[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                     KEEPING COLLEGE WITHIN REACH:
                 EXAMINING OPPORTUNITIES TO STRENGTHEN
                     FEDERAL STUDENT LOAN PROGRAMS

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

                                HEARING

                               before the

                         COMMITTEE ON EDUCATION
                           AND THE WORKFORCE
                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, MARCH 13, 2013

                               __________

                            Serial No. 113-9

                               __________

  Printed for the use of the Committee on Education and the Workforce


                   Available via the World Wide Web:
                       www.gpo.gov/fdsys/browse/
           committee.action?chamber=house&committee=education
                                   or
            Committee address: http://edworkforce.house.gov




                  U.S. GOVERNMENT PRINTING OFFICE
79-738                    WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  

                COMMITTEE ON EDUCATION AND THE WORKFORCE

                    JOHN KLINE, Minnesota, Chairman

Thomas E. Petri, Wisconsin           George Miller, California,
Howard P. ``Buck'' McKeon,             Senior Democratic Member
    California                       Robert E. Andrews, New Jersey
Joe Wilson, South Carolina           Robert C. ``Bobby'' Scott, 
Virginia Foxx, North Carolina            Virginia
Tom Price, Georgia                   Ruben Hinojosa, Texas
Kenny Marchant, Texas                Carolyn McCarthy, New York
Duncan Hunter, California            John F. Tierney, Massachusetts
David P. Roe, Tennessee              Rush Holt, New Jersey
Glenn Thompson, Pennsylvania         Susan A. Davis, California
Tim Walberg, Michigan                Raul M. Grijalva, Arizona
Matt Salmon, Arizona                 Timothy H. Bishop, New York
Brett Guthrie, Kentucky              David Loebsack, Iowa
Scott DesJarlais, Tennessee          Joe Courtney, Connecticut
Todd Rokita, Indiana                 Marcia L. Fudge, Ohio
Larry Bucshon, Indiana               Jared Polis, Colorado
Trey Gowdy, South Carolina           Gregorio Kilili Camacho Sablan,
Lou Barletta, Pennsylvania             Northern Mariana Islands
Martha Roby, Alabama                 John A. Yarmuth, Kentucky
Joseph J. Heck, Nevada               Frederica S. Wilson, Florida
Susan W. Brooks, Indiana             Suzanne Bonamici, Oregon
Richard Hudson, North Carolina
Luke Messer, Indiana

                        [Vacant], Staff Director
                 Jody Calemine, Minority Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on March 13, 2013...................................     1

Statement of Members:
    Kline, Hon. John, Chairman, Committee on Education and the 
      Workforce..................................................     1
        Prepared statement of....................................     3
    Miller, Hon. George, senior Democratic member, Committee on 
      Education and the Workforce................................     4
        Prepared statement of....................................     5

Statement of Witnesses:
    Delisle, Jason, director, Federal Education Budget Project, 
      New America Foundation.....................................    13
        Prepared statement of....................................    14
    Draeger, Justin S., president and CEO, National Association 
      of Student Financial Aid Administrators (NASFAA)...........    25
        Prepared statement of....................................    27
    Lucas, Deborah, Sloan distinguished professor of finance, 
      Massachusetts Insititute of Technology.....................     8
        Prepared statement of....................................     9
    Mercer, Charmaine N., Ph.D., vice president of policy, 
      Alliance for Excellent Education...........................    37
        Prepared statement of....................................    39

Additional Submissions:
    Bonamici, Hon. Suzanne, a Representative in Congress from the 
      State of Oregon, letter, dated January 23, 2012, from 
      Robert D. Reischauer.......................................    71
    Mr. Delisle, response to question submitted for the record...    81
    Mr. Draeger:
        Report, ``Reimagining Financial Aid to Improve Student 
          Access and Outcomes,'' Internet address to.............    78
        Report, ``Report of the NASFAA Task Force on Student Loan 
          Indebtedness,'' Internet address to....................    79
        Report, ``Report of the NASFAA Award Notification and 
          Consumer Information Task Force,'' Internet address to.    79
        Response to questions submitted for the record...........    79
    Grijalva, Hon. Raul M., a Representative in Congress from the 
      State of Arizona, questions submitted for the record to Mr. 
      Draeger....................................................    79
    Hudson, Hon. Richard, a Representative in Congress from the 
      State of North Carolina, questions submitted for the record 
      to:
        Mr. Draeger..............................................    79
        Mr. Delisle..............................................    81
    Chairman Kline:
        Prepared statement of the Education Finance Council......    77
    Mr. Miller:
        Memo, dated March 12, 2013, from the Associated Students 
          of Michigan State University...........................    47
        Memo, dated March 12, 2013, from Emily Yu, president, 
          American University Student Government.................    48
        Statement of the National Campus Leadership Council: 
          ``Summary of Student Perspectives on Student Loans''...    48
    Roby, Hon. Martha, a Representative in Congress from the 
      State of Alabama, questions submitted for the record to Mr. 
      Draeger....................................................    79


                     KEEPING COLLEGE WITHIN REACH:
                 EXAMINING OPPORTUNITIES TO STRENGTHEN
                     FEDERAL STUDENT LOAN PROGRAMS

                              ----------                              


                       Wednesday, March 13, 2013

                     U.S. House of Representatives

                Committee on Education and the Workforce

                             Washington, DC

                              ----------                              

    The committee met, pursuant to call, at 10:03 a.m., in room 
2175, Rayburn House Office Building, Hon. John Kline [chairman 
of the committee] presiding.
    Present: Representatives Kline, Petri, Foxx, Roe, Walberg, 
Salmon, DesJarlais, Roby, Heck, Brooks, Hudson, Miller, 
Andrews, Scott, Hinojosa, McCarthy, Tierney, Holt, Davis, 
Grijalva, Bishop, Loebsack, Courtney, Fudge, Polis, Wilson, and 
Bonamici.
    Staff present: Katherine Bathgate, Deputy Press Secretary; 
James Bergeron, Director of Education and Human Services 
Policy; Heather Couri, Deputy Director of Education and Human 
Services Policy; Amy Raaf Jones, Education Policy Counsel and 
Senior Advisor; Nancy Locke, Chief Clerk/Assistant to the 
General Counsel; Brian Melnyk, Professional Staff Member; 
Krisann Pearce, General Counsel; Mandy Schaumburg, Education 
and Human Services Oversight Counsel; Nicole Sizemore, Deputy 
Press Secretary; Emily Slack, Legislative Assistant; Alex 
Sollberger, Communications Director; Alissa Strawcutter, Deputy 
Clerk; Aaron Albright, Minority Communications Director for 
Labor; Tylease Alli, Minority Clerk/Intern and Fellow 
Coordinator; Kelly Broughan, Minority Education Policy 
Associate; Jody Calemine, Minority Staff Director; Jamie 
Fasteau, Minority Director of Education Policy; Scott 
Groginsky, Minority Education Policy Advisor; Brian Levin, 
Minority Deputy Press Secretary/New Media Coordinator; Rich 
Williams, Minority Education Policy Advisor; and Michael Zola, 
Minority Senior Counsel.
    Chairman Kline. A quorum being present, the committee will 
come to order. Good morning and welcome to our hearing. This is 
the third of a series we began last Congress to discuss ways 
institutions, states, and leaders in Washington can work 
together to help more students access an affordable college 
degree.
    We are fortunate to have a distinguished panel of higher 
education experts here today and I would like to thank each of 
you for joining us.
    Last summer, debate about student loans reached a fever 
pitch thanks to a scheduled increase in the interest rate for 
subsidized Stafford Loans made to undergraduate students. The 
President began touring college campuses, calling on Congress 
to prevent the increase, frankly, that his own party set in 
motion back in 2007.
    As I said at the time, no one wants to see student loan 
interest rates increase, particularly as young people continue 
to struggle with high un- and underemployment. But we need to 
move away from a system that allows Washington politicians to 
use student loan interest rates as bargaining chips, creating 
uncertainty and confusion for borrowers.
    When Congress approved legislation to temporarily stave off 
the Stafford Loan interest rate increase, my colleagues and I 
lent our support with the promise that we would use this time 
to work toward a long-term solution that better aligns interest 
rates with the free market.
    Today's hearing provides an opportunity to explore the 
merits of a market-based system. As many of you are aware, such 
a system was previously in place from 1992 through 2005. Had it 
remained, interest rates on student loans could be less than 3 
percent today.
    In addition to our discussion on student loan interest 
rates, we must also begin a larger conversation on the state of 
federal student aid programs as a whole. Supporting higher 
education remains a top priority in Washington.
    Each year, taxpayers dedicate billions of dollars to help 
students afford to attend the college of their choice. In the 
2011-2012 school year, students received more than $237 billion 
in aid, of which the federal government provided nearly $174 
billion.
    Given this significant investment, it is troubling to learn 
students struggle to navigate the various federal student aid 
programs available to help them pay for college. More work must 
be done to help students and families understand the federal 
student aid system and make informed choices about their higher 
education options.
    Congress has a responsibility to explore ways we can 
strengthen and streamline federal student aid programs, making 
the process simpler for students, institutions, and families.
    In his fiscal year 2013 budget request, President Obama 
proposed a number of initiatives affecting federal student aid 
programs, including a plan to change how three campus-based aid 
programs--Supplemental Education Opportunity Grants, Perkins 
Loans, and Work-Study--are distributed to shift funds away from 
institutions where the administration believes tuition is too 
high.
    While my Republican colleagues and I continue to support 
the basic principles of competition and transparency to help 
encourage lower costs in higher education, we remain concerned 
that such policies could lead to federal price controls and 
more confusion for institutions and borrowers.
    Though we are still waiting for the President's delayed 
fiscal year 2014 budget proposal, I hope the administration 
will abandon these previous proposals and instead illustrate a 
willingness to work with Congress to improve existing programs 
while demanding states and institutions do their part to tamp 
down college costs.
    Before I yield to the senior Democratic member of the 
committee, Mr. Miller, I would be remiss if I didn't note my 
continued concerns with the Department of Education's 
management of the Direct Loan program, which is responsible for 
the implementation and repayment of all federal student loans.
    Borrowers continue to report a range of problems, including 
missing financial information, unexpected changes to loan 
amounts, poor customer service, difficulty rehabilitating 
loans, and data breeches.
    The committee has been working with the Government 
Accountability Office to investigate some of these issues, and 
I hope we are able to solve some of these problems as we move 
into the reauthorization of the Higher Education Act.
    With that said, I look forward to a productive discussion 
with my colleagues and our witnesses on proposals to improve 
and simplify federal student loan programs.
    I now recognize Mr. Miller for his opening remarks.
    [The statement of Chairman Kline follows:]

            Prepared Statement of Hon. John Kline, Chairman,
                Committee on Education and the Workforce

    Last summer, debate about student loans reached a fever pitch 
thanks to a scheduled increase in the interest rate for subsidized 
Stafford Loans made to undergraduate students. The president began 
touring college campuses, calling on Congress to prevent the increase 
that his own party set in motion back in 2007.
    As I said at the time, no one wants to see student loan interest 
rates increase, particularly as young people continue to struggle with 
high un- and underemployment. But we need to move away from a system 
that allows Washington politicians to use student loan interest rates 
as bargaining chips, creating uncertainty and confusion for borrowers.
    When Congress approved legislation to temporarily stave off the 
Stafford Loan interest rate increase, my colleagues and I lent our 
support with the promise that we would use this time to work toward a 
long-term solution that better aligns interest rates with the free 
market.
    Today's hearing provides an opportunity to explore the merits of a 
market-based system. As many of you are aware, such a system was 
previously in place from 1992 through 2005. Had it remained, interest 
rates on student loans could be less than 3 percent today.
    In addition to our discussion on student loan interest rates, we 
must also begin a larger conversation on the state of federal student 
aid programs as a whole. Supporting higher education remains a top 
priority in Washington. Each year, taxpayers dedicate billions of 
dollars to help students afford to attend the college of their choice. 
In the 2011-2012 school year, students received more than $237 billion 
in aid, of which the federal government provided nearly $174 billion, 
or 73 percent.
    Given this significant investment, it is troubling to learn 
students struggle to navigate the various federal student aid programs 
available to help them pay for college. More work must be done to help 
students and families understand the federal student aid system and 
make informed choices about their higher education options. Congress 
has a responsibility to explore ways we can strengthen and streamline 
federal student aid programs, making the process simpler for students, 
institutions, and families.
    In his fiscal year 2013 budget request, President Obama proposed a 
number of initiatives affecting federal student aid programs, including 
a plan to change how three campus-based aid programs--Supplemental 
Education Opportunity Grants, Perkins Loans, and Work-Study--are 
distributed to shift funds away from institutions where the 
administration believes tuition is too high.
    While my Republican colleagues and I continue to support the basic 
principles of competition and transparency to help encourage lower 
costs in higher education, we remain concerned that such policies could 
lead to federal price controls and more confusion for institutions and 
borrowers.
    Though we are still waiting for the president's delayed fiscal year 
2014 budget proposal, I hope the administration will abandon these 
previous proposals and instead illustrate a willingness to work with 
Congress to improve existing programs while demanding states and 
institutions do their part to tamp down college costs.
    Before I yield to the senior Democratic member of the committee, 
George Miller, I would be remiss if I didn't note my continued concerns 
with the Department of Education's management of the Direct Loan 
program, which is responsible for the implementation and repayment of 
all federal student loans. Borrowers continue to report a range of 
problems, including missing financial information, unexpected changes 
to loan amounts, poor customer service, difficulty rehabilitating 
loans, and data breeches.
    The committee has been working with the Government Accountability 
Office to investigate some of these issues, and I hope we are able to 
solve some of these problems as we move into the reauthorization of the 
Higher Education Act. With that said, I look forward to a productive 
discussion with my colleagues and our witnesses on proposals to improve 
and simplify federal student loan programs.
                                 ______
                                 
