writing prescriptions. Instead what we do is we separate
    the doctor who is making the diagnosis from the pharmacist who
    is selling the drugs. And so if there is a problem with for-
    profit colleges benefiting from the system, there are ways in
    which we can internalize the costs that they are imposing on
    student borrowers without having to take the broad brush of
    eliminating the ability of people like me--I grew up in the
    Terrace Village housing projects of Pittsburgh, Pennsylvania. I
    would not have been able to go to school without student loans.
    My father worked in a steel mill. But student loans provided me
    an opportunity to get an education, and I am sitting here today
    because I was able to credibly commit to lenders that I would
    repay from my future income.
        Thank you, Senator, for this opportunity.
        [The prepared statement of Mr. Cole appears as a submission
    for the record.]
        Senator Durbin. Thank you, Professor Cole.
        Our next witness is Neal McCluskey. He is the associate
    director of the Center for Educational Freedom at the Cato
    Institute, author of the book ``Feds in the Classroom: How Big
    Government Corrupts, Cripples, and Compromises American
    Education.'' His writings have appeared in numerous
    publications such as the Wall Street Journal. Prior to working
    at Cato, he served in the United States Army, taught in high
    school, and was a freelance reporter. He received an
    undergraduate degree from Georgetown, a master's from Rutgers,
    and a Ph.D. candidate at George Mason.
        Mr. McCluskey, thanks for joining us. Please proceed.

      STATEMENT OF NEAL MCCLUSKEY, ASSOCIATE DIRECTOR, CENTER FOR
         EDUCATIONAL FREEDOM, CATO INSTITUTE, WASHINGTON, D.C.

        Mr. McCluskey. Chairman Durbin, Members of the Committee,
    thank you for inviting me to speak with you today. My name is
    Neal McCluskey, and I am the associate director of the Center
    for Educational Freedom at the Cato Institute, a nonprofit,
    non-partisan public policy research organization. My comments
    are my own and do not represent any position of the institute.
        As a result of decades of skyrocketing college prices, the
    Nation has begun to focus on the extraordinary cost of
    postsecondary education. And the Federal Government, as the
    primary supplier of aid to students, has a critical role to
    play in restoring sanity to college pricing: It must greatly
    reduce student aid. Unfortunately, what this Committee is
    contemplating--changing bankruptcy law concerning private
    student loans--will do almost nothing in this regard.
        Now, the logic behind seeing federal aid as a primary cause
    of inflation is straightforward. First, subsidies drive
    increased demand, which increases prices. Second, colleges
    raise their prices if they know students will be able to pay
    them.
        The facts support this. Between the 1981-82 and 2010-11
    school years, inflation-adjusted aid per student rose 215
    percent. Meanwhile, tuition and fee costs grew 268 percent at
    four-year public institutions and 181 percent at four-year
    nonprofit private schools. In addition to this evidence, a
    growing body of empirical research, which I itemize in my
    written testimony, supports this conclusion.
        Perhaps, though, price increases are necessitated by State
    and local funding cuts to public colleges, and there is
    certainly some truth to this. But it is an inadequate
    explanation for rampant tuition inflation.
        For one thing, of course, it does not explain inflation at
    private colleges. More directly, inflation-adjusted State and
    local outlays to colleges for general operations rose from
    $57.7 billion in 1986 to $74.2 billion in 2011.
        Now, where it does appear that taxpayers have become less
    generous is expenditures on a per pupil basis, with real
    appropriations declining 22 percent between 1986 and 2011. That
    said, State and local appropriations rise and fall with the
    business cycle, and the overall trend is pretty flat. And over
    the past quarter-century, public institutions have raised
    tuition revenue by about $2 for every dollar in cuts.
        Which brings us to the root problem. Far too many people
    who do not benefit from it are enrolled in college. As much as
    we want to help all people by giving them money to go to
    college, it is doing few any real favors. That is, other than
    the colleges, which research shows are profiting mightily
    whether they are officially for-profit or not-for-profit
    institutions.
        Let us look at completion rates. Only 57 percent of first-
    time, full-time bachelor's degree seekers finish their degree
    within six years. That is 150 percent of the expected time. At
    two-year institutions, the three-year completion rate is a puny
    28 percent. Many enter colleges of all types. Few complete.
        What about those who do finish? Does a degree confer major
    new earning ability?
        That is the case on average, though how much is a matter of
    great dispute, with some estimates as low as $100,000 over a
    lifetime. And many graduates will not gain even that $100,000,
    depending on their field.
        It also appears that the value of a bachelor's degree is
    shrinking, with weekly earnings for people whose maximum
    educational attainment is a B.A. having dropped about four
    percent over the last decade.
        Now, is this a function of credential inflation or the
    economy increasingly demanding advanced skills?
        Well, we have no comprehensive measure of what students are
    learning in college, but one of the few longitudinal studies we
    have suggests that the problem is credential inflation. The
    National Assessment of Adult Literacy shows that the literacy
    of people with at least a bachelor's degree dropped
    precipitously between 1992 and 2003, with generally only a
    third of those people--these are with at least a bachelor's
    degree--now considered proficient.
        Finally, it is assumed that almost everyone will need some
    sort of postsecondary training to get a job in the new economy.
    But according to BLS projections, the large majority of the 30
    occupations expected to see the greatest employment growth this
    decade will require no more than a high school diploma and on-
    the-job training. So the Federal Government should get out of
    the student aid business. The aid drives self-defeating
    inflation and massive overconsumption, and Washington has no
    constitutional authority to be involved.
        Unfortunately, making private loans dischargeable in
    bankruptcy misses this gigantic root problem--federal aid--and
    would at best nibble around its edges. In 2010-11, only about
    $6 billion was originated in private student loans. In that
    same year, total federal loans were almost $104 billion, an
    amount almost 17 times larger. You throw in grants, tax
    benefits, and work study, and federal aid exceeded $169
    billion.
        What would changing bankruptcy laws for private loans do
    for affordability? If lenders know that borrowers can escape
    repayment through bankruptcy, they would likely raise interest
    rates to account for that risk, discouraging use of such loans.
    However, students might be more apt to take such loans--and pay
    still higher college prices--if they think that they will be
    able to unload their debt without repaying it.
        Both possible outcomes are concerning, but the change would
    still have a negligible effect on affordability because private
    loans are such a small piece of the pie. Ultimately the problem
    is too much aid, and most of that comes from Washington.
        Thank you, and I look forward to your questions.
        [The prepared statement of Mr. McCluskey appears as a
    submission for the record.]
        Senator Durbin. Thank you, Mr. McCluskey.
        Our final witness is Deanne Loonin, staff attorney with the
    National Consumer Law Center and director of the NCLC Student
    Loan Borrower Assistance Project, author of NCLC publication
    ``Student Loan Law: A Guide to Surviving Debt.'' And she also
    provides direct representation to low-income student loan
    borrowers, served as legal aid representative at numerous
    Department of Education negotiated rulemaking sessions,
    graduated from Harvard-Radcliffe, and the University of
    California-Berkeley School of Law.
        Ms. Loonin, the floor is yours.

