[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

                               ----------

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                       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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