    Mr. Miller. Thank you very much, Mr. Chairman, and thank 
you for holding this hearing on student loans.
    Today more than ever higher education is viewed as a 
pathway to middle-class jobs and economic security. A college 
degree plays a critical role in most American dreams.
    Unfortunately, we know all too well about the rising costs 
of higher education is pushing those American dreams a little 
bit further out of reach for too many families.
    The rising costs are due to a number of factors. States' 
falling support for higher education has caused tuition to go 
up well above inflation. Many of us in this committee can 
remember the days when a decent higher education was well 
within the reach of average working families.
    But this is no longer true. Higher education costs have 
been shifted increasingly to students and families. And to make 
matters worse, families' incomes have not kept pace with rising 
costs.
    When workers incomes were growing with their productivity, 
parents could afford to contribute to the education of the 
children, but this too is fast becoming a thing of the past.
    To make up most of this shortfall, students and parents 
turn to loans in order to pay for college. As a result, the 
average student now graduates $26,000 and that in the Consumer 
Financial Protection Agency tells us that there is over $1 
trillion in debt out of the streets. This is higher than the 
nation's total credit card debt.
    Just last week we had yet another report from the New York 
Federal Reserve on the impact of rising student loan debt on 
the economy. It found that student loan debt is almost tripled 
in the last 8 years as more students need to borrow more money 
to go to college and it is simply unsustainable.
    Students who did everything that was asked of them are 
rightly concerned about their future. They wonder whether 
borrowing all of that money to get a degree is worth the 
trouble. Repaying their student loans has become a tremendous 
financial obstacle to making other life decisions.
    It affects where they can work, whether they can ever dream 
of saving enough money to purchase a home, whether they will be 
able to afford to take the risk of starting a business, or 
should they just get married--or whether they should get 
married and start a family. In short, student debt can become a 
very serious drag on the economy.
    This isn't just young people borrowing, either. Those 40 
and older hold 34 percent of our nation's student loan debt. 
Older borrowers may be forced to delay savings for their 
child's education or for their retirement.
    Falling behind on monthly payments will scar borrowers' 
credit ratings and open the door to wage, Social Security, and 
tax-refund garnishments. This debt threatens the very upward 
mobility of higher education once guaranteed.
    A few years ago, Congress took significant steps forward in 
helping students and families deal with these realities and to 
afford an education, but those were just the first steps. There 
is more that needs to be done in short and long term to make 
college affordable, accessible, and to make student aid 
programs work better.
    Members of both sides of the aisle should work together to 
develop these solutions. In the short term, while the economic 
recovery remains fragile, this committee must make sure that 
student loan interest rates do not double on students this 
summer.
    On July 1, the subsidized Stafford loan interest rates will 
double to 6.8 percent for millions of undergraduate students if 
Congress does nothing. With the job market still recovering, we 
should not be asking students with the greatest need to be 
burdened by higher loan costs.
    Interest rates for banks are at a historic low. In a sense, 
they are getting free money and there is no good policy reason 
why to allow rates for students to double at this time.
    In the longer term, we need to consider new ways to 
calculate interest rates for federal student loans. There are a 
number of proposals that have been put forward, and we will 
hear more this morning, that we should examine.
    Also, we must not ignore the problems of the private loan 
market. These rates are higher. Refinancing can be next to 
impossible and borrowers do not enjoy access to various 
repayment options that we provided to help borrowers pay for 
their loans.
    We also should consider various solutions. As we do so, we 
must not lose sight of the fact that the borrowers are our 
nation's future.
    I look forward to hearing from our witnesses on the way 
Congress can work together to address the interest rate 
question and reduce student loan debt.
    I would also suggest that, Mr. Chairman, you and I have had 
a number of conversations about we are trying to make college 
more affordable, but we have to sometime get the colleges in 
here to tell us how they are going to reduce the cost of 
education, and there is a lot of things coming on the horizon 
now with online courses and massively-sized online courses.
    I see in my state legislation in California they are about 
to introduce legislation that they think is going to pass that 
suggests that these online courses in fact be given credit so 
that students can save money by participating in that and 
reduce the cost of education and money they have to borrow.
    So I think there's a lot we need to have a conversation 
with the colleges and universities about in this question of 
the cost of college. We have dealt long and hard with the 
affordability of it but we are running out of tools. Thank you.
    [The statement of Mr. Miller follows:]

  Prepared Statement of Hon. George Miller, Senior Democratic Member, 
                Committee on Education and the Workforce

    Good morning, Chairman Kline. Thank you for holding this hearing on 
student loans.
    Today, more than ever, higher education is viewed as the pathway to 
a middle class job and economic security. A college degree plays a 
critical role in most American Dreams.
    Unfortunately, we know all too well that the rising cost of higher 
education is pushing those American Dreams a little further out of 
reach for too many families. This rise in costs is due to a number of 
factors.
    States' falling support for higher education has caused tuition to 
go up well above inflation. Many of us in this committee can remember 
the days when a decent higher education was well within reach for 
average working families.
    Thanks to significant state support for higher education, credit 
hours were affordable. A summer job could be enough to help us get 
through the following year. But this is no longer true. Higher 
education costs have been shifted increasingly to students and 
families. And to make matters worse, families' incomes have not kept 
pace with this rising cost.
    When workers' incomes were growing with their productivity, parents 
could afford to contribute to the education of their children. But 
this, too, is fast becoming a thing of the past.
    To make up for this shortfall, students and parents turn to loans 
in order to pay for college. As a result, the average student now 
graduates with $26,000 in debt. And that debt looks more like a 
mortgage if a student goes on to attend graduate or professional 
school.
    Last year, the Consumer Financial Protection Bureau found that 
student loan debt was more than $1 trillion. This is higher than the 
nation's total credit card debt. Just last week we had yet another 
report from the New York Federal Reserve on the impact of rising 
student loan debt on our economy. It found that student loan debt has 
almost tripled in the last eight years as more students need to borrow 
more money to go to school.
    This is unsustainable. Students who did everything that was asked 
of them are rightly concerned about their future. They wonder whether 
borrowing all that money to get a degree was worth the trouble. 
Repaying their student loans has become a tremendous financial obstacle 
to making other life decisions.
    It affects where they can work, whether they can ever dream of 
saving enough money to purchase a home, whether they can afford to take 
a risk and start a business, or when they should get married or start a 
family.
    It isn't just young people borrowing either--those 40 and older 
hold 34 percent of our nation's student loan debt. Older borrowers may 
be forced to delay saving for their child's education or their 
retirement. Falling behind on monthly payments will scar a borrower's 
credit rating and open the door to wage, Social Security, and tax 
refund garnishment. This debt threatens the very upward mobility that 
higher education once guaranteed.
    A few years ago, Congress took significant steps forward in helping 
students and families deal with these realities and afford an 
education. But those were just the first steps. There is more to be 
done in the short and long term to make college affordable, accessible, 
and make student aid programs work better.
    Members from both sides of the aisle should work together to 
develop and move those solutions. In the short-term, while the economic 
recovery remains fragile, this committee must make sure student loan 
interest rates do not double on students this summer.
    On July 1, the subsidized Stafford loan interest rate will double 
to 6.8 percent for millions of undergraduate students. With the job 
market still recovering, we should not be asking students with the 
greatest need to be burdened by higher loan costs. Interest rates for 
banks are at historic lows. There is no good policy reason to allow 
rates for students to double at this time.
    In the longer term, we need to consider new ways to calculate 
interest rates for federal student loans. There are a number of 
proposals that have been put forward that we should examine.
    Also, we must not ignore problems in the private student loan 
market. There, rates are higher. Refinancing can be next to impossible. 
And borrowers do not enjoy access to various repayment options that we 
have provided to federal loan borrowers.
    As we consider various solutions, we must not lose sight of the 
fact that these borrowers are the nation's future. If they are shackled 
by unmanageable debt, our economy will invariably suffer. We have a 
moral and economic obligation to ensure that all qualified students who 
want to attend college can afford to go.
    Our ability to compete in the global marketplace depends on it. I 
look forward to hearing from our witnesses on ways Congress can work 
together to address the interest rate question and reduce student loan 
debt.
    Thank you for joining us today. I yield back.
                                 ______
                                 
    Chairman Kline. I thank the gentleman, and I agree with 
that comment.
    As the gentleman knows, we have been looking at that. We 
have had a number of experts come in and talk to us. We are 
going to continue that dialogue and I am confident that will be 
in a bipartisan way as we explore the technology explosion that 
is so impressive and there is no way that we, Washington, can 
keep up with that. They are just going to move faster than we 
can. But there is work to be done there----
    Mr. Miller. Faster than us?
    Chairman Kline. Faster than us. I know, it is shocking. 
Shocking concept I know.
    Pursuant to committee Rule 7C, all committee members will 
be permitted to submit written statements to be included in the 
permanent hearing record and without objection, the hearing 
record will remain open for 14 days to allow statements, 
questions for the record, and other extraneous material 
referenced during the hearing to be submitted in the official 
hearing record.
    It is now my pleasure to introduce our distinguished panel 
of witnesses. Dr. Deborah Lucas is the Sloan Distinguished 
Professor of Finance at the Massachusetts Institute of 
Technology's Sloan School of Management.
    Mr. Jason Delisle serves as the director of the Federal 
Education Budget Project at the New America Foundation. 
Previously, Mr. Delisle was a senior analyst on the Republican 
staff of the Senate Budget Committee and from 2000 to 2006 he 
was a legislative aide in the office of Mr. Thomas Petri who 
will be joining us shortly.
    Mr. Justin Draeger is the President and CEO of the National 
Association of Student Financial Aid Administrators. Prior to 
joining NASFAA--I don't know who invents these acronyms--in 
2006, Mr. Draeger served as a financial aid director at the 
Douglas J. Aveda Institute in East Lansing, Michigan.
    And Dr. Charmaine Mercer joined the Alliance for Excellent 
Education in June 2012 as Vice President of Policy. Prior to 
joining the Alliance, Dr. Mercer worked for the House Education 
and Workforce Committee under Mr. George Miller on elementary 
and secondary education issues.
    And while this is truly a distinguished panel, I have to 
say that it is especially distinguished having former key 
staff.
    So, before I recognize each of you to provide your 
testimony, let me briefly explain our lighting system.
    You will each have 5 minutes to present your testimony. 
When you begin, the light in front of you will turn green. When 
1 minute is left, the light will turn yellow. When your time is 
expired, the light will turn red. At that point, I ask you to 
please wrap up your remarks as best you are able.
    After everyone has testified, members will each have 5 
minutes to ask questions of the panel and I would remind my 
colleagues that that 5 minutes includes the answers of our 
witnesses.
    I would now like to recognize Dr. Lucas for 5 minutes.

    STATEMENT OF DR. DEBORAH J. LUCAS, SLOAN DISTINGUISHED 
  PROFESSOR OF FINANCE, MASSACHUSETTS INSITITUTE OF TECHNOLOGY

    Ms. Lucas. I am happy to testify on this important issue.
    I want to focus on several programmatic changes that may 
seem technical in nature, but that are likely to yield 
significant benefits to students and taxpayers, and the budget.
    A critical issue is what the rule should be that determines 
the interest rates charged to borrowers. As you know, interest 
rates on student loans are set in statute. Those rules have 
been changed numerous times throughout the history of the 
programs including shifting between fixed interest rates and 
variable interest rate formulas.
    Since 2006, new Stafford loans have carried a fixed 
interest rate of 6.8 percent. The rate on subsidized loans is 
fixed at 3.4 percent, but that rate is scheduled to increase to 
6.8 percent for loans made after the end of June.
    The current practice of setting fixed interest rates that 
extend many years into the future--rather than linking them by 
formula to prevailing market interest rate conditions--has 
adverse consequences for students, for taxpayers, and for the 
stability and control of budgetary costs.
    For students, the current policy creates large swings in 
the value of government assistance from year-to-year; very 
similar students that attend the same school but in different 
years receive very different amounts of support. Subsidies are 
small when interest rates are low as they are now and large 
when rates are high.
    As well as raising fairness concerns, this volatility makes 
it more difficult for prospective students to assess the 
affordability of pursuing a higher education.
    At the same time, the variability in year-to-year subsidies 
creates potentially large and uncertain liabilities for 
taxpayers, and from a budgeting and control perspective, the 
uncertain size and volatility of subsidies over time is 
detrimental to budgetary planning, and it has the effect of 
reducing the control that Congress exercises over the 
allocation of scarce budgetary resources.
    Adopting the alternative of market-indexed rates would 
reduce the volatility in subsidies for borrowers and taxpayers 
and also help to stabilize the budgetary costs of the programs.
    Under that approach, the interest rate charged on new loans 
each year would be linked to a market rate; for instance, to a 
Treasury security with a similar duration to the loans. The 
interest rates could still be fixed over the life of an 
individual loan, but that fixed rate charged to new borrowers 
would vary year-to-year.
    Alternatively, borrowers could be charged a floating rate 
that resets every year over the life of the loan as was the 
case before 2006.
    The notion that allowing interest rates to vary with market 
conditions would create greater stability and fairness than 
fixing interest rates by statute may at first seem unintuitive.
    However, market-linked interest rates are beneficial 
because they generate more stable real, or inflation-adjusted, 
loan payments. High nominal interest rates generally coincide 
with periods of high expected inflation rates.
    Market rates increase because investors need more 
compensation just to maintain the purchasing power of the loan 
repayments they receive. At the same time, wages grow more 
quickly during periods of higher inflation, making higher 
nominal payments more affordable to borrowers.
    Furthermore, low nominal interest rates tend to be a 
symptom of a weak economy and job market, as is the situation 
today. Fixing the interest rate by law tends to shrink 
government subsidies at just those times when students would 
benefit from them the most.
    With market-indexed interest rates, the generosity of 
subsidies could be controlled by choosing an appropriate 
interest rate spread; a number which could be specified in 
legislation in place of the fixed interest rates that are there 
today.
    Because of the way student loans are budgeted for, moving 
to indexed rates would have the effect of lowering the 
volatility of their budgetary costs over time.
    Specifically, under the Federal Credit Reform Act of 1990 
or FCRA, credit programs are budgeted for on an accrual basis 
that records the lifetime cost of the loans disbursed each 
year.
    Specifically, the costs are calculated by discounting to 
the present the expected cash flows over the life of the loan 
using maturity-matched, Treasury interest rates as the discount 
rates.
    With interest rates on student loans that are fixed by 
statute, when market Treasury rates go up, the value of the 
projected future payments fall and the budgetary cost of the 
loans increases; and conversely when market rates fall.
    Indexing interest rates on student loans would largely 
eliminate that source of budget volatility.
    The move to accrual accounting for federal credit with FCRA 
represented a significant improvement over the cash accounting 
that preceded it in terms of accuracy and transparency. 
However, the requirements use Treasury rates for discounting 
fail to account for the full cost to taxpayers.
    A proposal that would alleviate the understatement of cost 
in the budget and increase transparency would be to replace 
FCRA subsidy costs with so-called fair or market value 
estimates in the budget.
    That change would eliminate the artificial appearance that 
the student loan programs are highly profitable for the 
government, which is the case now. It would also put credit and 
noncredit assistance on a more level playing field in the 
budgetary process.
    In particular, it would reduce the cost disadvantage of 
Pell grants compared to student loans by accurately portraying 
the cost of the loans.
    I also have some comments in my written testimony on the 
effects of moving to a more income-based repayment system, but 
in the interest of time, I will end here and look forward to 
your questions. Thank you.
    [The statement of Ms. Lucas follows:]

 Prepared Statement of Deborah Lucas, Sloan Distinguished Professor of 
            Finance, Massachusetts Insititute of Technology

    Thank you, Chairman Kline and Congressman Miller. To all the 
members of the committee, I appreciate the opportunity to testify on 
opportunities to strengthen the Federal student loan programs. My focus 
will be on four programmatic changes that are seemingly technical in 
nature, but which are likely to yield significant benefits to students 
and taxpayers, and that could increase the stability and transparency 
of budgetary costs.