       STATEMENT OF DEANNE LOONIN, NATIONAL CONSUMER LAW CENTER,
                         BOSTON, MASSACHUSETTS

        Ms. Loonin. Thank you, Senator, and thank you, all of you,
    for inviting me here to testify today. I am here today on
    behalf of NCLC's low-income clients. We provide direct
    representation to low-income borrowers in Massachusetts, as
    Senator Durbin mentioned. We also have a Web site where we hear
    from thousands of borrowers every day, and we work with
    advocates across the country, so we are very familiar with how
    widespread the problem of student debt burdens are across the
    country.
        Our clients and the people we hear from are a very diverse
    group. I think it is important that we focus on not just the
    traditional students that we hear a lot about, and they are a
    very important population of young people who are graduating
    from college having trouble finding jobs in this economy. But
    our clients are in their 20s, 30s, all the way up into their
    80s and 90s, all races, and all class levels, all of whom share
    one thing in common, and that is that they were all trying to
    better their lives through education. And they also share that
    they are mired in debt when they come to see us.
        When they come in to see us, the focus is on the future at
    this point. We are trying to figure out prospectively what we
    can do to either provide relief and in many cases to help
    people go back to school because it did not work out for them
    the first time around.
        The first thing we do is look at non-bankruptcy
    alternatives, whether it is a federal loan or private loan.
    This makes sense both because in many cases, particularly for
    federal loans, those options are more accessible, but also
    because that is what our clients tell us they want. I have
    never had a client tell me that their first choice is to file
    for bankruptcy. They see it as a failure. They see it as
    something that is very humiliating. There is a stigma
    associated with it, and there are consequences, credit report
    consequences and other things, that students borrowers are very
    aware of.
        So we look at the non-bankruptcy alternatives which are
    available in many cases on the federal student loan side--not
    for everyone, but there are good options for a lot of people.
    We try on the private loan side, and we find that it is
    virtually impossible to get relief outside of the bankruptcy
    system.
        So bankruptcy is not the first option, not necessarily the
    best option for everybody, but in many cases it is actually the
    only option that people can consider to get relief. But, again,
    because of the changes in the law, this, too, is not an option
    for many borrowers.
        So I am here to support the bill, S. 1102, for these
    borrowers, but also because, as I want to go through quickly,
    the rationales that have been mentioned for not restoring
    bankruptcy relief do not stand up.
        The first rationale that we generally hear is that there
    was a lot of abuse of the system and student borrowers were
    filing bankruptcy more than other debtors. There is simply no
    evidence that that is true, and I can tell you again from my
    clients, as I mentioned, who are not seeking out bankruptcy,
    certainly not thinking about that when they enter school and
    optimistically are hoping that it is going to improve their
    situations. And there are safeguards in the bankruptcy system
    to address these exact problems if we think that people with
    too many assets are trying to file for bankruptcy.
        The other rationale that private loans would disappear--
    again, no evidence. And, in fact, if you actually look at the
    actual experience, the private student loan industry grew the
    most during a time before 2005 when bankruptcy was available
    for most private student loan borrowers. The industry has
    contracted significantly since 2005 when the loans were
    actually much harder to discharge. So the experience in many
    ways has been the opposite. Fluctuations are due to market
    forces, not to bankruptcy policy.
        The rationale that the products would be worse if we
    restore bankruptcy relief to borrowers--again, no evidence. The
    terms have essentially been the same over time or fluctuated
    over time without regard to what the bankruptcy policy is. And,
    further, it is really hard to imagine a product much worse than
    some of those that some of the Attorneys General have
    mentioned, all of which have sprung up during a time when, in
    fact, bankruptcy--private student loans are difficult to
    discharge in bankruptcy.
        The point that student loans are unique, which is what
    Professor Cole in particular focused on, is, in fact--on the
    private loan side is a little bit of an outdated view of what
    private student loans are. Almost all, nearly 80, 90 percent of
    private student loans now require co-signers. These are
    generally parents or older adults, and in that case, they are
    actually the private creditors assessing current ability to
    pay, not just speculating on future ability to pay.
        There is no evidence that in any way bankruptcy policy has
    affected access to higher education. And, again, private
    student loans in any case are not financial aid. They are
    private credit products.
        If we have time in the question-and-answer, I can answer
    more questions about the undue hardship issue and why that test
    has also not worked well. But I just want to say finally that
    we have a system that is set up to encourage access to
    education, and, fortunately, we have done that, but we slam
    those who fail based on really speculation of what might happen
    as opposed to looking at the real experience. It is time to
    provide relief for student borrowers.
        Thank you.
        [The prepared statement of Ms. Loonin appears as a
    submission for the record.]
        Senator Durbin. Thank you, Ms. Loonin.
        Let me ask a few questions of the panel. Ms. Jokela, I do
    not know if you are familiar with this, but as of November
    first last year, Career Education Corporation, which owned
    Harrington College of Design, was found to have falsely claimed
    that too many of its students were getting jobs after they
    graduated. Like you, many of them were not. Because of this
    fraudulence and falsification, they forced the CEO of Career
    Education Corporation to resign last November. The parting gift
    for this fraudulent misrepresentation to the Department of
    Education was a $4 million parachute that he was given as he
    left, an indication, I am afraid, at the time of some inherent
    problems within that industry, that you would be saddled with
    the debt, with a degree that has not led to the job you thought
    you would get, and he would be getting a parting gift of $4
    million to leave.
        I would like to ask the Attorneys General who are here,
    both of whom have been engaged, at least through their
    predecessors and perhaps personally, in multi-State efforts to
    deal with issues initially on tobacco--before your time
    probably--and then later on foreclosure. Is there any effort
    underway to convene Attorneys General in States across the
    Nation to discuss addressing this on a national basis? And let
    me add parenthetically, the reason this is being done by
    Attorneys General is because we do not have the political will
    to do it here. Please proceed.
        Mr. Conway. Well, Senator Durbin, thank you for the
    question. First of all, thanks for your leadership on the
    issue. The answer to your question is yes, there is a move
    afoot. Each Attorney General typically has at his or her
    disposal a consumer protection act or an unfair trade practices
    act. In the Commonwealth of Kentucky, it empowers the Attorney
    General to go after false and misleading and deceptive
    representations and marketing. We are using that as a vehicle
    in our investigations of seven schools, two lawsuits that have
    been announced, and additional work that we are doing.
        As I got into this issue, after Decker and after the
    American School of Law, I found out we have 141 of these
    institutions now in the Commonwealth of Kentucky. In talking to
    my colleagues like General Madigan, I found out a lot of--you
    know, Colorado and other States had investigations or actions
    ongoing.
        So we have put together a multi-State effort. I am
    currently the Chair of it. It is bipartisan. There are 23
    States that have signed on to the multi-State effort. We have
    executed information-sharing agreements that allow us to share
    law enforcement information amongst the States, particularly
    where we have common targets.
        This effort is very distinct and different than tobacco or
    the recent mortgage settlement. In the recent mortgage
    settlement, we are looking at the five largest banks. In
    tobacco, we were looking at the four largest producers who
    turned out to be the participating manufacturers.
        Here we have such a diffuse group of schools, some
    operating only in particular States, others being large
    corporations that are traded on Wall Street or owned in part by
    hedge funds, for example. We are sharing information, but we
    are having some difficulty finding the common targets.
        I can share with you that we in the leadership of the
    multi-State effort have been talking to the new CFPB and to
    Director Cordray----
        Senator Durbin. Consumer Financial Protection Bureau.
        Mr. Conway. Right, Consumer Financial Protection Bureau and
    Director Cordray, because we are finding more of this
    institutional lending on the part of some of the for-profit
    schools. The 90/10 rule drives everything. So many of these
    schools are up against that 90-percent barrier that you see the
    extraordinary recruiting of veterans or current people in the
    military in order to get to the 10 percent to leverage to
    recruit another nine. We are also seeing these schools get into
    institutional lending, and it is essentially a loss leader.