Market-Indexed Student Loan Rates
    A critical issue is to revisit the rule for how the interest rates 
on student loans are determined. Student loan interest rates are set in 
statute. The statutory rules have been changed numerous times 
throughout the history of the programs, including shifting between 
fixed interest rates and variable interest rate formulas. Since 2006, 
new Stafford loans have carried a fixed interest rate of 6.8%. The rate 
on subsidized loans is fixed at 3.4%, but that rate is scheduled to 
increase to 6.8% for loans made on or after July 1, 2013. The rates on 
other types of loans also are fixed in legislation.
    The current practice of setting fixed interest rates that extend 
many years into the future--rather than linking them by formula to 
prevailing market interest rate conditions--has adverse consequences 
for students, for taxpayers, and for the stability and control of 
budgetary costs.
     For students, the current policy creates large swings in 
the value of government assistance from year to year. Similar students 
that attend the same school but in different years receive very 
different amounts of support: Subsidies will be small when market 
interest rates are low and large when rates are high. As well as 
raising fairness concerns, the volatility makes it more difficult for 
prospective students to assess the affordability of pursuing a higher 
education.
     At the same time, the variability in year-to-year 
subsidies creates potentially large and uncertain liabilities for 
taxpayers.
     From a budgeting and control perspective, the uncertain 
size and volatility of subsidies over time is detrimental to budgetary 
planning, and it has the effect of reducing the control that Congress 
exercises over the allocation of scarce budgetary resources.
    The volatility in federal subsidies caused by fixing the interest 
rates on student loans is illustrated in Table 1, which shows the 
subsidy rates estimated by OMB for loans originated between 2006 and 
2011. The pattern of sharply lower subsidies starting in 2009 reflects 
that the rates charged to students remained constant even as Treasury 
interest rates fell to historically low levels.



    Adopting the alternative of market-indexed rates would reduce the 
volatility of subsidies for borrowers and taxpayers, and also help to 
stabilize the budgetary costs of the programs. Under that approach, the 
interest rate charged on new loans each year would be linked to a 
market rate, for instance, to a Treasury security with a similar 
duration to the student loans. The interest rates could still be fixed 
over the life of each individual loan, but that fixed rate would change 
year to year.
    The notion that allowing interest rates to vary with market 
conditions would create greater stability and fairness than fixing 
interest rates by statute may at first seem unintuitive. However, 
market-linked interest rates can be beneficial because they result in 
more stable real (or inflation-adjusted) loan payments. High nominal 
interest rates generally coincide with periods of high expected 
inflation rates. Market rates increase with inflation because investors 
need more compensation just to maintain the purchasing power of the 
loan repayments they receive. Wages also grow more quickly during 
periods of higher inflation, making higher nominal payments more 
affordable to borrowers. Furthermore, low nominal interest rates tend 
to be a symptom of a weak economy and job market, as is the situation 
today. Fixing the interest rate by law tends to shrink government 
subsidies at just those times when students would benefit from them 
most.
    With market-indexed interest rates, the generosity of subsidies 
could be controlled by choosing an appropriate ``interest rate 
spread''--a number which could be specified in legislation in place of 
a fixed interest rate. For example, Stafford borrowers could be charged 
a 3 percent spread over the 10-year Treasury bond rate (which would 
translate to an interest rate of 5 percent under current interest rate 
conditions of 10-year rates at about 2 percent). Lower rate spreads 
could be specified for subsidized loans.
    If rates are indexed, policymakers may want to protect borrowers 
from unusually high interest rate conditions by setting an interest 
rate cap that limits the maximum rate charged. For example, the cap on 
consolidation loans is currently 8.25%. However, the lower is the cap 
that is chosen, the higher the cost and volatility that would be 
reintroduced. It is worth noting that even without a cap, borrowers 
would have some protection against unusually high interest rates 
because student loans can be prepaid without penalty.

Fair Value Accounting for Costs
    Because of the way student loans are budgeted for, indexing student 
loan interest rates would have the effect of lowering the volatility of 
their budgetary costs over time. Specifically, under the Federal Credit 
Reform Act of 1990 (or FCRA), credit programs are budgeted for on an 
accrual basis that records the lifetime cost of the loans disbursed 
each year. Specifically, costs are calculated by discounting to the 
present the expected cash flows over the life of the loan using 
current, maturity-matched, Treasury interest rates as the discount 
factors.
    With interest rates on student loans that are fixed by statute, 
when Treasury rates go up the value of projected future payments fall 
and the budgetary cost of the loans increases; and conversely when 
market rates fall. Indexing the interest rates on student loans would 
largely eliminate that source of volatility. (Subsidies would still 
vary over time with changes in projected default rates, program 
participation, and other factors.)
    The move to accrual accounting for federal credit represented a 
significant improvement over the cash accounting that preceded it in 
terms of accuracy and transparency. The use of Treasury rates as 
discount factors, however, fails to account for the full costs of the 
risks associated with government credit assistance. Those costs must 
ultimately be borne by taxpayers, just as they must be borne by the 
equity holders (owners) of private lenders that make private loans.
    A consequence of that incomplete accounting for risk is that in 
recent years student loans have appeared to be quite profitable for the 
government. For example, OMB reported that the government earned 14 
cents per dollar on student loans made in 2011, even though the rates 
charged were significantly lower than those offered by private lenders, 
and despite the heightened risk of defaults caused by the still weak 
job market.
    A policy change that could alleviate the understatement of costs in 
the budget and increase transparency would be to replace FCRA subsidy 
costs with so-called ``fair'' or market-based cost estimates in the 
budget. That change would eliminate the artificial appearance that the 
student loan programs are highly profitable for the government. To 
illustrate, Table 2 reproduces CBO's 2010 estimates of the hypothetical 
effect of switching from FCRA to fair-value estimates of program cost.



    As well as improving transparency about program costs, moving to 
fair value estimates would have the salutary effect of putting credit 
and non-credit assistance to students on a more level playing field in 
the budgetary process. In particular, the budgetary disadvantage of 
offering Pell grants as compared to student loans would be reduced by 
using a more comprehensive approach to estimating of the cost of credit 
assistance.

Income-Based Repayments
    Proposals have been put forward to move to a more income-based 
repayment system, under which borrowers' payments would depend on their 
earnings after they graduate. Such policies would benefit students in 
several ways: It would help them avoid unmanageable debt levels, and it 
would make it easier to pursue careers in lower paying fields such as 
the military, public service, or teaching. It could be especially 
beneficial to low-income students whose prospects after graduation are 
less predictable and who are therefore more wary of taking on debt.
    The costs and risks to the government of an income-based repayment 
scheme would depend critically on the details of how the policy is 
structured. In principle it would be possible to set up the system in a 
way that did not increase overall program costs. However, because the 
savings that would be anticipated from lower default rates are unlikely 
to fully make up for the higher costs associated with reducing or 
extending the payments of students who get relief but would not have 
defaulted under the old system, overall costs would tend to be higher 
unless the average interest rates charged were also increased.

Restructure the Consolidation Option
    Finally, modifying the consolidation option to eliminate borrowers' 
ability to convert a floating rate loan to a fixed rate loan with the 
same interest rate could potentially save the government a significant 
amount of money in the event that Congress ever decides to return to 
fully floating interest rates. My academic work on the consolidation 
option suggests that between 1998 and 2005, a period when student loans 
carried a variable interest rate tied to 3-month Treasury rates, the 
cumulative cost of consolidation to the government was about $27 
billion.\1\ The greatest benefits accrue to cohorts who happen to 
graduate when interest rate conditions are favorable to consolidation, 
to professional students with the largest loan balances, and to 
borrowers with the sophistication to manage their loans efficiently. As 
such, the option is unlikely to be an efficient way to subsidize higher 
education. The benefits of allowing students to combine all their loans 
into a single loan could be preserved, but the costs of consolidation 
reduced, by charging a rate on floating-to-fixed conversions that is 
linked to a current long-term Treasury rate.
---------------------------------------------------------------------------
    \1\ Deborah Lucas and Damien Moore, ``The Student Loan 
Consolidation Option,'' manuscript, MIT, January 2013.
---------------------------------------------------------------------------
                                 ______
                                 
    Chairman Kline. Thank you.
    Mr. Delisle, you are recognized for 5 minutes.

 STATEMENT OF JASON DELISLE, DIRECTOR OF THE FEDERAL EDUCATION 
           BUDGET PROJECT, THE NEW AMERICA FOUNDATION

    Mr. Delisle. Thank you Chairman Kline, Ranking Member 
Miller, and committee members. Thank you for inviting me to 
testify about the need to improve the federal student loan 
program.
    If there is one thing recent debates about federal student 
loans have demonstrated is that Congress needs to develop a 
rational, long-term plan for setting interest rates.
    Currently, the program charges borrowers the same fixed 
interest rates no matter what happens to other interest rates 
in the economy, and the rates are arbitrary.
    Congress wrote them into law back in 2002, and with the 
exception of an arbitrary cut to 3.4 percent on some loans, 
those rates have been in law ever since.
    There are a lot of problems with picking a fixed rate that 
looks about right for the time being and then deciding to cut 
it in half on some loans some of the time when market or 
political conditions might warrant it. That approach, as you 
are all aware, makes rate adjustments in either direction very 
difficult to legislate.
    An upward adjustment is politically unpopular and a 
downward adjustment is prohibitively costly to taxpayers.
    Here is what I believe is a better approach. Set a fixed 
interest rate for newly issued student loans based on the rate 
on the 10-year treasury notes time the loans are issued plus 
three percentage points.
    That formula would set rates low enough to provide a 
subsidy to borrowers. That is, the terms will be better than 
those in the market all the time, but the rates will be high 
enough to partially offset the cost of the program. Rates would 
still be fixed and borrowers would receive lower rates when 
rates are low and higher rates when rates are high.
    On loans issued this coming school year under this approach 
would carry a fixed rate of 4.9 percent, lower than the current 
6.8 percent rate on the most widely available federal student 
loans. What is more, the rate would be available to all 
undergraduate and graduate students, unlike an extension of the 
3.4 percent rate.
    Now of course, under this formula, the rate on loans issued 
in subsequent years could be higher or lower than today's 
rates. The Congressional Budget Office projects that long-term 
interest rates will eventually rise, but this is also why the 
budget office shows that the proposal I have recommended does 
not score as a cost over a 10-year window; although there would 
be costs in the first 5.
    Now student aid advocates in some policymakers worry that a 
rate-setting formula like the one I have recommended could make 
loans unaffordable for borrowers should interest rates increase 
significantly.
    They suggest capping the rate, yet a cap would be costly 
for taxpayers and it would reintroduce an arbitrary interest 
rate back into the program. More importantly, a cap would be 
redundant. The federal student loan program already includes a 
built in interest rate cap and it is targeted only to borrowers 
who need it. It is called income-based repayment, or Pay-As-
You-Earn.
    Under these programs, borrowers make monthly payments based 
on their incomes, not the interest rates on their loans. 
Moreover, the loan terms are fixed at 10 or 20 years through 
loan forgiveness so that a borrower with a high interest loan 
would have his debt forgiven before the rate influences 
payments provided he qualified for the assistance based on his 
income.
    An IBR is an even more effective interest rate cap thanks 
to the large new benefits that the Obama administration has 
added to the program.
    Now I should note that my colleague, Alex Holt, and I have 
identified some significant flaws in those new benefits. Our 
ongoing analysis shows that that graduate and professional 
students face a clear and obvious incentive to borrow more 
rather than less.
    These students can easily accumulate loan balances where 
they will bear no incremental cost in borrowing an additional 
dollar. The added debt and interest will be forgiven under IBR.
    So using a very plausible income scenario, we find that 
once a borrower takes on about $65,000 in debt, he bears none 
of the incremental costs of borrowing an additional dollar 
under the new IBR even if he goes on to earn over $100,000 for 
most of his repayment term.
    If he expects to pursue a career in the nonprofit sector, 
he bears none of the incremental cost of borrowing an 
additional dollar once he reaches $49,000 in debt.
    In other words, the message that this program sends to 
graduate students is keep borrowing. The message it sends to 
schools is expand your graduate programs, start new ones, and 
charge more. These are very bad messages to send.
    Fortunately, Congress and the administration can address 
this problem without rolling back all of the new benefits that 
IBR and Pay-As-You-Earn provide and I have included those 
recommendations in my written testimony.
    So to wrap up today, I want to reiterate that Congress 
should set student loan interest rates based on a formula like 
the one I outlined and let a modified, income-based repayment 
program cap the interest rate for borrowers who truly need the 
assistance, but remember to address the perverse incentives and 
unnecessary benefits that IBR now provides to graduate and 
professional students.
    Thank you. I look forward to answering any questions that 
you may have.
    [The statement of Mr. Delisle follows:]

             Prepared Statement of Jason Delisle, Director,
        Federal Education Budget Project, New America Foundation

    Chairman Kline, Ranking Member Miller, and committee members, thank 
you for inviting me to testify about the need to improve the federal 
student loan program.
    My colleagues in the New America Foundation's Education Policy 
Program and I have developed a set of recommendations that we believe 
will improve the federal student loan programs to the benefit of 
students and taxpayers. These recommendations were first published in 
two New America Foundation papers, Safety Net or Windfall? Examining 
Changes to Income-Based Repayment for Federal Student Loans (October 
2012) and Rebalancing Resources and Incentives in Federal Student Aid 
(January 2013). Those recommendations are discussed briefly below.
    At the end of this testimony is a brief explanation of the series 
of events that led Congress to enact the current interest rate 
structure on federal student loans. That information may be helpful to 
the Committee as it considers changes to student loan interest rates.
The Case for Reforming Federal Student Loans
     The federal student loan program is extremely complex, 
offering students and their families a variety of choices, with each 
carrying different congressionally set interest rates and borrowing 
limits. Borrowers also face a baffling array of repayment options. 
Benefits often overlap, which lead to unintended interactive effects.
     Graduate students and the parents of undergraduates can 
take out loans up to the full cost of attendance. This encourages and 
enables imprudent borrowing, and also makes it easier for colleges and 
universities to raise their prices with impunity.
     The benefits of the loan program are poorly targeted. The 
programs provide generous federal subsidies to some students based on 
their incomes before they enroll in school, rather than after they 
graduate, which is when they actually pay their loans back. Students 
are also charged the same interest rates regardless of changes in 
market interest rates, such that students are provided different levels 
of subsidies from year to year for no particular reason. Recent changes 
to the Income-Based Repayment plan provide the largest benefits to 
those who borrow most, particularly graduate students, even if they 
earn a high income.
     The program does not provide enough incentives for 
students to make steady progress and complete a credential on time. In 
some cases, it does the opposite.