    They are willing to write off in documents that they share with
    Wall Street that they are going to lose 50 percent of these
    loans just to get to that 10 percent.
        Senator Durbin. Thank you, Attorney General.
        Mr. McCluskey, I understand the Cato Institute--and I
    understand you are not speaking for them but probably share
    their philosophy or you would not be working there. And I
    understand your notion about the role of the Federal Government
    and where you may see it excessive. You stated the Federal
    Government should get out of the student aid business and there
    are too many students going to college.
        So let me ask you about another aspect of federal subsidy
    beyond student aid, and the Attorney General has just referred
    to it. We had to pass a law to say that these for-profit
    schools could receive no more than 90 percent of their revenue
    from the Federal Government. They found a way around it when it
    came to the GI bill. Now they are up to 95 percent. They are
    within 5 percent of being federal agencies, except for one
    thing: the federal pass-through of money to these schools
    results in these multimillion-dollar giveaways and profit
    taking by the owners.
        So do you have the same level of outrage about the federal
    subsidy to for-profit schools as you do to federal student aid?
        Mr. McCluskey. Yes, the important thing is that we put this
    all in context. The focus has been on for-profit schools, and,
    of course, there are for-profit schools making huge amounts of
    money through taxpayer funding. What we are missing in focusing
    on for-profit schools is that not-for-profit schools--both
    private not-for-profit and public schools--are also making
    tremendous amounts of money through federal student aid as well
    as, if we are talking about public colleges, through State
    subsidies. And so we have looked at how much profit, meaning
    how much more money are you bringing in than it costs to
    educate an undergraduate? How much profit are all schools
    making? And what our research has shown is that, depending on
    whether you include State subsidies on a per pupil basis,
    whether you include endowment funds on a per pupil basis, but
    you will find the normal profit, depending on the type of
    school, for nonprofit schools runs between $2,000 and $12,000
    per pupil.
        So this is the point. Yes, for-profit schools are making a
    huge amount of money through federal aid, but so are other
    schools, and most importantly, this is what enables all
    colleges to raise their prices at rates far in excess of
    inflation. We are giving people money to pay for that.
        Senator Durbin. You may be surprised to know I agree with
    you, and I have said to those who run public universities as
    well as private universities that they are out of control.
    Georgetown Law School is now $50,000 a year, and to me that is
    just over the moon. And there are many that are very, very
    close in my home State of Illinois. The difference is this: I
    do not know that anyone at Georgetown is going to walk out with
    a $4 million parachute when it is all over, as they did at
    these for-profit schools.
        So I would agree with you. I would say ratchet down to at
    least the level of private and public schools the federal
    subsidy to for-profit schools, and let us see if they can
    survive in that world as the private and public schools do.
        My time is up at this point. You will get a chance, I am
    sure, again.
        Senator Franken.
        Senator Franken. Thank you. There is really so much here to
    talk about. It is good to see you again, Attorney General
    Conway. You brought up the 90/10 rule, and, again, on these
    for-profit schools, they have to make sure that at least 10
    percent of the loans fall into the non-federal loans. But our
    troops coming back who are benefiting from the GI bill are
    counted in the 10 percent, and you said you are working with
    Holly Petraeus at the CFPB. Can you tell about this recruitment
    even at hospitals? And did she tell you about the gentleman
    with TBI who was recruited?
        Mr. Conway. No, she did not.
        Senator Franken. I am sorry. She testified about it, that
    there was these for-profit--one of these for-profit schools
    went to, I think it was San Antonio, where there was a unit for
    guys and women who had TBI, and they recruited there. And one
    of the students at one of these for-profit schools was asked,
    you know, ``Do you go to school here? '' And he said, ``Yeah.''
    ``What are you majoring in? '' He said, ``I do not know.''
        Mr. Conway. To react to that, we have had instances of
    people with brain injuries signed up in the Commonwealth of
    Kentucky as part of our investigation. We have seen instances
    where people who do not have access to a computer have been
    signed up for online classes.
        Ms. Petraeus wrote a piece for the New York Times recently
    about the for-profit colleges and targeting the military. She
    and I spent a day together with the Attorney General of
    Tennessee at Fort Campbell, which is a large military
    reservation in Tennessee and Kentucky. And the commanding
    general literally pulled us aside as we were talking about
    consumer protection issues and said, ``I need to get my arms
    around this for-profit college recruitment issue because every
    Thursday night we have an on-post recruiting seminar where
    local vendors are able to come in and talk about services that
    they can provide to our military servicemembers, and we are
    being overrun by for-profit college recruiters.'' And the No. 1
    complaint we heard on post that day was from students who had
    been signed up, were not certain they got a good deal, and we
    heard quite a few horror studies. I did not hear the TBI story
    from Ms. Petraeus that day, but it does not surprise me.
        Senator Franken. Well, I think that maybe we should
    consider not including those veterans on the GI bill in the 10
    but, rather, in the 90. I think that might be a good idea.
        Ms. Loonin, or Professor Loonin, Dr. Loonin--Deanne. I am a
    little confused here. Did the interest rates for non-federal
    loans or private loans go down when they became non-
    dischargeable in 2005?
        Ms. Loonin. No. On average, we did not see any evidence of
    them----
        Senator Durbin. Turn your microphone on.
        Senator Franken. Put your microphone on.
        Ms. Loonin. I am sorry. We did not see any evidence that
    they went down, and, in fact, you know, there are some loan
    products now where the interest rates have gone down, so they
    fluctuated. But there is no pattern that we have seen that is
    connected to the bankruptcy----
        Senator Franken. So I do not know why both Professor Cole
    and Mr. McCluskey assumed they would go up if they became
    dischargeable. It does not seem backed up by empirical
    evidence. I know that Mr. McCluskey talked about the inflation
    at colleges being tied to the amount of aid that students got,
    but he does acknowledge in his written testimony that this
    creates a major endogeneity problem. And I think it really
    does. I think it is very hard to say that the loans are driving
    the costs of the school. I think very often the costs of the
    school are driving the loans. And I think that endogeneity
    problem includes more than even what Mr. McCluskey wrote in his
    testimony. I think it includes what people perceive, anyway, as
    the importance of college for future income and future
    progress.
        I see my time has run out. I look forward to another round
    of questioning. Thank you.
        Senator Durbin. Thank you.
        Senator Blumenthal.
        Senator Blumenthal. Thank you, Senator Durbin. And I want
    to thank Senator Durbin for having this hearing on a topic that
    I consider as important as any we are addressing in the
    Congress today. And I thank Attorneys General who are here for
    the excellent work they and their colleagues are doing on this
    issue.
        Senator Durbin made reference to the tobacco initiative and
    to the lack of political will now to address this topic. In
    fact, the reason that the Attorneys General played a leading
    role in starting the tobacco investigation, as I can tell you
    from firsthand experience was, in fact, the lack of political
    will on the part of Washington, D.C., and the Department of
    Justice at the time, whom we requested and, indeed, implored to
    become involved. So thank you for the great work that you are
    doing in this area really leading the way to the Federal
    Government.
        You know, Senator Durbin used the word ``outrage,'' and I
    think the present system is an outrage not only because of its
    impact on individual students and consumers, but in the larger
    sense that Professor Cole described very well, its impact on
    human capital. And you described well, Professor Cole, how
    student loans are different insofar as the incentives of the
    lender are different and the assets of the borrower are
    different.
        But it is also different from the standpoint of our Nation
    and society because we are investing in our human capital, our
    human infrastructure, our human resources for the future. And
    so that is a reason why I think this area is so critically
    important to our society and why we need to do better. And it
    is an outrage that we are failing to do better.
        We have begun in the Health, Education, Labor, and Pensions
    Committee an investigation of the for-profit college marketing
    techniques to our veterans and our military service people. But
    that is just a part of the problem, and so I am going to ask
    you, since you offered to do so, what would be your remedies,
    suggested proposals, if we were not to use discharge in
    bankruptcy?
        Mr. Cole . Well, thank you, Senator. There are various
    other ways of attacking the problem. If the problem is that we
    have got these for-profit entities that are essentially
    benefiting from what might be fraud, essentially selling a
    growth in human capital that is really not taking place, then
    there are other ways to address that other than simply having a
    blanket removal of the discharge.
        So, for example, there is actually a practice in Europe
    with--there are not a lot of private colleges and universities
    in Europe, but there are some, and because they do not have a
    lot of foundations and charitable organizations to support
    them, they are supported largely by tuition. So I can give you
    an example of Bucerius Law School in Germany, which has a
    reputation of being the best law school in Germany. It is both
    an undergraduate and a graduate institution. And it is private,
    and it is very, very expensive.
        So while students who could go to college for free decide
    that they want to go to Bucerius because they want the
    reputation and the better job prospects of going to Bucerius,
    what Bucerius does is they make a deal with their students. If
    you come here and you get a degree and go out in the world and
    perform, we will waive your tuition now in exchange for a
    portion of your income over the next 10 years. So, in other
    words, they basically place a bet on their graduates that they
    are going to get some percentage, 13, 18, 15 percent.
        Senator Blumenthal. And, presumably, they borrow to cover
    the cost of covering----
        Mr. Cole. Yes. So they are essentially lending, but they
    are lending in a different way. They are not requiring the
    payment back of their tuition. They are saying, ``We are going
    to lend you this tuition now in exchange for what we believe is
    going to be a higher income, a growth in human capital.'' So
    they really believe that they are producing growth in human
    capital.
        Senator Blumenthal. I just want to say, my time is going to
    expire shortly, but I would invite you and the other members of
    the panel to add to your response because I think that proposal
    and others may be very promising ways to go forward. But, you
    know, I would just observe that the experience at Decker, where
    there was a questionable relationship between the school and
    SLX, the lender, and at Westwood, where there were outright
    deceptive and misleading practices, you know, ``fraud'' is the
    right word, and maybe it is that the penalties have to be
    increased. The penalties here have to be more than just a cost
    of doing business, and there is a significant enforcement
    problem that, Attorney General Conway, you described insofar as
    the targets are more diverse and numerous and very often the
    costs of pursuing them can be substantial.
        So I would welcome any and all ideas that you may have,
    both on the penalty, the substantive prohibition, and the
    enforcement aspects of this problem.
        Thank you.
        Senator Durbin. Senator Whitehouse.
        Senator Whitehouse. Thank you, Chairman Durbin. First of
    all, thank you for bringing attention to this issue. I know
    some of the witnesses have used-- there was nearly $900 billion
    in student loan debt. I have seen figures that show that there
    were $1 trillion in student loan debt in this country. And when
    you compare that to other countries where a student can get a
    college degree, essentially on the government or at a very low
    cost, it builds a huge burden in for individuals. And when
    things do not work out, as they sometimes do not in life,
    usually what you can do is start over. And it is a tough
    process because bankruptcy is not easy, but you get a clean
    shot to kind of the American dream to rebuild again, and
    everybody understands that that is right. It has been something
    that witnesses have described to us as very important
    economically for people to be able to restart and, you know,
    find a way to create value in their lives and build a life for
    themselves rather than just be saddled with this debt forever
    with no way to get out of it, as Ms. Jokela's testimony showed.
        First of all, we have got a bunch of former colleagues
    here. It is sort of Attorney General Day here in the Judiciary
    Committee--former Attorney General Blumenthal and myself, and
    both of you, Attorney General Conway and Attorney General
    Madigan. I had a consumer protection division in my office.
    Senator Blumenthal was very active with consumer protection in
    his office. I assume you have consumer protection divisions in
    your office. From a consumer protection standpoint, what are
    the issues that you are seeing in your offices related to
    student loans?
        Ms. Madigan. Senator, at this point we are looking at
    student loans as really just the next predatory lending issue
    that we need to contend with. So it has been mortgage loans,
    auto loans, payday loans, and now student loans. Our lawsuit
    against Westwood goes through, really, from the beginning when
    students are recruited to attend all the way through the sign-
    up, and then the student aid meetings that they have and get
    signed up for these loans. It is fraudulent throughout the
    process. And when people are leaving Westwood's criminal
    justice program, they have on average $70,000 in debt, and
    because the college itself is not regionally accredited, these
    individuals are unable to become the police officers that the
    recruiters told them they could become. And so we find people
    working at Sam's Club. We have found people who have dropped
    out of the job market because their degree is essentially
    worthless. And there are alternatives.
        They could have, for instance, gone to a community college,
    spent a tenth of what they had to spend at Westwood, and
    actually gotten a degree that would have allowed them to become
    a member of the Illinois State Police, the Chicago Police
    Department, or a suburban police department. And so what we are
    seeing is a lot of the exact same fraudulent conduct.
        When it specifically comes to the loans, it is the
    misrepresentations to the students about the fact that, you
    know, what is the interest rate. We have many students who tell
    us they never realized they had a loan at 18 percent. They were
    never given documentation. When they asked for documentation,
    they were told it would be sent to them. It was never sent to
    them. There was no real affordability test ever done. But they
    were constantly being told that this degree is accredited, you
    will be able to become a police officer, we have got good
    contacts with police departments, you know, do not worry, you
    will be fine. And the next thing people know, they graduate and
    they cannot get a job, and they are left with extraordinary
    amounts of debt. And so we are pursuing them through the
    consumer fraud act.
        Senator Whitehouse. And, Attorney General Conway, it seems
    as if there is room here for common schemes to develop between
    lenders and from for-profit higher education where you draw the
    victim in, you loan them enormous amounts of money. The
    institution gets paid through tuition and it makes its money.
    The lender has these people on the hook forever because there
    is no protection in bankruptcy for the individual. And at the
    end, somebody leaves, as Attorney General Madigan said, with
    very limited career options and an enormous amount of debt that
    they can never get out from under for the rest of their lives.
        Have you seen that kind of--how frequent does it seem that
    there is a common scheme emerging between lenders and for-
    profit higher education institutions?
        Mr. Conway. We have seen it. We certainly saw it in the
    instance of the for-profit law school in western Kentucky and
    their arrangement with SLX. We see it in one of two ways,
    Senator. We see it either in some sort of arrangement like
    that, some sort of preferred lender arrangement, or
    increasingly, we have seen a significant increase in
    institutional loans where the institution makes the loan
    itself, is willing to anticipate they are going to have a loss,
    just so that they meet the minimum criteria for non-federal
    revenue into their stream under the so-called 90/10 rule. So we
    are seeing it both ways.
        To sort of follow up on what General Madigan said, we have
    141 of these schools in Kentucky, and we have subpoenaed and
    are investigating seven. We let the data take us to where we
    thought we needed to be with those seven. We are looking at
    where we have the most complaints to our office or our council
    on postsecondary education. Where are we seeing--where do we
    have documents of the high-pressure sales tactics claiming 98
    percent job placement or something like that? And then where do
    we cross-reference that with federal student loan default
    rates?
        If you are seeing a school claiming 96 percent job
    placement and they have got a 40 percent federal student loan
    default rate, something is wrong. But we had a school like that
    in the Commonwealth of Kentucky. In one particular case, we had
    a school claiming 96 percent job placement, but then we found
    the information they sent to their accreditor--which was
    national accreditation, not regional--and they were claiming 60
    percent in that. Now, that 60 percent may have been someone
    working in fast food who was still working in fast food after
    getting the so-called career education. But it is a simple
    consumer protection case to make out when you are claiming 96
    percent job placement and what you are reporting to your
    accreditor does not even meet that.
        So for the Federal Congress, we could use a lot of help. I
    know the gainful employment rule was a big right up here. But
    we need some help in understanding what for-profit schools need
    to report to accreditors regarding job placement, whether that
    is regional accreditation or national accreditation, because
    what we are seeing are high-pressure sales tactics, oftentimes
    going after single parents or people that have real problems
    making ends meet in this difficult economy. In fact, we have
    seen documents coming out of the Senate HELP Committee called