Recommended Reforms

            Address Flaws in the IBR Program and Make it the Sole 
                    Repayment Option for Borrowers

    A simpler federal loan program with better targeted benefits should 
offer a single repayment plan that is similar to both the Pay-As-You-
Earn plan that the U.S. Department of Education recently enacted (which 
itself is meant to mimic a plan in statute set to take effect in 2014 
and is referenced throughout this testimony as ``new IBR'') and the 
Income-Based Repayment plan that was enacted in 2007 (referenced 
throughout this testimony as ``old IBR'').\1\ This sole repayment plan 
must incorporate changes to the current system to ensure that it does 
not provide windfall benefits to higher income borrowers who have the 
means to repay their debt or indemnify high tuitions and over-
borrowing. Those recommended changes are the following:
     Recommendation #1: Maintain the lower payment calculation 
(10 percent of AGI) in New IBR, but only for borrowers with AGIs at or 
below 300 percent of the federal poverty guidelines ($33,510 for a 
household size of one). Borrowers with AGIs above 300 percent will pay 
according to the Old IBR formula (15 percent of AGI).
    Justification: This change targets the benefits of lower monthly 
payments under New IBR to lower-income borrowers only. Borrowers 
earning more, while still eligible for IBR, must make payments based on 
the Old IBR formula. Additionally, by requiring borrowers with incomes 
above 300 percent of the federal poverty guidelines to make monthly 
payments based on 15 percent of their AGIs, it is much less likely that 
high-income borrowers will receive loan forgiveness. It also allows 
borrowers with lower incomes to benefit from the 10 percent rate that 
New IBR offers, but ensures that they will repay those benefits by 
paying at a higher rate if their incomes increase later.
    Lastly, those borrowers with AGIs above 300 percent of the poverty 
guidelines will likely have total incomes that are markedly higher than 
their AGIs because they are able to make pre-tax benefit payments, 
contribute to retirement savings, and take larger above-the-line 
deductions. Imposing a higher payment calculation (15 percent of AGI) 
on these borrowers compensates for their significantly lower AGIs 
relative to their total salaries.
     Recommendation #2: Maintain the loan forgiveness threshold 
from New IBR (20 years), but only for borrowers whose loan balances 
when they entered repayment do not exceed $40,000. Borrowers with 
higher initial balances would qualify for loan forgiveness after 25 
years of repayment, the same as under Old IBR.
    Justification: Like the first recommendation, this proposal would 
maintain the more generous benefits of New IBR, but not for all 
borrowers. A two-tiered loan forgiveness system based on initial debt 
levels would keep the 20-year loan forgiveness targeted toward 
borrowers who have debt from undergraduate studies or moderate amounts 
of debt from graduate studies and who struggle to repay. By creating a 
longer loan forgiveness threshold for borrowers with debt levels above 
$40,000, this recommendation also reduces the tendency that New IBR has 
to provide loan forgiveness to high-income, high-debt borrowers when 
they are most able to make higher payments on their loans for a total 
of 25 years. This two-tiered approach would discourage graduate and 
professional schools that charge high tuitions and their students who 
borrow federal loans from using IBR as an indemnification tool.
     Recommendation #3: Eliminate the maximum payment cap. 
Borrowers must always pay based on the IBR income formulas, no matter 
how high their incomes are. Additionally, borrowers may not opt to 
enroll in another repayment plan.\2\
    Justification: The maximum payment cap targets IBR benefits to 
higher-income borrowers either by reducing their monthly payments, 
increasing the amount of loan forgiveness they receive, or both. It can 
also increase the chances that a borrower earning a very high income 
(over $200,000) would qualify for loan forgiveness. Lastly, requiring 
that borrowers stay in IBR for the duration of their repayment term 
will ensure that borrowers who benefited from IBR when their incomes 
were low will pay commensurately higher payments should their incomes 
increase--this helps offset some of the initial costs the government 
incurred when the borrowers benefitted from low payments while their 
incomes were lower.
     Recommendation #4: The U.S. Department of Education and 
policymakers should be forthcoming about the negative consequences 
borrowers may face when repaying through IBR. The Department should 
provide borrowers with illustrative examples of how paying off their 
loans more slowly could increase what they pay and provide clear 
warnings. Private companies servicing federal student loans should 
clearly indicate to borrowers how much interest accrues on their loans 
when they repay through IBR and how that is likely to increase the 
repayment term and total interest costs they will pay.
    Justification: IBR entails some financial risks for borrowers 
(those risks exist for Old IBR, though New IBR entails far less 
financial risk for borrowers with debt levels that exceed $20,000). 
Borrowers may save little per month under IBR and end up paying more 
and for longer due to the added interest costs. Borrowers do make a 
trade-off in paying a minimum monthly payment under IBR over electing 
to make pre-payments, and loan servicers and the U.S. Department of 
Education should ensure that borrowers are informed of those trade-
offs.
     Recommendation #5: IBR payments for a borrower who is 
married but files a separate income tax return should be based on the 
household's combined AGI. The program currently allows borrowers to 
file separate income tax returns and use only the borrower's income to 
calculate payments under IBR. This policy should include an exception 
for cases where both spouses are making payments on federal student 
loans under IBR. In that case, each borrower's loan payments should be 
based on one-half of household income.
    Justification: Married borrowers with low individual, but high 
household incomes can still qualify for IBR (including loan 
forgiveness) by filing a separate income tax return. If these borrowers 
also have children, they can significantly increase the benefits they 
earn under IBR by designating the children as dependents on their 
annual IBR application since it increases their household size and the 
poverty exemption they receive under IBR. This provision is another way 
in which higher-income borrowers (based on household income) can 
qualify for generous benefits under IBR. Ending this provision will 
ensure that the program's benefits are targeted to borrowers who need 
the most assistance. The exception for couples in which each spouse is 
repaying a federal student loan will ensure that borrowers in a two-
borrower household do not each have to make payments on their loans on 
their combined incomes--which would essentially be double-counting 
their incomes.
     Recommendation #6: Make loan forgiveness tax-free using 
budgetary savings that arise from the other recommendations outlined 
above.
    Justification: Federal tax law treats loan forgiveness under IBR 
(except when provided for public service employees) as taxable income. 
Borrowers who receive loan forgiveness (under an IBR that reflects the 
recommendations outlined here) will likely have experienced some degree 
of financial hardship. Therefore, they are also likely to struggle with 
what could be a relatively large tax bill in the year they receive loan 
forgiveness. If IBR is meant to aid this type of borrower, then it 
should not impose its own type of financial burden on them.
     Recommendation #7: Allow all current borrowers to enroll 
in an IBR that reflects these recommendations. Do not limit it to new 
borrowers and new loans.
    Justification: Old IBR is available to all borrowers, but Congress 
and the Obama administration have limited access to New IBR to more 
recent borrowers to reduce the cost of the program. The recommendations 
outlined above would preserve some of the benefits of New IBR, but 
target them to those borrowers with more financial need, thereby 
reducing the cost. The recommendations would further reduce costs by 
limiting benefits to higher-income borrowers compared to even Old IBR. 
Therefore, policymakers could open the program to all borrowers at 
little or no incremental cost to taxpayers, and a greater number of 
borrowers would gain access to lower repayments and earlier loan 
forgiveness.
     Recommendation #8: Ensure that loan servicers have the 
requisite income information from borrowers when they begin repaying 
their loans. Require borrowers to agree in their promissory notes to 
allow their loan servicers and the U.S. Department of Education to 
access necessary information from their most recent federal income tax 
return.
    Justification: The main impediment to making IBR the automatic and 
only repayment plan for all new borrowers is that borrowers must first 
submit information to loan servicers before their monthly payment can 
be calculated and billed. Requiring that borrowers authorize the U.S. 
Department of Education to access the necessary information from their 
tax returns upon signing a promissory note for a federal student loan 
will ensure that the loan servicer can calculate a borrower's payment 
without the borrower having to first submit information.

Repayment Tables for Two Borrowers Under Different Repayment Plans
    The tables below are excerpted from Safety Net or Windfall? 
Examining Changes to Income-Based Repayment for Federal Student 
Loans.\3\







    Figures for the recommended IBR changes reflect all proposed 
changes listed in this testimony except that borrower income does not 
reflect household income. All borrowers file separate federal income 
tax returns and designate any children that they have as dependents. 
The interest rate for all repayment plans is the rate the borrower 
would pay under the consolidation plan, which is the weighted average 
rate rounded to the nearest one-eighth of one percent.

End the Subsidized Stafford Interest Rate Benefit
    Since the passage of the Higher Education Amendments of 1992, all 
undergraduate borrowers have been able to take out federal Stafford 
loans regardless of income or other need-based tests, at terms that 
have been generally more favorable than those in the private market.\4\ 
Prior to the enactment of that policy, the federal loan program allowed 
only financially needy students to borrow.\5\ These loans had always 
included an interest-free benefit under which the loan would not accrue 
interest while the borrower was in school. However, when policymakers 
opened up the federal student loan program to borrowers of all income 
backgrounds in 1992, they maintained the interest-free benefit for 
borrowers who met a needs analysis test that accounted for the cost of 
attendance at students' institutions, but did not provide a similar 
benefit for other borrowers. That interest-free benefit remains the 
distinction between the two loan types that still exist in today's 
program: Subsidized Stafford loans and Unsubsidized Stafford loans.
    In other words, Subsidized Stafford loans were not created to 
provide benefits over and above those on Unsubsidized Stafford loans. 
Rather, it is a benefit that was always provided as part of the federal 
student loan program. The Subsidized and Unsubsidized Stafford loan 
distinction remains current policy mainly due to historical 
circumstances. That fact is made clearer by some of the policy's 
shortcomings and how it interacts with the myriad changes policymakers 
have made to the student loan programs in recent years.
    In fact, Subsidized Stafford loans do not always provide the 
greatest benefits to the lowest-income students. Subsidized Stafford 
loans are awarded to borrowers in part according to the cost of 
attendance of their schools. That means a borrower with a high-family 
income will be eligible for the loans if he attends the most expensive 
type of institution, while a similarly situated borrower who opts to 
attend a low-cost institution will qualify only for Unsubsidized 
Stafford loans. This is why, in spite of income and assets tests 
targeting the aid to lower income families, 12 percent of borrowers who 
receive Subsidized Stafford loans come from families earning over 
$100,000 per year.
    Furthermore, the Income-Based Repayment Plan better aligns 
repayment with a borrower's ability to repay, whereas Subsidized 
Stafford loans are provided to borrowers based largely on their family 
income when they enter school. For example, borrowers with Unsubsidized 
Stafford loans begin repayment with higher loan balances than students 
with Subsidized Stafford loans (assuming everything else is equal) 
because interest has accrued on the loan. Under IBR, the higher loan 
balance does not necessarily mean the borrower will pay more than if he 
had a lower loan balance--monthly payments are based on a borrower's 
income, not loan balance. Therefore a borrower who earns a persistently 
low income over his repayment term would make the same payments 
regardless of the size of his initial loan balance. Only borrowers with 
higher incomes in repayment stand to gain from Subsidized Stafford 
loans.\6\
    The Obama administration recommended in 2011 that graduate students 
be eliminated from the Subsidized Stafford program going forward, and 
Congress acted on that policy, redirecting the budgetary resources to 
the Pell Grant program. The administration noted that, in addition to 
the Income-Based Repayment option available to graduate and 
professional students, ``eligibility for the interest subsidy is based 
on `ability-to-pay' at the time of enrollment, but the borrower 
realizes the benefit later--typically years later--in the form of lower 
loan payments after leaving school.''\7\ The administration also argued 
that government aid should be targeted to the highest-need students.\8\ 
All of those arguments apply to the case for eliminating the Subsidized 
Stafford loan interest-free benefit for undergraduate students, 
particularly if IBR is the only repayment option for borrowers.

Create a Fixed Formula for Setting Student Loan Interest Rates
    Interest rates on federal student loans are arbitrary and 
inflexible because Congress set the rates as nominal figures in law 
based on what would have been a subsidized interest rate in the year 
2001.\9\ They are not based on any formula, nor do they bear any 
relation to changes in related interest rates in the market since then. 
The rate on all newly-issued Unsubsidized Stafford loans as of 2006 is 
6.8 percent, and under current law will remain so in perpetuity.
    The effect of such a policy is to provide very different levels of 
subsidies to borrowers depending on when they take out their loans. The 
subsidy on loans issued at the 6.8 percent interest rate in 2007 when 
the economy was booming and interest rates were relatively high was 
much larger than the subsidy provided to students in today's low-
interest rate, slow-growth economy. That means students receive larger 
subsidies when they are least needed; the policy is both inefficient 
and unfair. In fact, the Congressional Budget Office estimates that the 
loans issued in fiscal year 2013 will not provide any subsidies 
(meaning the terms provide no value over loans in the private market) 
to the vast majority of borrowers.\10\ This will be the first time that 
federal student loans provide no subsidy, based on fair-value 
estimates.
    A better policy would be to set interest rates on all newly-issued 
federal student loans at 3.0 percent, plus a markup equal to long-term 
U.S. Treasury borrowing rates. The fixed rate of 3.0 percent would 
ensure that the government partially covers the costs of making the 
loans (i.e. administrative costs and costs associated with defaults, 
collections, and delinquencies), and the markup would allow the loan 
rates to adjust based on long-term interest rates. The interest rates 
charged to borrowers would still be fixed for the life of the loan, but 
the rate for new loans would change each year based on the market rates 
for 10-year Treasury notes.
    Under that formula, the interest rate for federal loans issued for 
the 2012-13 school year would be about 4.9 percent, a big drop from the 
6.8 percent rate that is currently charged on Unsubsidized Stafford 
loans. That rate would be available on all newly issued Stafford loans 
to undergraduate and graduate borrowers.
    Because the rate offered on newly-issued loans would adjust 
annually, it could be higher in future years. However, Income-Based 
Repayment on federal student loans, coupled with loan forgiveness after 
20 or 25 years in repayment, ensures that the rate a borrower pays 
cannot rise to unaffordable levels regardless of the loan's nominal 
rate. It also ensures that borrowers earning higher incomes, those who 
are most able to pay, are the only ones who could face higher interest 
rates under the policy. Income-Based Repayment is effectively an 
income-based interest rate cap that provides benefits to borrowers 
based on need, but it determines the cap in repayment, rather than at 
the time of enrollment.