    ``the pain funnel.'' Try to find the people that you can sign
    up today for these loans, and we have just seen some really
    remarkable practices.
        One school in Kentucky in particular, they would not allow
    students access to their federal funds until they bought books
    at a premium, new from that very for-profit college's
    bookstore. That is the type of scams we are seeing and that we
    are fighting on a daily basis as AGs.
        Senator Whitehouse. Thank you very much, Chairman.
        Senator Durbin. Thank you, Senator Whitehouse.
        Professor Cole, I am going to take exception to your theory
    about secured loans, unsecured loans, and student loans being
    sui generis. If this were so compelling and spot on that these
    were really different kinds of loans and needed to be treated
    differently, there might have been all of at least five minutes
    of testimony on the bankruptcy reform bill about this. No. This
    was slipped in. This was not even discussed, and no one knows.
    How did this get in there? How did we say that private loans
    are not dischargeable in bankruptcy?
        And I might also say that I appreciated the refresher, I
    needed it, on the different kinds of loans. But if a person
    goes out and crosses North Capitol here and gets hit by a car
    and is taken to the local hospital and needs emergency surgery
    and ends up with a $200,000, $300,000 medical bill, I think
    that might qualify the same argument that you made for student
    loans. They did not operate on that person because of a
    security that they have in their body. They did not operate on
    them because they checked their net worth. They did their
    operation and then set out to collect it. You could make a
    similar argument to what you made that medical loans should not
    be discharged in bankruptcy on the same theory. It is based on
    getting well, right? Student loans are based on getting
    educated.
        So I do not buy it. I do not buy the premise on what you
    are saying, and if it really was so compelling, it would not
    have been slipped in as it was in this circumstance here.
        I do want to say, Ms. Jokela, would you be kind enough to
    tell us what the impact of all this debt has had on your
    ability to go back to school or borrow money or make plans for
    your own life?
        Ms. Jokela. Yes, absolutely. You know, ultimately I have a
    dream of operating my own design firm, but just, you know,
    thinking about the cost of starting your own business is just--
    you know, how could I even consider taking on any additional
    debt to try to do that? I certainly could never go back to
    school to even achieve an MBA or a master's degree because, you
    know, how would I pay for it? I definitely do not want to take
    out any more student debt.
        So I am in this place right now where I just have to keep
    working and working and working and trying and trying to trying
    to pay this debt down and not really making any progress. And
    then sort of long term, even if I did not have these other
    aspirations, because of this student debt, I am not even in a
    place where I can have, you know, an emergency savings account
    or contribute to any kind of IRA for my long-term retirement.
    And, really, when I am facing retirement is the point that I am
    going to be done paying these student loans.
        Senator Durbin. How old are you now?
        Ms. Jokela. I am 32. So I have got 25 more years left, and
    then, you know, I will be a few years away from retirement, and
    that is not going to be enough time for me to really build the
    life that I want to have for myself in the future.
        Senator Durbin. Attorney General Madigan, I take the
    Kennedy Expressway out to O'Hare a lot, and I do not get on the
    plane with any trepidation, but usually with anger because I
    have just passed that building that has the big sign on it that
    says, ``Westwood College.'' And every time I see it, I think of
    the worthless diplomas that they are peddling.
        I had a situation in my office with a cleaning lady who was
    nearing retirement. Her daughter was accepted at Westwood,
    signed up. Her mom has to co-sign. After the Pell grant worth
    $5,000-plus, they signed up for $17,000 more in debt for the
    same worthless degree that you are now investigating. I wish
    these crime shows would get off television for a while so kids
    could start thinking about other things to do with their lives
    other than being a super chef or a forensic crime scene
    investigator.
        But let me ask you, the incidents of parents co-signing and
    the impact that has had, you said you have had about 800
    Westwood students who have contacted you. Have you found
    instances of the parents being brought into this kind of
    situation?
        Ms. Madigan. We have. In terms of the APEX loans that I
    talked about, 40 percent of the Westwood College student end up
    taking out those APEX loans, whether they know it or not. And
    in many circumstances we have found--and I think as Ms. Loonin
    testified to--an increasing number of private loans requiring a
    co-signer. And so we are seeing that.
        As I said, in the past few months, we have had over 1,000
    people contact our office, and so they are now sending in
    paperwork and filling out questionnaires so that we are
    gathering more and more information. But it is just clear from
    the beginning that people are being put into loans and, again,
    they have no idea--and it is not just being put into loans at
    the outset. It is that they are pressured while they are in
    school. We in our complaint have testimony from students saying
    that they were literally pulled out of class and told they had
    to sign up for another loan if they wanted to continue their
    enrollment in the school. And, again, they are kind of forced
    to because those credits cannot be transferred anywhere. I
    mean, it is just egregious, unconscionable situations.
        Senator Durbin. I might tell you, my cleaning lady's story
    has a happy ending. She had told me she was prepared to defer
    her retirement because her daughter was finally in college at
    Westwood. And when we found out the details, we called them and
    said, ``There will be a press conference right outside your
    front door tomorrow morning with this lady and me if you do not
    tear up the paper.'' And they did. I wish I could do that for
    the thousands who have been exploited by this worthless
    Westwood College and so many like it. But I am glad you are
    pursuing this.
        Are they being investigated by other States as well?
        Ms. Madigan. Yes.
        Senator Durbin. Thank you.
        Senator Franken.
        Senator Franken. Thank you, Mr. Chairman.
        Let us follow up a little bit with Westwood, Attorney
    General Madigan. Your suit against them was for deceptive
    marketing practices, and I think that highlights a huge problem
    for the for-profit sector: the accreditation process, and the
    fact that many of these programs may not have the regional
    accreditation and, therefore, may not have their credits or
    degrees accepted by other local institutions or employers.
        Ms. Madigan. Right.
        Senator Franken. What does the Federal Government need to
    do to strengthen and improve the accreditation process? And
    what can it do to make students more aware of the importance of
    the type of accreditation of their programs?
        Ms. Madigan. Senator, it is a great question, and let me
    start by telling you something that one of the students told me
    from Westwood who was savvy enough to know to ask the question
    of the recruiter: ``Are you accredited? '' And they were told,
    ``Yes, we are accredited.'' But that student would have had to
    know to ask more specifically, ``Are you regionally accredited
    or nationally accredited? '' Because most people have no
    understanding of the difference. And believe it or not, it is
    regional accreditation that is really the gold standard when it
    comes to accreditation and not national accreditation.
        This is obviously work that can be done on the federal
    level to make sure that the accreditation process is something
    that is meaningful. You can do that, obviously, by looking at
    job placement rates. You do that by looking at default rates.
    And those are certain things that, when, for instance, Westwood
    was going through an accreditation process at one point, when
    they went on campus, interestingly enough--and this is just to
    add some more color to this story--administration actually told
    students that they were not allowed to complain or talk to the
    accreditation people who were on campus and that they may be
    thrown out of school if they did talk to them.
        So, obviously, there is a lot that can be done to ensure
    that, you know, there would be whistleblower provisions put in
    place, and that could be done both at the State level and at
    the federal level to protect students from ending up in
    programs where they end up with an enormous amount of debt and
    worthless degrees.
        Senator Franken. Ms. Jokela, thank you for your moving
    testimony. It reminds us all of how this impacts the lives of
    those who go through this and why it is so important to improve
    the student loan policy in this country.
        Attorney General Madigan just talked about at Westwood
    that, I guess, 40 percent of the students got APEX loans, and a
    lot of them were not even aware that they did have APEX loans.
    I am very interested in working on ways to improve information
    that students receive before they decide how to pay for their
    college. Do you think that it would have helped in your case if
    you had been given a simple single sheet explaining your
    financial aid?
        Ms. Jokela. Well, I think it would have been somewhat
    helpful, but one of the staff members in Mr. Durbin's office
    had forwarded me a document that my school, Harrington, issues
    and the information that they are sort of saying as far as, you
    know, what students are taking out in private loans versus