How IBR Works as an Interest Rate Cap
    The following scenarios were developed using the New America 
Foundation IBR calculator.\11\
    Consider someone with $45,000 in debt from undergraduate and 
graduate studies who works in the government/non-profit sector and 
earns a starting salary of $38,000 (AGI of $34,200) with a four percent 
annual raise. At an interest rate of 4.9 percent, she pays a total of 
$22,281 on her loans over 10 years, and then the remaining balance is 
forgiven under Public Service Loan Forgiveness. At an interest rate of 
12 percent she still pays $22,281 and the remaining balance is 
forgiven. Even if her interest rate were 0.0 percent, her total 
payments would still be $22,281.
    What if the same person worked in the for-profit sector and 
therefore qualifies for loan forgiveness after 20 years of payments 
instead of 10? At an interest rate of 4.9 percent, her total payments 
over 20 years are $58,998, and she has some remaining debt forgiven. 
Increase her interest rate to 12 percent and her total payments are 
still $58,998. IBR has capped her payments--and the interest rate on 
her loan--because her income is not high enough for the interest rate 
to matter.
    As another example, consider a borrower with undergraduate debt of 
$28,000, who works in the for-profit sector, with a starting income of 
$29,000 (AGI of $26,100) and an annual increase of three percent. She 
would pay $27,228 on her loans over 20 years at an interest rate of 2 
percent, 5 percent, or 25 percent. Her monthly payments over that time 
would be no higher or lower under any of those interest rates.
    Under IBR, only borrowers with higher incomes would be affected by 
higher interest rates. But the program still provides a cap even for 
these borrowers, albeit a higher cap. Moreover, monthly payments are 
still based on income; only the length of payment is affected by the 
interest rate. And high-income borrowers who work for the government or 
non-profit organizations fare even better, because they qualify for 10-
year loan forgiveness.
    Imagine a borrower with $40,000 in debt and a starting salary of 
$50,000 (AGI $45,000), who receives an annual raise of four percent. If 
she works for a non-profit employer, the interest rate on her loan is 
irrelevant. She will pay $35,247 before her remaining debt is forgiven 
(after 10 years of payments) whether the interest rate is 2 percent, 6 
percent or 12 percent. However, if she works for a for-profit employer, 
her higher income means she will pay for longer if the interest rate is 
higher. But if the rate is 8 percent or higher, she won't pay all of 
the extra costs. Instead, she will have much of it forgiven once she 
reaches 20 years of payments.

Set One Loan Limit for All Undergraduates, Irrespective of Their 
        Dependency Status
    Policymakers should simplify the federal loan program by 
eliminating the distinction between dependent and independent 
undergraduates and allowing both types of students to borrow the same 
amount of loans. Under the New America Foundation proposal, the annual 
limits for all undergraduates would be $6,000 for a first year student, 
$7,000 for a second-year student, and $9,000 for a third-, fourth-, or 
fifth-year student. The aggregate limit for undergraduates would be 
$40,000.
    These proposed limits are higher than dependent undergraduates can 
currently borrow on their own but less than independent undergraduates 
can take out. This increase is appropriate due to our proposed 
elimination of Parent PLUS loans, which is outlined later in this 
document, and the fact that current loan limits for independent 
students can lead to excessive amounts of debt. As of now, an 
independent undergraduate student who borrows the maximum in federal 
loans would begin repayment with a principal and interest balance of 
approximately $74,000, an amount that would require $486 monthly 
payments over 30 years to repay under the currently available repayment 
plans.

End Grad PLUS, but Increase Stafford Loan Limits for Graduate Students
    Policymakers should end the Grad PLUS loan program. This program 
allows graduate and professional students to borrow up to the full cost 
of attendance at an institution of higher education, with no time or 
aggregate limit. Such a policy, especially when coupled with loan 
forgiveness and Income-Based Repayment, can discourage prudent pricing 
on the part of institutions and prudent borrowing by students. However, 
policymakers should increase the annual limit on Unsubsidized Stafford 
loans for graduate students from the current $20,500 to $25,500 to 
replace some of the borrowing ability graduate students will lose when 
the Grad PLUS loan program is eliminated.
    If institutions can no longer rely on PLUS loans to fund their 
high-tuition programs and if the private market is responsive to the 
ability of borrowers to repay, then graduate schools may have to set 
their pricing based, in part, on students' expected earnings. Since 
those in graduate school already have an undergraduate degree and are 
preparing for a profession, it is more reasonable to expect that loans 
above the Stafford limits be based on prospective ability to repay. 
Underwriters will likely focus most intently on institutional 
characteristics to determine risk. Consequently, programs that poorly 
prepare students to repay their debts will find that their students 
cannot access much credit in the private market, which should change 
institutional behavior in terms of quality and pricing.

End Parent PLUS Loans
    In addition to ending the Grad PLUS loan program, policymakers 
should eliminate the Parent PLUS loan program. As the cost of attending 
college has soared, so too have Parent PLUS loan disbursements. 
According to a recent article in The Chronicle of Higher Education, the 
government issued $10.6 billion of Parent PLUS loans to approximately 
one million families last year.\12\ That is nearly double the numbers 
of borrowers and an increase of $6.3 billion over the past decade 
alone. Many colleges use these loans when packaging financial aid to 
fill large gaps in financial aid awards.
    Parents can borrow up to the cost of attendance at the schools 
their children attend, which means families can easily over-borrow, and 
institutions have an easy source of funds if they wish to raise 
tuition. Moreover, the federal government does not track or publish the 
rate at which parents default on PLUS loans at each institution. 
Lastly, the loans carry a relatively high fixed interest rate of 7.9 
percent and origination fee of four percent, which can pose a financial 
risk to vulnerable families; and the loans are not eligible for 
repayment options designed to help struggling borrowers, like Income-
Based Repayment.

Limit Loans to 150% of Program Length
    The package of student aid reforms presented here proposes both 
annual and aggregate limits for federal student loans and gives 
colleges the flexibility to adopt lower limits for their students. We 
also believe that policymakers should add a new program-length limit 
that would apply in addition to the annual and aggregate limits. The 
new limit would end loan eligibility once a borrower exceeds 150 
percent of the standard time needed to complete the degree or program 
that he is pursuing. For instance, a student who borrows $5,000 per 
year over six years to complete a four-year degree would, under this 
proposal, exhaust his eligibility for federal student loans, even 
though he did not exceed the annual or aggregate borrowing limit. This 
policy is meant to discourage extended and prolonged enrollments beyond 
150 percent of the time the student would need to complete his or her 
program.
    The policy would leave in place the annual limit and aggregate 
limit on borrowing for students who may begin one type of program but 
switch to another. In other words, the 150 percent time limit would 
start over when the student enrolls in a new program, but the overall 
aggregate and annual limits would still apply. Meanwhile, time spent in 
remedial education would not count toward the 150 percent program-
length limit. The proposal would also prorate annual loan limits if a 
student pursues his or her program on a half-time basis.

History of Federal Student Loan Interest Rates
            Why the Federal Student Loan Interest Rate Is 6.8 Percent
    Since the 1960s, the federal government has supported a loan 
program that helps students pay for the cost of higher education at 
institutions across the country. While the program has undergone many 
changes and evolved to provide loans to students from all income 
backgrounds, its original purpose remains. The program ensures that 
students can borrow at favorable terms without regard to their credit 
histories, incomes, assets, or fields of study.\13\ In 2013, students 
and parents are expected to borrow $106 billion in federal loans, and 
over $800 billion in federal student loans were outstanding in 
2011.\14\
    From the program's inception until 1992, Congress set the interest 
rate on student loans at fixed rates ranging from 6.0 percent for loans 
issued in the 1960s to 10.0 percent for loans issued between 1988 and 
1992.\15\ Congress enacted variable rates in 1992, seeking to better 
align them with the interest rate the government paid private lenders 
holding the loans and thereby reduce the government's costs.\16\ The 
new variable rates reset once a year and consist of the interest rate 
on short-term U.S. Treasury securities plus 3.1 percentage points (a 
``markup''), capped at 9.0 percent. Congress made minor adjustments to 
this formula over the subsequent six years, lowering the markup and the 
cap.
    Shortly after the move to variable rates, in 1993 Congress passed 
the Student Loan Reform Act to establish the Direct Loan program.\17\ 
Congress intended this program, under which the U.S. Department of 
Education makes loans directly to students, to gradually replace the 
existing program that subsidized private lenders to make loans (i.e., 
the bank-based program). At the time, policymakers also sought to more 
closely link the interest rates borrowers were charged to the rates the 
government paid to borrow since there would be no further need to link 
them to subsidies for private lenders.\18\ In response, the 1993 law 
pegged borrower rates to longer-term U.S. Treasury securities that were 
similar in duration to the student loans, plus a smaller markup of 1.0 
percentage point would be calculated for loans issued after July 1, 
1998.\19\ This formula would also be used to set the interest rate 
guaranteed to lenders for any loans still made in the bank-based 
program in 1998 and later.
    By the mid-1990s, the Direct Loan program phase-in had not gone as 
Congress had originally planned; as 1998 approached, the bank-based 
program still accounted for the majority of newly issued federal loans. 
However, the pending interest rate change for both borrowers and 
lenders enacted in 1993 was still set to occur in 1998. As a result, 
lenders in the bank-based program--who Congress assumed in 1993 would 
not be playing the major role they still were in 1998--expressed 
concerns that the interest rate change would increase their costs and 
reduce returns to such an extent that they would no longer be willing 
to make federally backed student loans.\20\
    Fearing that lenders would flee the program and disrupt loan 
availability, in 1998 Congress postponed the pending rate changes until 
2003 (a permanent fix was too costly) and left the then-current 
interest rate formulas in place with some minor adjustments (it reduced 
the markup on the borrower's annual interest rate from 3.1 to 2.3 
percentage points). Despite this action, lenders participating in the 
bank-based loan program continued to express worries over the interest 
rate structure change, now delayed until 2003. They encouraged Congress 
to address it before mid-2002 to avoid disrupting student loan 
availability.
    As an alternative to the pending rate change, lenders and some 
lawmakers proposed making permanent the then-current formulas (short-
term interest rates plus 2.3 percentage points). But student advocates 
and some lawmakers opposed this approach because the formula set to 
take effect in 2003 (variable rates based on longer-term U.S. Treasury 
rates plus 1.0 percentage point) produced more favorable rates for 
borrowers.\21\ At the time, short-term and long-term Treasury rates 
were similar, meaning that the lower markup built into the pending 
formula produced lower overall rates.
    In late 2001, after months of negotiations, lawmakers proposed a 
bipartisan compromise that would avert the pending rate change and make 
permanent the then-current interest rate formula for lenders. It also 
extended through 2006 the existing variable rate formula for borrowers 
but established fixed interest rates at 6.8 percent for Subsidized and 
Unsubsidized Stafford loans made after July 1, 2006.\22\
    Lawmakers, higher education associations, and student advocate 
organizations championed the bill because the fixed 6.8 percent 
interest rate that would start in 2006 was lower than estimates of what 
borrowers would pay if Congress had maintained the variable 
formula.\23\ In selecting a fixed rate, Congress and advocacy groups 
decided on 6.8 percent because it was approximately the average of the 
projected interest rates set to take effect in 2003 based on longer-
term U.S. Treasury bills.\24\ Supporters also cited the certainty that 
fixed rates provided over variable rates as a benefit to borrowers. The 
Senate passed the bill unanimously in December 2001, the House passed 
it with overwhelming support in January 2002, and the president signed 
it into law.
    Congress chose to delay the implementation of the fixed rates until 
2006--maintaining the existing variable rate formula in the meantime--
to reduce the costs of the policy over a ten-year budget window. The 
Congressional Budget Office estimated that adopting fixed rates would 
reduce the rates for borrowers compared to then-current law, increasing 
costs for the government by $5.2 billion from 2007-2011.\25\ It would 
have cost more if Congress had chosen to implement the change 
immediately.
    Meanwhile, in the latter half of 2001, the U.S. Federal Reserve was 
in the midst of reducing its short-term benchmark interest rate in 
response to a mild economic recession and the terrorist attacks of 
September 11th. By the time the ink was dry on the 2002 law that 
established the fixed 6.8 percent interest rate, the Federal Reserve 
had cut short-term interest rates below 2.0 percent. It had been as 
high as 6.5 percent in early 2001. Two more Federal Reserve rate cuts 
in 2002 and 2003 brought the rate to 1.25 percent and 1.0 percent, 
respectively. Given the low-interest-rate environment that began in 
2002, it appeared unlikely that a fixed 6.8 percent rate would lower 
costs for borrowers as supporters had previously argued.