    public loans and what the total overall debt is does not really
    reflect my situation nor the situation of many, many of the
    students that I graduated with.
        I think what really would be helpful, what information
    needs to be presented up front, is how much is this particular
    loan, what is the interest rate on this particular loan; at
    this point, as they are going through your education, what is
    the total of your loans and sort of what you can reasonably
    expect to have to repay once you are done and graduated.
        Senator Franken. So a certain level of transparency might
    be required.
        Ms. Jokela. Yes, and not just putting it into a document
    that the student signs and takes home or gets filed away, but
    just really having a clear and concise discussion about it so
    that the students absolutely understand what it is that they
    are getting into before they make that decision and sign that
    paperwork.
        Senator Franken. Thank you.
        Ms. Loonin, many commentators have equated the abuses in
    the private loan industry with the abuses that went on in the
    housing industry. I know that Attorney General Madigan said
    that this is really kind of an extension in her consumer bureau
    of what went on in the mortgage industry and the credit card
    industry.
        The Dodd-Frank Act now requires institutions that
    securitize mortgages to retain some of the risk. Most
    institutions of higher education currently do not carry any
    risk associated with either federal or student loans. I think
    Professor Cole talked about this German institution that does.
    And that is, if students are unable to pay back their student
    loans, it does not really harm the institutions. Perhaps this
    should change so that institutions have more of a stake in what
    happens to their graduates.
        How could the Federal Government require colleges to bear
    some of the risk students take on when they take out federal or
    private student loans? In other words, can the Federal
    Government require institutions of higher learning to have some
    skin in the game?
        Ms. Loonin. Yes, thank you, and that is something that we
    are very interested in looking at some options.
        First, the parallels really in the private student loan
    market and the subprime mortgage are very clear. A lot of the
    same things happened. But even on the federal loan side, here
    is an example, I think, of where you can incentivize schools by
    holding them more accountable when they commit fraud or other
    things. There are some limited relief options, discharge
    options, false certification, closed school, unpaid refund.
    This is on the federal student loan side, and the closed school
    is difficult. If the schools are closed, it is difficult to
    have them pay anything back. But the false certification is
    based on, you know, bad acts essentially that the schools did.
    The relief goes to the borrowers, which is great. We are able
    to get that for a lot of our clients. The Department of
    Education has the authority now to then seek reimbursement from
    the schools, and as far as we know, they have not been doing
    that even though the authority already exists. But something
    like that is an example where, if the school was actually held
    accountable, the borrower was made whole, the relief was paid
    out, and the taxpayer could be more whole also by seeking
    reimbursement.
        Senator Franken. I think most taxpayers would be for that.
        Mr. Chairman, thank you.
        Senator Durbin. Senator Whitehouse. Senator Whitehouse
    defers to Senator Blumenthal.
        Senator Blumenthal. Thank you.
        Since we are on the second round of questioning, I want to
    thank the Chairman again for having----
        Senator Durbin. Take all the time you need.
        Senator Blumenthal. Thank you.
        [Laughter.]
        Senator Blumenthal. You know, I am struck by some of the
    discussion here because we are talking about the bankruptcy
    process for people about the age of the group that just entered
    this room. They are about the age of my four children who are
    in school, and they are at the start of their lives. And
    Senator Whitehouse rightly described the bankruptcy process as
    giving people a new start.
        My goal here is really to enable people to avoid bankruptcy
    because it is a searingly painful and sometimes disabling
    process. As much as it may be a new start, it is also a public
    confession of financial failure that will follow people for the
    rest of their lives. And so the more we can do to avoid
    bankruptcy in the first place, in my view, that ought to be the
    objective here.
        And so, you know, I am also struck by the experience,
    General Conway, at Decker. Decker failed. People went into
    bankruptcy because the school failed to deliver their
    education. They were unable to discharge themselves in
    bankruptcy from a debt they had because of the school's failure
    and its bankruptcy. What an anomaly in American life that the
    students were unable to get the same relief that the school did
    after it failed them, again, people not much older than college
    students in the case of law school, but also undergraduates at
    Decker.
        You very rightly suggested two much more limited means of
    avoiding bankruptcy, for example, providing the opportunity for
    students to avoid repayment if they are unable to get the
    education that they took the loan to receive, which is provided
    under the federal loan program, and, again, also enabling
    people to avoid having to repay while they are still in school.
        I want to ask you, and perhaps the other members of the
    panel, whether the protections under the federal student loan
    program should not be applied to the private loans, as you have
    suggested, General Conway, in two instances.
        Mr. Conway. Well, I think going back, Senator Blumenthal,
    to the example of Decker, as I said, we approached the
    bankruptcy trustee in the Decker case because we had these
    students with these problems, and yet we had the trustee going
    after the students. And that is sort of--as you said, I think
    you called it an ``anomaly,'' a situation like that.
        We were able to get $4.6 million in very tangible debt
    relief for those students in the instance of Decker. And Decker
    is interesting because it was happening at about the time that
    Congress was going through bankruptcy reform and this mystery
    amendment that Senator Durbin has talked about was put in
    place. But the filing of bankruptcy happened after the changes,
    so this really was one of the cases of first impression how
    this was going to work out.
        We were able to get that $4.6 million forgiven because they
    were institutional loans. What we basically said is, ``Listen,
    you failed, and you cannot be going after these students.'' But
    what is still hanging out, and hanging out there to this day,
    is the roughly $13 million in private loans. We have had some
    success in saying, ``Listen, okay, you did not have the right
    kind of lending relationship. We are going to advocate on
    behalf of the student.'' But we have not been successful in all
    those cases. And because the school failed and because federal
    protections--federal law has protections in the instance when a
    school fails, we have had some success in about $21 million
    worth of federal student loans that are involved in Decker. But
    we do still have this $13 million in private loans hanging out
    there, and I would argue, as you said in your remarks, that
    those people from Decker still facing those loans ought to have
    the same kind of protections that we were able to get either
    for the institutional loans or the federal loans.
        Senator Blumenthal. Professor Cole, what do you think about
    applying the federal protections to private loans?
        Mr. Cole. Senator, I think that would be an appropriate
    thing to do. I think that it treats private loans, private
    student loans, as student loans, and in that sense it is an
    appropriate thing to do.
        I do want to respond, if I may, to Senator Durbin's comment
    about--I almost feel as though I am being held responsible for
    the processes of Congress with the way the bill was--the
    Bankruptcy Code was amended. If I had been there, I would have
    made a comment similar to what I have made today. I do think
    that the rationale for exempting student loans is to be able to
    make students able to credibly commit. But I do think that
    there has to be a way to internalize the costs that some of
    these private for-profit colleges are imposing on people. And
    one of the ways to do that--the States can do that without
    bankruptcy, for example, by extending fraudulent conveyance
    reach-back periods for college tuition only. If you are giving
    value and getting none in return, there ought to be a way in
    which individuals and their other creditors ought to be able to
    address that, and that can be done under State law without the
    stain of bankruptcy.
        If you want to do it through the Bankruptcy Code, another
    way to do it is to allow for discharge for all but a percentage
    of future income, and that way the lenders are going to take
    more responsibility in investigating the colleges that are
    receiving these funds to make sure that they are giving an
    education, because no lender is going to want to lend against
    an education that is only going to generate a small amount of
    income in the future if they are worried that the rest of it is
    going to be discharged in bankruptcy.
        So those are options that do not necessarily implicate the
    Bankruptcy Code or the bankruptcy process.
        Senator Blumenthal. Thank you.
        Thank you, Mr. Chairman.
        Senator Durbin. Thanks.
        Senator Whitehouse.
        Senator Whitehouse. Thank you, Mr. Chairman.
        Let me ask Ms. Loonin: The National Consumer Law Center
    looks at this sort of from the 50,000-foot level as well as at
    the individual level. Have you made any determinations as to
    what the effect of the 2005 change in the law was on student
    loan interest rates? Is there a report of some kind that shows
    a categorical shift to the benefit of students as a result of
    the 2005 law?
        Ms. Loonin. Thank you. We have not done a report on that.
    The Project on Student Debt has done some analysis of that. We
    have done some--not an actual report. We have done some
    internal analysis as well as a report that we did in 2008
    looking at private student loan products, and in all of those
    cases, we have not found, again, that the interest rates were--
    they fluctuated, but you cannot see any pattern that is tied to
    bankruptcy.
        Senator Whitehouse. Cannot attribute.
        Ms. Loonin. Right.
        Senator Whitehouse. Okay. Professor Cole, the history of
    this, as I understand it, was that, you know, the baseline is
    that debt is dischargeable in bankruptcy. Is that correct?
        Mr. Cole. Yes, that is correct.
        Senator Whitehouse. And the baseline for student loans
    until 2005 was that they were dischargeable in bankruptcy?
        Mr. Cole. For private student loans.
        Senator Whitehouse. Private student loans, correct?
        Mr. Cole. That is right.
        Senator Whitehouse. And then the 2005 law, as our Chairman
    said, magically appeared without a lot of testimony to support
    it, but somehow it got into the law. And when it got in, it
    applied not just to loans that were originated after the change
    in the law. It applied to all student loans, did it not?
        Mr. Cole. Yes, it did.
        Senator Whitehouse. So if you took out a loan in 1995 with
    the expectation that you would be able to discharge in a
    bankruptcy, you had that expectation disrupted by this law,
    correct?
        Mr. Cole. Yes, that is correct. And if I can add, that is
    inappropriate. It is inappropriate for that to have been the
    case because you are changing the expectations in the middle of
    the game in the same way that this would change expectations--
    --
        Senator Whitehouse. And the loaner never went back and said
    to that student who had the 1995 loan, ``Hey, you know what? We
    are operating in a new environment in which you cannot get out
    from under this debt. I am going to be able to chase you to
    your deathbed and, therefore, I am eliminating a little
    bankruptcy risk to myself, and so I am going to reduce your
    interest rate.'' That student pre-2005 just plain lost
    something and got no value.
        Mr. Cole. That is right. That is a windfall to the lenders.
        Senator Whitehouse. It is a windfall.
        Mr. Cole. Yes, it is a complete windfall to the lenders.
        Senator Whitehouse. So in your testimony, where you express
    concern that to go back to the status quo ante of the 2005
    bill, what existed beforehand, that would be a ``change in the
    rules.''
        Mr. Cole. That is right, but----
        Senator Whitehouse. It would be just as bad to change the
    rules against the interests of the students.
        Mr. Cole. Yes, Senator. But----
        Senator Whitehouse. As it is to change it against the
    interests of the loan companies, correct?
        Mr. Cole. Yes, Senator. My response to that would be that
    two wrongs do not make a right. It is----
        Senator Whitehouse. Well, it does go back to the status quo
    ante, right?
        Mr. Cole. It does. It does, but----
        Senator Whitehouse. So it puts everything back on the level
    playing field it was before.
        Mr. Cole. But I also want to explain that you cannot really
    compare interest rates from before the change to after the
    change because interest rates, as I explained in my written
    testimony, are made up of at least three different components:
    There is a natural rate of interest; there is an industry rate;
    and then there is a borrower-specific rate of interest. And so
    just looking at the surface----
        Senator Whitehouse. I understand. You get into a huge
    attribution problem.
        Mr. Cole. Right, exactly.
        Senator Whitehouse. But if your position is correct that
    this has a beneficial effect on the interest rate market, you
    have this exemption from bankruptcy to deny people the right to
    start again.
        Mr. Cole. Yes.
        Senator Whitehouse. If it has that benefit, then clearly
    that is a benefit that was taken away from everybody pre-2005.
        Mr. Cole. I agree completely.
        Senator Whitehouse. And so they got basically--I am not
    going to use the word in a Senate hearing, but you know what I
    mean. It was a plain consumer--they had something that they
    were entitled to, they had an expectation. It was taken away
    from them. It was taken away from them by something slipped
    into a bill in Congress. They lost as a result. And setting
    aside the market issues, it would be fair to at least put them
    back in the situation where they were before some lobbyist
    snuck this into the bill and took away their rights, correct?
        Mr. Cole. You could not have more agreement from anyone
    than I have with regard to that statement, although I would
    add----
        Senator Whitehouse. Thank you. I am way over my time.
        Mr. Cole [continuing]. That this amendment does not do
    that.
        Senator Whitehouse. I appreciate you letting me go over my
    time. Thank you, Chairman.
        Senator Durbin. You are welcome, and thank you for being
    here. And the amendment is a work in progress, and some ideas
    have come up during the course of this hearing that I think
    should be brought into play.
        Professor Cole, you gave a good written statement here, and
    I am glad you came a long way to be here to testify. I was
    stopped cold on the first page by two words when you described
    ``innocent lenders.''
        Now that you have listened to what happened to Ms. Jokela,
    after you have heard the Attorneys General talk about the
    schools that are lending money, do you still consider them
    innocent?
        Mr. Cole. No, Senator, I do not. But I want to say that the
    proposed amendment lumps in innocent lenders with guilty,
    fraudulent lenders. And what I am suggesting is that you can
    address those fraudulent lenders without undermining the
    student loan market.
        Senator Durbin. I do not quarrel with that premise.
        I might also add for the record that the largest for-profit
    school in the United States of America makes no private loans.
    You will probably be able to guess which one that is, but I was
    surprised to learn that. This seems to be a little sidelight,
    kind of a juice loan deal, a little, you know, title loan
    company that goes with some for-profit schools. So I do not
    think there is a lot of innocence.
        You know, one of the things that I think should be
    disclosed to the student is before you borrow private loans
    with three times the interest rate, you incidentally still are
    eligible to borrow more under the federal loan. Wouldn't that
    be a pretty reasonable thing to disclose?
        Mr. Cole. I think it would be an absolutely appropriate
    disclosure.
        Senator Durbin. Ms. Loonin, one of the things you talk
    about here is the statute of limitations. Do you want to
    address that for a moment?
        Ms. Loonin. On the federal loan side, the fact that there
    is no----
        Senator Durbin. I do not think your microphone is on.
        Ms. Loonin. Oh, I am sorry. On the federal loan said, there
    is no statute of limitations. It was eliminated in 1991. So
    that is a major reason why I have clients who are in their 80s
    and 90s still being hounded on the federal loan side.
        But one of the connections we have seen on the private loan
    side on the debt collection side, the debt collectors
    collecting private loans take advantage, frankly, of borrowers
    and of borrowers' confusion about what type of loan they have
    and will often say, you know, there is no time limit, we can
    come after you forever on the private loan side, even though
    that is not the case.
        Senator Durbin. I am going to bring this hearing to a
    close. It has been a good one and a great panel. I thank you
    all for coming because I know there was some personal sacrifice
    to your being here. It is an issue which has been taken up in
    the authorizing Committee by Senator Harkin with a number of
    hearings. We have had several hearings through the Judiciary
    Committee, and they will continue.
        As I mentioned at the outset, come July there will be a
    moment of reckoning when we decide whether to address the
    interest rate to be charged on federal student loans. As I
    understand it, it doubles from 3.4 percent to 6.8 percent, a
    burden which I do not want to impose on students across this
    country. But it also creates an opportunity for us, if we are
    up to it, to have an honest discussion about what is happening
    to student debt in America. The student debt crisis in this
    country is largely ignored by Congress. We are not paying any
    attention. And, unfortunately, there are a lot of lives of
    individuals--Danielle Jokela is one--who are being changed
    dramatically by laws that we pass or fail to pass.
        And going back to the point made by Senator Blumenthal, it
    is hard to imagine a young person who thinks they are doing the
    right thing--an education, for goodness' sake--borrowing money
    to get that degree which they have been told is the most
    important thing in life, making a decision before they are 25
    or 26 years old that ends up haunting them for a lifetime. And
    that is literally what we are talking about here. When it is
    not dischargeable in bankruptcy, it is there to the grave, and
    that is why it is so important we continue to work on this.
        Thanks again to the panel. Members may send you some
    written questions. It is rare, but occasionally they do. And if
    you receive one and could respond promptly, we would appreciate
    it. Thank you.
        This meeting will stand adjourned.
        [Whereupon, at 11:41 a.m., the Subcommittee was adjourned.]