A 2005 Effort to Block Fixed Rates Sets Stage for Temporary Rate Cut
    Despite the low interest rate environment of the mid-2000s, the 
fixed rates scheduled to take effect in 2006 received little attention 
until 2005, when Congress considered proposals to reduce annual budget 
deficits. That year, Republican majorities in the House and Senate 
began drafting legislation to cut spending and reduce budget deficits. 
Both chambers made changes to federal student loans a large component 
of their respective proposals, spurred by reforms outlined in the 
president's budget request.
    The House plan would have canceled the fixed interest rates set to 
take effect in 2006, maintaining the existing variable rate formula, 
which that year set rates between 3.4 and 5.3 percent.\26\ Sponsors of 
the proposal argued that variable rates would be better for borrowers 
and taxpayers. The Senate, however, maintained the fixed rates set to 
take effect in 2006.\27\
    To meet deficit reduction goals, both the House and Senate bills 
made a change to the interest rate guaranteed to lenders making 
federally backed student loans. The bills included a provision that 
required lenders to rebate interest that borrowers paid in excess of 
the rate at which the government guaranteed lenders.\28\ The provision 
cut spending compared to then-current law because it reduced what 
lenders could earn on the loans. However, the Senate bill had a larger 
deficit-reducing effect because it left the scheduled fixed rates in 
place, increasing the size of the lender rebates. The rebate provision 
produced $34.4 billion in savings over ten years in the Senate bill 
compared to $14.5 billion under the House's variable rate proposal.\29\
Why Interest Rates on Some Loans May Double This Year
    The president signed a final version of the deficit reduction bill 
into law in January 2006, which included the Senate's proposal to 
maintain the fixed rate formula and impose a rebate on lenders.\30\ 
Even though Congress enacted the fixed rates in 2002, some observers 
interpreted Congress' decision to maintain the rates as a Republican-
led Congress charging higher interest rates on student loans to reduce 
the deficit.
    In their 2006 campaign platform, A New Direction for America, House 
Democrats claimed that ``Congressional Republicans * * * have allowed 
student loan interest rates to increase, making student loans even 
harder to repay.'' The platform document promised to ``slash interest 
rates on college loans in half to 3.4 percent for students and to 4.25 
percent for parents,'' if Democrats were elected that fall.\31\
    After Democrats won majority control of both the House and Senate 
in 2006, the Congressional Budget Office revealed that the proposal was 
extremely costly, estimating that the rate cut proposal would cost $52 
billion and $133 billion over five and ten years, respectively, 
compared to then-current policy. The rate cut on PLUS loans for 
graduate students and parents accounted for about two-thirds of the 
cost.
    The high cost of the proposal did not bode well for the Democrats' 
campaign pledge because the newly elected majority had also pledged to 
follow Pay-As-You-Go budgeting principles to fully offset new spending 
with tax increases or other spending cuts. The Pay-As-You-Go principles 
meant that lawmakers would have to enact $132 billion in spending cuts 
over ten years (a substantial sum) within education or other programs, 
or raise taxes to offset the new spending in the rate cut proposal. In 
the end, lawmakers opted to scale back their original proposal to 
reduce the cost.
    Just weeks into the new session of Congress in January 2007, the 
new House Democratic majority passed a bill to cut interest rates in 
half, but with significant caveats.\32\ The bill cut rates in half only 
for a subset of loans--Subsidized Stafford loans--which are available 
only to borrowers from families with middle and lower incomes. While 
both graduate and undergraduate students had been eligible for 
Subsidized Stafford loans, only undergraduate students were eligible 
for the rate cut. The bill left rates unchanged for the largest loan 
category--Unsubsidized Stafford loans--as well as for PLUS loans for 
parents and graduate students, despite their inclusion in the campaign 
pledge. All new costs in the bill were offset with spending reductions 
on subsidies for lenders making federally-backed student loans, 
ensuring that the bill complied with Pay-As-You-Go principles.
    To further reduce the cost of the proposal, the bill phased in 
incremental rate cuts starting in the 2008-09 school year such that 
only loans issued for the 2011-12 school year would carry rates of 3.4 
percent (half of 6.8 percent). Subsidized Stafford loans issued after 
that year would again carry a fixed rate of 6.8 percent. In short, the 
proposed legislation ``cut interest rates in half'' for loans issued 
only in one year.
    The changes to the original proposal--limiting the cut to 
Subsidized Stafford loans for undergraduates, phasing it in, and ending 
it in 2012--reduced the cost to $7.1 billion in the ten-year budget 
window, much less than the earlier estimate for the permanent cut for 
all loan categories. Making the rate cut permanent for Subsidized 
Stafford loans for undergraduates after 2012 would have cost an 
additional $12.8 billion over ten years.\33\
    In September of 2007, both the House and Senate passed a budget 
bill that included the rate cut provision, and the president signed it 
into law.\34\ The first rate cut went into effect for Subsidized 
Stafford loans issued in the 2008-09 school year.
    Loans issued for the 2012-13 school year were originally set to 
carry a 6.8 percent interest rate, because the 2007 rate cuts would 
have expired. However, in 2012, President Obama included in his fiscal 
year 2013 budget request to Congress a proposal to extend the rate cut 
under the 2007 law for one additional year.\35\ Later that year, 
Congress passed and the president signed into law a one-year extension 
of the 3.4 percent interest for Subsidized Stafford loans issued to 
undergraduates during the 2012-13 school year.\36\ The extension was 
included on a broader piece of legislation that included provisions 
that the Congressional Budget Office estimated would offset the $6 
billion cost of the extension.\37\ One of those provisions was a 
limitation on a separate interest rate benefit available on Subsidized 
Stafford loans that the president had also included in his fiscal year 
2013 budget request.
    As it stands today under current law, all-newly issued Subsidized 
Stafford loans will be issued with a fixed interest rate of 6.8 percent 
on July 1st, 2013 and thereafter.

                                ENDNOTES

    \1\ PAYE: 77 Fed Reg. 66087, (November 1, 2012): http://
www.gpo.gov/fdsys/pkg/FR-2012-11-01/pdf/2012-26348.pdf. 2014 law: P.L. 
111-152 B2213. 2007 Law: College Cost Reduction and Access Act, Public 
Law 110-84 B203(c)(1), 110th Congress (September 27, 2007), Available: 
U.S. Government Printing Office, http://www.gpo.gov/fdsys/pkg/PLAW-
110publ84/pdf/PLAW-110publ84.pdf. The 2007 law set the effective date 
on and after which borrowers could enroll at July 1, 2009.
    \2\ The recommended IBR would capitalize a borrower's accrued 
unpaid interest once his payments under IBR exceed what he would be 
required to pay under the standard 10-year repayment plan based on his 
original loan balance. This is consistent with the practice currently 
under both Old and New IBR.
    \3\ Jason Delisle and Alex Holt, ``Safety Net or Windfall? 
Examining Changes to Income-Based Repayment for Federal Student 
Loans,'' New America Foundation (October 2012) http://newamerica.net/
publications/policy/safety--net--or--windfall
    \4\ P.L. 102-325.
    \5\ Cervantes, Angelica, Marlena Creusere, Robin McMillion, Carla 
McQueen, Matt Short, Matt Steiner, Jeff Webster, ``Opening the Doors to 
Higher Education: Perspectives on the Higher Education Act 40 Years 
Later,'' TG Research and Analytical Services (November 2005): http://
www.tgslc.org/pdf/hea--history.pdf.
    \6\ Delisle, Jason and Alex Holt, ``Subsidized Stafford Loans 
Obsolete and Regressive Due to New Income Based Repayment,'' Ed Money 
Watch (November 15, 2012): http://edmoney.newamerica.net/blogposts/
2012/subsidized--stafford--loans--obsolete--and--regressive--due--to--
new--income--based--repayment-7.
    \7\ ``FY 2012 Justifications of Appropriations Estimates to 
Congress: Student Loans Overview,'' U.S. Department of Education,'' 
(March 31, 2011): http://www2.ed.gov/about/overview/budget/budget12/
justifications/s-loansoverview.pdf, S-15.
    \8\ Ibid.
    \9\ Delisle, Jason, ``Federal Student Loan Interest Rates: History, 
Subsidies, and Cost,'' Federal Education Budget Project (February 
2012): http://edmoney.newamerica.net/sites/newamerica.net/files/
policydocs/Interest%20Rates%20Issue%20Brief%20Final--0.pdf.
    \10\ ``Fair-Value Estimates of the Cost of Federal Credit Programs 
in 2013,'' Congressional Budget Office (June 2012): http://www.cbo.gov/
sites/default/files/cbofiles/attachments/06-28-FairValue.pdf.
    \11\ Delisle, Jason and Alex Holt, ``New America Releases Income-
Based Repayment Calculator for Forthcoming Report,'' Ed Money Watch 
(October 10, 2012): http://edmoney.newamerica.net/blogposts/2012/new--
america--releases--income--based--repayment--calculator--for--
forthcoming--report-72603.
    \12\ Wang, Marian, Beckie Supiano, and Andrea Fuller, ``The Parent 
Loan Trap,'' The Chronicle of Higher Education (October 4, 2012): 
http://chronicle.com/article/The-Parent-Plus-Trap/134844.
    \13\ White House Office of Management and Budget. Analytical 
Perspectives: FY2012 Budget, Page 369. http://www.whitehouse. gov/
sites/ default/files/omb/budget/ fy2012/assets/topics.pdf.
    \14\ White House Office of Management and Budget. Analytical 
Perspectives: FY2013 Budget. http://www.whitehouse.gov/sites/default/
files/omb/budget/fy2013/assets/topics.pdf; Congressional Budget Office. 
CBO February 2013 Baseline Projections for the Student Loan Program. 
http://www.cbo.gov/sites/default/files/cbofiles/attachments/43913--
StudentLoans.pdf.
    \15\ Senate Budget Committee. ``2002 Student Loan Law Takes Effect, 
Lowers Interest Rates.'' Budget Bulletin, August 4, 2006.
    \16\ Until the early 1990s when Congress created the Direct Loan 
program, private lenders made and held all federal student loans. The 
government guaranteed the loans against default losses and guaranteed 
lenders a minimum interest rate each financial quarter that was based 
on short-term U.S. Treasury securities (plus a markup) if the rate the 
borrower paid fell below this formula in any given financial quarter. 
Congress terminated the guaranteed loan program in 2010 and no new 
loans have been through the program since July of that year.
    \17\ Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, Title 
IV.
    \18\ U.S. Department of Education. ``The Financial Viability of the 
Government-Guaranteed Student Loan Program,'' Page 2, February 1998. 
http://www2.ed.gov/PDFDocs/stuloan9.pdf.
    \19\ Policymakers may also have chosen the new formula because 
longer-term interest rates are less volatile than the short-term rates 
used to set student loan rates at the time.
    \20\ U.S. Department of Education. ``The Financial Viability of the 
Government-Guaranteed Student Loan Program,'' Page 2, February 1998. 
http://www2.ed.gov/PDFDocs/stuloan9.pdf; Burd, Stephen. ``Bill Provides 
Fix for Dispute Over Interest Rates on Student Loans,'' Chronicle of 
Higher Education, June 5, 1998.
    \21\ Stoll, Adam. ``Memorandum: Student Loans: Replacing the 
Interest Rate Structure Scheduled to Take Effect in 2003,'' 
Congressional Research Service, June 14, 2001.
    \22\ The law also set a fixed rate of 7.9 percent for PLUS loans 
made to parents of undergraduates. P.L. 107-139. http://www.gpo.gov/
fdsys/pkg/PLAW-107publ139/pdf/PLAW-107publ139.pdf.
    \23\ Bannon, Ellynne. ``Student Loan Interest Rate Legislation (S. 
1762) Will Make College More Affordable for Millions.'' The State 
PIRGs' Higher Education Project, January 24, 2002. http://www.pirg.org/
highered/media/1--24--02.html.
    \24\ Burd, Stephen. ``Lenders and Student Advocates Seek a Deal on 
Interest Rates.'' Chronicle of Higher Education, October 12, 2001.
    \25\ 25 Congressional Budget Office. ``Pay-As-You-Go Estimate: S. 
1762,'' January 30, 2002. http://www.cbo.gov/ftpdocs /32xx/doc3282/
s1762.pdf.
    \26\ U.S. Congress. House. College Access and Opportunity Act of 
2006, H.R. 609. February 8, 2005. http://www.gpo. gov/fdsys/pkg/BILLS-
109hr609eh/pdf/BILLS-109hr609eh.pdf.
    \27\ The law also increased the interest rate charged on Parent 
PLUS loans made under the bank-based program and created a new category 
of loans that allowed graduate students to borrower Parent PLUS loans 
for themselves up to the full cost of attendance.
    \28\ This would have ended an existing policy that allowed lenders 
to keep the excess interest--sometimes called ``floor income'' or 
``windfall profits.''
    \29\ Congressional Budget Office. ``Cost Estimate: S. 1932,'' 
January 27, 2006. http://www.cbo.gov/ftpdocs/70xx/doc7028/
s1932conf.pdf; Congressional Budget Office. ``Cost Estimate: H.R. 
609,'' September 16, 2005. http://www.cbo.gov/ftpdocs/66xx/doc6648/
hr609.pdf. The Senate proposal also increased the fixed rates on PLUS 
loans for parents and graduates students to 8.5 percent from 7.9 
percent for loans issued under the bank-based loan program and was 
included in the final law. This change also increased the deficit 
reduction compared to the House proposal.
    \30\ Deficit Reduction Act of 2005. P.L. 109-171. http://
www.gpo.gov/fdsys/pkg/PLAW-109publ171/pdf/PLAW-109publ171.pdf.
    \31\ ``A New Direction for America,'' Office of House Democratic 
Leader Nancy Pelosi. http://www.democraticleader.gov/pdf/thebook.pdf.
    \32\ ``Estimated Impact on Direct Spending of H.R. 2669 with 
Possible Extensions.'' Congressional Budget Office, July 10, 2007. 
http://www.cbo.gov/ftpdocs/83xx/doc8303/hr2669Ryanltr.pdf.
    \33\ While lawmakers needed to offset all the new spending 
provisions in the bill with spending reductions to comply with Pay-As-
You-Go principles, they also needed to meet a similar requirement to 
pass the bill under budget reconciliation procedures which require that 
new spending in a bill be budget-neutral in the latter-years of a 
budget window. Legislation passed using budget reconciliation 
procedures cannot be filibustered in the Senate and therefore needs 
only a simple majority to pass.
    \34\ College Cost Reduction and Access Act. P.L. 110-84. http://
www.gpo.gov/fdsys/pkg/PLAW-110publ84/pdf/PLAW-110publ84.pdf.
    \35\ White House Office of Management and Budget. FY2013 Budget, 
Page 97. http://www.whitehouse.gov/sites/default/files/omb/budget/
fy2013/assets/budget.pdf.
    \36\ Moving Ahead for Progress in the 21st Century Act. P.L. 112-
557. http://www.gpo.gov/fdsys/pkg/PLAW-112publ141/pdf/PLAW-
112publ141.pdf.
    \37\ Congressional Budget Office. ``Cost Estimate: H.R. 4348, MAP-
21,'' June 29, 2012. http://www.cbo.gov/publication/43368.
                                 ______
                                 
    Chairman Kline. Thank you.
    Mr. Draeger, you are recognized.