                                A P P E N D I X

                  Additional Material Submitted for the Record

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              Prepared Statement of Ranking Member Chuck Grassley

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          Prepared Statement of Jack Conway, Attorney General for the
                 Commonwealth of Kentucky, Frankfort, Kentucky

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     Prepared Statement of Lisa Madigan, Attorney General for the State of
                          Illinois, Chicago, Illinois

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       Prepared Statement of G. Marcus Cole, Professor of Law, Stanford
                        University, Stanford, California

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            Prepared Statement of Danielle Jokela, Chicago, Illinois

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      Prepared Statement of Deanne Loonin, National Consumer Law Center,
                             Boston, Massachusetts

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     Prepared Statement of Neal McCluskey, Associate Director, Center for
              Educational Freedom, Cato Institute, Washington, DC

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    Questions submitted by Senator Dick Durbin for Professor G. Marcus Cole

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          Questions submitted by Senator Dick Durbin for Deanne Loonin

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     Questions submitted by Senator Jeff Sessions for Professor G. Marcus
                                      Cole

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        Questions submitted by Senator Jeff Sessions for Neal McCluskey

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      Responses of Deanne Loonin to questions submitted by Senator Durbin

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     Responses of Neal McCluskey to questions submitted by Senator Sessions

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        NOTE: At the time of printing, after several attempts to
    obtain responses to the written questions, the Committee had
    not received any communication from G. Marcus Cole.

    American Association of University Women (AAUW), March 19, 2012, letter

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                  Consumer Bankers Association, Washington, DC

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         Institute for College Access & Success, March 19, 2012, letter

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     Letter to Senator Durbin from 35 Organizations Expressing Support for
                the Fairness for Struggling Students Act of 2011

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            Consumer Action, Washington, DC, March 16, 2012, letter

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    American Bankers Association, American Financial Services Association,
    Consumer Bankers Association, The Financial Services Roundtable, March
                             20, 2012, joint letter

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         National Association of Student Financial Aid Administrators,
                           Washington, DC, statement

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     National Council of Higher Education Loan Programs, Inc., Washington,
                                 DC, statement

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     ``How Much Ivory Does This Tower Need?'' October 27, 2011, Report by
                                 Neal McCluskey

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     ``Unbearable Burden? Living and Paying Student Loans as a First-Year
             Teacher,'' December 15, 2008, report by Neal McCluskey

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    ``Federal Higher Education Policy and the Profitable Nonprofits,'' June
                       15, 2011, report by Vance H. Fried

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              Education Finance Council, Washington, DC, statement

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