   STATEMENT OF JUSTIN DRAEGER, PRESIDENT AND CEO, NATIONAL 
      ASSOCIATION OF STUDENT FINANCIAL AID ADMINISTRATORS

    Mr. Draeger. Thank you, Chairman Kline, Ranking Member 
Miller, and members of the committee for this invitation to 
testify.
    The National Association of Student Financial Aid 
Administrators represents 3,000 colleges and universities from 
across the nation. Collectively, our financial aid 
administrators serve 97 percent of all federal student aid 
recipients and today I would like to share some of the 
practical implications of our current student loan policies 
that aren't working for students.
    Today, it is estimated that nearly 40 million Americans 
have outstanding student loan debt and at current projections, 
the number of people with federal student loans will soon 
exceed the number of people receiving Social Security or food 
stamps.
    In other words, federal student loans could soon be the 
United States' largest federal assistance program. That puts 
added pressure on us to make sure that we get these policies 
right and keep federal loans accessible, affordable, 
predictable, and fiscally sustainable.
    The current structure of federal student loan interest 
rates is out of step with current market rates and is confusing 
for students and parents. The current interest rate on federal 
unsubsidized Stafford loans is near 7 percent. The current 
interest rate on federal PLUS loans for graduate students and 
parents is nearly 8 percent, and this is after a 4 percent off 
the top origination fee.
    These rates make it nearly impossible for financial aid 
administrators to stress the benefits and safeguards of the 
federal loan programs compared to private loans. The federal 
loan programs help students avoid default through safeguards 
such as deferment, forbearance, loan forgiveness, income-based 
repayment, and discharge for disability and death. All of this 
is overshadowed when private market loans are currently offered 
at much lower rates.
    Yes, the interest rate on subsidized Stafford loans is 
currently at 3.4 percent, much closer to market rates, but the 
subsidized Stafford loan program only serves a fraction of all 
federal loan borrowers and half of them, half of the subsidized 
Stafford loan borrowers, are also borrowing unsubsidized 
Stafford loans at double the rate.
    If financial aid weren't confusing enough, we have created 
a situation essentially where 4 million students have one loan 
with two different interest rates.
    We recognize that to you as lawmakers must find the right 
balance between benefits to students and risk to taxpayers for 
the source of this funding.
    Within that effort, NASFAA is advocating for a long-term, 
market-based solution by returning to a variable interest rate 
that is determined based on cost of government capital and 
origination, cost of proper loan servicing, and future market 
risk.
    Moving to a rate based on the market with cost built in 
ensures students and parents have access to safe loans at a 
competitive rate all while creating stability in the loan 
programs.
    Federal student loans could further be strengthened through 
some additional policy changes unrelated to interest rates and 
this is the second area I would like to address today.
    First, institutions need more flexibility in providing 
counseling and limiting borrowing to ensure students are 
academically prepared, understand their loan obligations, and 
are able to keep loan borrowing in check.
    Currently, federal student loans are considered entitlement 
aid and schools are not permitted in any practical way to limit 
part-time students from borrowing at full-time rates or to 
deter students enrolled in 2-year programs from borrowing up to 
4-year levels.
    Schools aren't even able to require additional loan 
counseling over and above minimal federal requirements for 
students enrolled in programs that statistically produce a 
disproportionate share of defaulters.
    Financial aid administrators need an expansion of 
professional judgment which is already granted in law to limit 
or at least slow borrowing for specific groups of identifiable 
students with discretion to allow borrowing up to the full load 
limits on a case-by-case basis.
    Second, to prevent over borrowing delinquency and default, 
we must streamline consumer tests and pare down the amount of 
information we heap on students in the name of a good consumer 
disclosure.
    With the help of one of our member institutions we have 
compiled this three-ring binder, which I won't lift for you, 
that contains all consumer disclosure required under Title IV 
of the higher education act.
    In the last year, we have counted no less than eight 
additional proposals from the administration and members of 
Congress to add to this binder. The path forward on better 
consumer disclosure will not be found in more paperwork, but 
instead finding what works for students.
    Third, make the repayment process and deferment process as 
easy as possible, possibly through employer withholding, and by 
implementing ways to automatically enroll students in income 
based repayment before they enter default.
    Whether one likes the direct loan program or not, the fact 
remains that with one holder of all federal loans, who is the 
federal government, we have an opportunity to take a giant step 
forward in essentially eliminating loan default as we know it.
    Of course, the best way to strengthen loan programs is to 
ensure that low income families have adequate grant funding and 
that includes at the institutional, state, and federal levels 
and were very grateful for the bipartisan support we have seen 
over the last few years in supporting programs like the Pell 
grant that keeps many low income students from having to borrow 
at all.
    For those families that need to fall back on loans, the 
strongest program will be one where interest rates are fair and 
understandable. There are additional safeguards in place to 
deter over borrowing and where consumer information is 
streamlined. Thank you.
    [The statement of Mr. Draeger follows:]

      Prepared Statement of Justin S. Draeger, President and CEO,
 National Association of Student Financial Aid Administrators (NASFAA)

    Chairman Kline, Ranking Member Miller, and members of the 
Committee: Thank you for inviting me to testify today. The National 
Association of Student Financial Aid Administrators, known as NASFAA, 
represents more than 17,000 financial aid administrators who serve more 
than 16 million postsecondary students each year. Our membership spans 
more than 3,000 colleges and universities from across the nation. 
Collectively, NASFAA schools serve 97 percent of all federal student 
aid recipients.
    The job of the financial aid administrator has evolved over the 
last five decades as more students rely on federal, state, and 
institutional aid and programs have become more complicated, however 
the core mission remains the same: to ensure that no qualified student 
is denied access to postsecondary education due to a lack of financial 
resources. We have been pleased to work with legislators on both sides 
of the aisle, including many of you, to ensure continued funding for 
Federal Pell Grants and other vital forms of federal student aid, and 
we look forward to working with you to strengthen the federal student 
loan programs.
    Almost 40 million Americans--both parents and students--have 
outstanding student loan debt (Lee, 2013). Based on current 
projections, in just a few short years, more Americans in this country 
will have outstanding student loans than receive Social Security 
(Social Security, 2013) or food stamps (Food Research and Action 
Center, 2012). And with federal loans making up 90 percent of the total 
student loan market (College Board, 2012), federal student loans will 
soon be the largest U.S. federal assistance program. Given these 
numbers, it's imperative that we get federal student loan policies 
right. We have a collective interest in ensuring that federal loans 
remain accessible, affordable, predictable, and fiscally sustainable.
    Today I want to give you some of the practical insights on what 
financial aid administrators experience when working directly with 
students and parents on student loan issues. These insights will 
demonstrate why our current student loan policies--and how we handle 
interest rates in particular--aren't working well for students and 
families. I'll divide my comments into two parts, first focusing on 
student loan interest rates and second focusing on the loan programs in 
general.
    The current structure of federal student loan interest rates is out 
of step with market rates and thereby confuses students and families. 
Students and parents often question why federal student loan interest 
rates are higher than nearly all other installment loans, particularly 
for families with good credit. And the truth is, there is no good, 
reasonable answer to that question.
    The Federal Stafford Loan program is divided into two parts: 
subsidized Stafford loans where the government pays the interest on the 
loans during periods of enrollment and deferment and unsubsidized 
loans, where interest accumulates while the student is enrolled in 
college. Federal PLUS loans may be taken by graduate students or 
parents of undergraduate students if they have no adverse credit 
history.
    The current interest rate on federal unsubsidized Stafford Loans is 
near 7 percent. The current interest rate on federal PLUS loans for 
graduate students and parents is worse, at nearly 8 percent (and this 
is after a 4 percent off-the-top origination fee). Families ask, how 
can this be? Mortgage rates are currently below 4 percent and interest 
rates on private education loans for borrowers with good credit are 
also much lower. In fact, one major lender just announced a private 
education loan for graduate students with no origination fees, no 
prepayment penalties, and interest rates between 2.25 and 7.5 percent 
(Sallie Mae, 2013)--all of which are better than the current terms for 
federal PLUS loans.
    While it is true that the interest rate on subsidized Stafford 
loans is currently at 3.4 percent--much closer to market rates--it is 
equally important to understand that overall, the subsidized Stafford 
loan program serves only a fraction of all federal loan borrowers. In 
fact, half of all subsidized Stafford loan borrowers also borrow 
unsubsidized Stafford loans, which results in students having an annual 
Stafford loan debt with a portion of their loans at 3.4 percent and 
another portion at 6.8 percent. If financial aid weren't confusing 
enough, we've essentially created a situation where roughly 4 million 
students have basically one loan with two different interest rates 
(U.S. Department of Education, National Center for Education 
Statistics, 2007-08 National Postsecondary Student Aid Study).
    The point is that few students are benefiting exclusively from the 
current 3.4 percent interest rate and, even after last year's temporary 
extension by Congress, the 3.4 percent interest rate is set to double 
to 6.8 percent this July.
    From a public policy standpoint, it is generally better for 
students to borrow within the safety of the federal loan programs 
before using capital from private markets. The federal loan programs 
offer safeguards to help students avoid the dire consequences of 
delinquency and loan default. They contain deferment rights and 
mandatory forbearance options, loan forgiveness options, income-based 
repayment, and safeguards to protect students, parents, and co-signers 
against the collateral financial damage of total and permanent 
disability or death. And most importantly, federal student loans 
represent a public investment in students who otherwise wouldn't 
qualify for private market loans due to credit restrictions. They 
create opportunity.
    Unfortunately, the current interest rate disparities between 
federal loans and private loans overshadow all of the benefits of 
federal student loans. This is naturally confusing to families, since 
financial aid administrators--not to mention required Truth in Lending 
Act (1968, as amended) disclosures--counsel families to use federal 
loans as their first option.
    This interest rate discrepancy will continue to be a problem as 
long as we have fixed federal student loan interest rates. Prior to 
2006, federal student loan interest rates were variable and changed 
annually based partially on the cost of government borrowing. (Interest 
rates were determined annually by adding on some additional basis 
points above the 91-day T-bill auctioned each May.) The numbers show 
that had we stayed with a variable interest rate in 2006, all student 
borrowers in the Stafford and PLUS loan programs would actually have 
fared better than they have under the fixed interest rates of the last 
six years (See Appendix).
    Based on Congressional Budget Office projections (2013), returning 
to a variable interest rate would also save students money into the 
foreseeable future, since the 91-day T-bill is projected to stay at or 
below 1 percent through 2017. Of course we acknowledge that making a 
change back to a 91-day T-bill could be costly.
    One of the unintended consequences of our current interest rate 
policy is the unexpected revenue being returned to the federal 
government. In Fiscal Year 2013, the government is expected to earn 64 
cents for each dollar lent to graduate students in the federal PLUS 
loan program, according to the Congressional Budget Office (2013). 
While we certainly want these programs to be fiscally sustainable, it 
is equally important to remember that the intent of the federal loan 
programs is to provide affordable and safe financing options for 
students who otherwise would not have had the opportunity to receive 
postsecondary education, and who go on to become productive taxpaying 
members of our society.
    Unfortunately, our current student loan interest rate policy has 
undermined the very feature fixed interest rates were supposed to 
provide: predictability. For the last two years we've run up against 
harsh budget realities that have called into question the 
sustainability of fixed interest rates and made them anything but 
predictable.
    This is the second year in a row policymakers have been left 
scrambling to keep interest rates down for subsidized Stafford Loan 
borrowers. Last year we kept interest rates from doubling from 3.4 
percent to 6.8 percent for these borrowers at a cost of roughly $6 
billion. To partially offset that expense, Congress reduced eligibility 
for subsidized Stafford loans. As has become accepted business 
practice, we made another piecemeal patch that took funding away from 
some students to provide it to others, except in this instance we 
provided one benefit and took away another from the same students. In 
effect, we robbed Peter to pay Peter!
    NASFAA continues to advocate for a long-term, market-based solution 
to these problems by returning to a variable interest rate, where the 
rate is determined based on the following: the cost of government 
capital and origination (without any reliance on origination fees), the 
cost of proper servicing and loan counseling, and future market risk. 
This should all be underscored by the idea that at no time should 
federal student loans turn into a profit- making venture for the 
federal government. We recognize that you as lawmakers must find the 
right balance between benefits to students and risks to taxpayers, who 
are the source of this student loan funding.
    Several proposals have called for a variable fixed interest rate, 
or an annual fixed interest rate, where the interest rate would change 
for new loans originated each year, but would then remain fixed for the 
future life of the loan. Such a policy would ensure that federal loan 
rates are closer to market rates while simultaneously providing some 
degree of predictability for current borrowers.
    Of course, interest rates are only one issue--albeit an immediate 
one--that needs to be addressed to strengthen the student loan 
programs. Federal student loans could further be strengthened through 
some additional practical policy changes. This is the second area I 
would like to address today.
    Despite many anecdotes in the mainstream press about the student 
loan bubble and runaway student debt, the majority of student loan 
borrowers are leaving schools with a manageable amount of loan 
indebtedness. Unlike the horror stories we often read, only 2 percent 
of students who first enrolled at a postsecondary institution in 2003 
had borrowed more than $50,000 by 2009. Over 40 percent of that cohort 
did not borrow at all and another 25 percent borrowed less than $10,000 
(College Board, 2012). Unfortunately, the hyper-focus on statistical 
outliers--those students who have racked up $100,000 in loans--
diminishes our ability to focus on those students who find themselves 
most economically harmed by student loan debt.
    Who are these students? If we were to build a statistical profile 
of the average federal student loan defaulter, he or she would likely 
be a student who went to school for a very short period of time, 
usually less than one year, accumulated a small amount of loan debt, 
had a low GPA, and attended either a community college or proprietary 
institution. Two out of every three borrowers who enroll in college for 
one year or less will fall delinquent or default outright on their 
student loans, many on less than $10,000 in total loan debt. Of all 
student loan defaulters, 70 percent dropped out of college (Loonin & 
McLaughlin, 2012).
    Given these statistics, we need to examine policies that give 
institutions more flexibility in providing counseling and safeguards to 
ensure students are academically prepared, understand their loan 
obligations, and are able to keep loan borrowing in check.
    Under current federal regulations, federal student loans are 
considered entitlement aid. Schools are prohibited from requiring 
additional loan counseling for students who appear to be over-borrowing 
or who are most at risk of defaulting. In addition, schools are not 
permitted, in any practical way, to limit part-time students from 
borrowing at full-time rates, or to deter students enrolled in two-year 
programs from borrowing up to four-year levels. Likewise, schools 
cannot halt or even slow over-borrowing by students enrolled in 
academic programs that produce a disproportionate share of loan 
defaults. In other words, students are currently entitled to borrow the 
maximum loan limits, and can only be deterred from over-borrowing on an 
individual, case-by-case basis.
    Financial aid administrators, particularly at the community college 
level, need additional authority to limit or at least slow borrowing 
for specific groups of students, with discretion to allow borrowing up 
to the full federal loan limits on a case-by-case basis (NASFAA, 
2013.). That would flip the current approach, to instead allow across-
the-board reductions in loan eligibility for identifiable categories of 
students with expanded borrowing permitted on a case-by-case basis.
    Additionally, more can be done to protect parent borrowers from 
over-borrowing. Since the recession, more schools are reporting 
instances of parents objecting to their own Federal PLUS loan approvals 
because they their income is insufficient to repay the debt. Current 
PLUS loan underwriting standards simply examine whether a parent has 
any ``adverse credit,'' without considering whether a parent is 
financially able to repay the loan.
    We would not want to mirror or duplicate commercial underwriting 
standards in the federal programs, since the purpose of the loan 
programs is to provide a public investment in college-ready students 
who otherwise would be unable to obtain credit. However, a simple debt-
to-income ratio on parent loans would at least take into consideration 
a parent's ability to repay the loan based on their current income. 
Under the Federal Family Education Loan Program (FFELP), which has 
since been phased out in favor of the Direct Loan Program, some lenders 
utilized debt-to-income ratios as part of their parent PLUS loan 
underwriting standards. In the Direct Loan program that simple 
financial stress test is not conducted. The result is that parents with 
no adverse credit, or even no credit, can be approved for tens of 
thousands of dollars of loans without any evaluation of their true 
ability to repay. If the mortgage meltdown taught us anything, it is 
that basic and proper underwriting not only protects lenders, it also 
protects borrowers.
    Another factor in preventing over-borrowing and loan default is 
loan counseling. Current loan counseling requirements seem to be based 
on the principle that more is better. But anyone who has ever signed a 
home mortgage loan knows that receiving mountains of consumer 
information does not necessarily improve understanding--it often has 
the opposite result. We must streamline, consumer test, and pare down 
the amount of information we heap on students and parents in the name 
of good consumer disclosure. With the help of one of our member 
institutions, we have compiled this three ring binder that contains all 
of the consumer disclosures currently required under Title IV of the 
Higher Education Act (1965, as amended). Within the last year, we've 
counted no less than eight additional proposals from the Administration 
and members of Congress for even more consumer disclosures. The path to 
smarter decisions on student loans and college costs will not be found 
in even more paperwork; it will be found through customized, 
streamlined, and consumer-tested information that gives students a 
complete picture of their student loan responsibilities and loan costs.
    In many cases, averting student loan default can be as simple as 
making the repayment process as easy and safe as possible for students 
and parents. Automatic enrollment in income-based repayment would 
ensure that no borrower's repayment amount will ever exceed their 
ability to repay. NASFAA has worked with Congressman Petri to explore 
whether this can be accomplished through the current federal loan 
programs using payroll withdrawal and federal withholding. We believe 
we're closer than ever to being able to institute repayment pathways 
that ensure student loans are repaid on time and remain affordable. 
Whether one agrees or even likes the Federal Direct Loan program, the 
fact of the matter is that with one originator and holder of federal 
loans--the U.S. government--we have an opportunity to take a giant step 
forward in nearly eliminating student loan default.
    Finally, the best way to strengthen the loan programs is to ensure 
adequate grant funding at the institutional, local, state, and federal 
levels. Our federal student aid programs are founded on the idea that 
grants, not loans, are the best way for qualified, low-income students 
to obtain access to higher education. Polls show time and again that 
the public supports continued funding of higher education and we're 
grateful for bipartisan support for programs like the Pell Grant. For 
those families that need to fall back on loans, the strongest program 
will be one where interest rates are fair and understandable, 
additional safeguards are in place to deter over-borrowing, consumer 
information is streamlined and delivered in a way that is easy for 
students and parents to understand, and loan repayment is simple and 
affordable.
    Thank you for your time. I am happy to answer any questions.

                               REFERENCES

College Board (2012). Trends in student aid, 2012. Retrieved from 
        http://trends.collegeboard.org/student--aid
Congressional Budget Office (2013, February). The budget and economic 
        outlook: Fiscal years 2013 to 2023. Retrieved from http://
        www.cbo.gov/sites/default/files/cbofiles/attachments/43907--
        BudgetOutlook.pdf
Food Research and Action Center (2012). SNAP participation increases in 
        November 2012. Retrieved from http://frac.org/reports--and--
        resources/snapfood--stamp--monthly--participation--data/#2nov
Higher Education Act of 1965, Pub. L. No. 89-329 Sec.  111, U.S.C Sec.  
        1001 (1965) (enacted).
Lee, D. (2013). Household debt and credit: Student Debt. Retrieved from 
        http://www.newyorkfed.org/newsevents/mediaadvisory/2013/
        Lee022813.pdf
Loonin, D., & McLaughlin, J. (2012). The student loan default trap: Why 
        borrowers default and what can be done. Boston: National 
        Consumer Law Center. Retrieved from http://
        www.studentloanborrowerassistance.org/blogs/wp--content/
        www.studentloanborrowerassistance.org/uploads/File/student--
        loan--default--trap--report.pdf
NASFAA (2013). Report of the NASFAA Task Force on Student Loan 
        Indebtedness. Washington, DC: NASFAA. Retrieved from http://
        www.nasfaa.org/indebtedness--report.aspx
SallieMae (2013, March). Sallie Mae announces lower interest rates for 
        graduate students, effective April 1. Retrieved from https://
        www.salliemae.com/about/news--info/newsreleases/2013/Lower--
        Int--Rate--Grad--Loans.aspx
Social Security (2013, February). Monthly statistical snapshot, January 
        2013. Retrieved from
http://www.ssa.gov/policy/docs/quickfacts/stat--snapshot/2013--01.pdf
Truth in Lending Act of 1968, Pub. L. No. 90-321, Sec.  82, 12 Stat. 
        146.
U.S. Department of Education, National Center for Education Statistics, 
        2007--08 National Postsecondary Student Aid Study. (2013). 
        Chart showing share of Stafford loan borrowers. NPSAS:2008 
        Undergraduate Students. Retrieved from http://nces.ed.gov/
        datalab/powerstats/output.aspx

        
        
        
        
        
        
        
        
        
        
        
        
        
        
                                 ______
                                 
    Chairman Kline. Thank you.
    Dr. Mercer?

 STATEMENT OF DR. CHARMAINE MERCER, VICE PRESIDENT OF POLICY, 
                ALLIANCE FOR EXCELLENT EDUCATION

    Ms. Mercer. Good morning. Chairman Kline, Ranking Member 
Miller, and members of the committee, good morning and thank 
you for this opportunity to testify today.
    The title of this hearing, ``Keeping College Within 
Reach,'' is both timely and appropriate for discussing various 
aspects of federal support for higher education, including 
student aid and loans.
    The federal student aid system, as initially designed, was 
intended to ensure access to college for students who would 
otherwise be unable to attend. Federal aid has helped countless 
numbers of students pursue their higher education aspirations 
since 1965, when the Higher Education Act was signed into law.
    The last decade has witnessed many changes to the student 
aid system including eliminating subsidized loans for graduate 
and professional students, mandatory funding for Pell, and 
decreasing the number of semesters for which students are Pell 
eligible, to name a few.
    Each of these changes occurred outside of the full HEA 
reauthorization and, although they are seemingly small, they 
have had a significant impact on the cost of the program, did 
little to stem the rising college costs, and in some instances, 
negatively changed the composition of the recipient population.
    Worse yet, many of these changes have done little to halt 
the ever increasing and dangerous amount of debt that students 
assume. In fact, student loan debt is fast approaching $1 
trillion, and the number of borrowers and the average amount of 
debt have increased by 70 percent in just 8 years.
    Incremental changes in some instances are necessary and 
unavoidable, but by their very definition they fail to address 
the student aid system in its entirety.
    These incremental changes have done little to respond to 
skyrocketing college costs and often, due to the rush to pass 
them, their unintended consequences are not fully explored.
    The time has come for Congress to reauthorize the HEA so 
that it responds to the 21st century needs of students, 
institutions of higher education, and our nation.
    A thoughtful reauthorization of this critical piece of 
legislation will require time, deliberation, and compromise. In 
the interim, other exigencies such as the pending interest rate 
increase on subsidized loans will require legislative action 
prior to a full reauthorization.
    However, to the extent practicable, these types of changes 
should be addressed with consideration for the broader context 
in which they exist. For example, if the current interest rate 
on subsidized student loans were to double, this would have a 
disproportionate impact on the neediest students since they are 
the recipient of these types of loans.
    A recent report by the Pew Research Center notes that 
student loan debt is 24 percent of household incomes for 
families in the lowest income quintile. The report states, and 
I quote--``The relative burden of student loan debt is greatest 
for households in the bottom fifth of the income spectrum, even 
though members of such households are less likely than those in 
other groups to attend college in the first place.''
    The nation needs a comprehensive plan to promote access, 
completion, and affordability for these and other students. 
Today, more than any other time in recent history, 
postsecondary educational attainment is critical for 
individuals and the nation as a whole.
    The United States' ability to maintain its international 
position as an economic powerhouse requires the country to have 
a highly educated and skilled workforce.
    The 21st century requires individuals to possess knowledge 
and skills that prepare them for college, a meaningful career, 
and economic security. Absent these skills, many Americans will 
remain un- or underemployed, and the nation's economy will 
stagnate or decline.
    The federal student aid system has previously focused on 
access exclusively, but access alone is not enough; completion 
must also be a goal. Although very well-intentioned, the 
federal student aid system is complex and poorly aimed at 
getting students to finish.
    Each year, there is a significant federal investment made 
in students at the K-12 and postsecondary education levels. 
However, the investment at both levels sees little return 
unless students complete what they start.
    Failing to complete college means there is little to no 
return realized other than often times unmanageable amounts of 
debt without a degree. Changes to the HEA should be directed at 
the twin goals of access and completion. The reality is that 
all students are not equally financially equipped to take 
advantage of postsecondary opportunities.
    It is critical that public policy maintain the focus on 
making higher education affordable and accessible for the 
lowest income and neediest students that the market might 
otherwise leave behind.
    The Alliance for Excellent Education recently released a 
report based on a comprehensive examination of the federal 
student aid system. The paper includes recommendations for how 
to change many of the existing programs to create a system 
whose components are purposeful towards promoting access to 
college as well as completion.
    These recommendations are a part of a broader package and 
resulted from thinking about the system in its entirety rather 
than a single aspect or individual programs.
    The alliance respectfully encourages Congress and this 
committee to approach these issues in a similar fashion.
    Undeniably, these are difficult fiscal times. However, 
there are no quick fixes to the nation's unacceptably low 
postsecondary completion rates, rising college costs, and 
student loan debt.
    What our nation needs now is a thoughtful and purposeful 
consideration of postsecondary education policies. Students 
must continue to have access to college and be appropriately 
incentivized and supported to complete in order to achieve 
individual prosperity and to become an integral part of the 
nation's economy.
    I thank the committee for taking on this important issue in 
focusing attention on keeping college within reach. Thank you.
    [The statement of Ms. Mercer follows:]

           Prepared Statement of Charmaine N. Mercer, Ph.D.,
       Vice President of Policy, Alliance for Excellent Education

    Chairman Kline, Ranking Member Miller, and members of the 
Committee, good morning and thank you for this opportunity to testify 
today. The title of this hearing, ``Keeping College Within Reach,'' is 
both timely and appropriate for discussing various aspects of federal 
support for higher education, including student aid and loans.
    The federal student aid system, as initially designed, was intended 
to ensure access to college for students who would otherwise be unable 
to attend. In fact, in his 1965 speech to Southwest Texas State 
College, after the signing of the Higher Education Act, President 
Lyndon Johnson said,
    ``To thousands of young men and women, this act means the path of 
knowledge is open to all that have the determination to walk it. It 
means a way to deeper personal fulfillment, greater personal 
productivity, and increased personal reward * * * an incentive to stay 
in school.''
    President Johnson's remarks suggest that the federal student aid 
system would function to keep college within reach for those who 
desired to attend. Since 1965, federal aid, consisting of grants, 
loans, work opportunities, and tax credits, has helped countless 
numbers of students pursue higher education aspirations.
    In the nearly 50 years since the passage of the 1965 Higher 
Education Act, it has been fully reauthorized eight times and each 
reauthorization has attempted to balance Congressional and 
Administration priorities; mounting budget deficits; and demands from 
students, families, and the general public, with changes in 
postsecondary education, workforce demands, and the economy. Outside of 
the comprehensive reauthorizations of HEA, there have been numerous 
incremental changes, primarily directed at eligibility requirements, 
the need-analysis formula, and increased aid limits.
    The last decade has witnessed many changes to the student aid 
system, including several changes to the loan programs, such as 
elimination of subsidized loans for graduate and professional students; 
mandatory funding for Pell Grants; and decreasing the number of 
semesters for which students are Pell eligible, to name a few. Each of 
these changes occurred outside of a comprehensive reauthorization, and 
although they are seemingly small, they have had a profound impact on 
the costs of the student aid programs, done little to stem the rise in 
college costs and associated debt, and in some instances, negatively 
changed the composition of the recipient population.
    Arguably, many of the changes that have occurred outside of a 
comprehensive reauthorization have been beneficial yet short sighted. 
For example, eliminating year-round Pell Grants allowed the maximum 
award of $5,550 to be maintained, but reportedly, it also significantly 
reduced the number of students taking additional courses during the 
summer--which typically leads to increased completion rates.
    Worse yet, many of these changes have done little to halt the ever 
increasing and dangerous amount of debt that students rack up due to 
increasing college costs, among other things. In fact, student loan 
debt is fast approaching a trillion dollars, and the number of 
borrowers and the average amount of debt have increased by seventy 
percent in just eight years. Incremental changes in some instances are 
necessary and unavoidable, but by their very definition, they fail to 
address the student aid system in its entirety. These changes have done 
little to respond to skyrocketing college costs and often due to the 
rush to pass them, their unintended consequences are not fully 
explored.
    Congress, starting with this Committee, is now positioned to 
thoroughly examine the Higher Education Act, including federal student 
aid programs, and to consider both the known and unintended 
consequences, and to produce legislation that continues the federal 
commitments to ensuring access, tackling college costs and soaring 
debt, and promoting completion.
    Focusing exclusively on student loans--or more specifically, the 
interest rates on subsidized loans for undergraduate students--fails to 
notice the forest for the trees.
    The complexities of the federal student aid system require that it 
be examined in its entirety. Looking solely at loans doesn't address 
the shortfalls of grants. Addressing the shortfalls of grants doesn't 
consider weaknesses in higher education tax credits. Fixing higher 
education tax credits doesn't, in turn, remedy the challenges and 
limitation of the campus-based programs. Addressing any one aspect of 
this system is necessary but individually, each is not sufficient for 
true reform of postsecondary aid programs and promoting student success 
and completion.
    The time has come for Congress to reauthorize the HEA so that it 
responds to the 21st-century needs of students, institutions of higher 
education, and our nation. A thoughtful reauthorization of this 
critical piece of legislation will require time, compromise, and 
deliberation. In the interim, other exigencies such as the pending 
interest rate increase on subsidized loans will require legislative 
action prior to a full reauthorization. However, to the extent 
practicable, these types of changes should be addressed with 
consideration for the broader context in which they exist. For example, 
if the current interest rate on subsidized loans were to double, this 
would have a disproportionate impact on the neediest students, since 
they are the recipients of these types of loans. A recent report by the 
Pew Research Center notes that student loan debt is twenty four percent 
of household income for families in the lowest income quintile. The 
report states, ``The relative burden of student loan debt is greatest 
for households in the bottom fifth of the income spectrum, even though 
members of such households are less likely than those in other groups 
to attend college in the first place.'' The nation needs a 
comprehensive plan to promote access, completion, and affordability for 
these and other students.
    Today, more than any other time in recent history, postsecondary 
education attainment is critical for individuals, communities, and the 
nation as a whole. The United States' ability to maintain its 
international position as an economic powerhouse requires the country 
to have a highly educated and skilled workforce.
    The 21st century ushered in a technology-driven and globally 
connected era that requires individuals to possess knowledge and skills 
that prepare them for college, a meaningful career, and economic 
security. Absent these skills, many Americans will remain unemployed or 
underemployed, and the nation's economy will stagnate or decline. In 
fact, Anthony Carnevale of Georgetown University estimates that 2012 
marked the year when more than 60 percent of all jobs required some 
form of postsecondary education; further, approximately 20 million new 
jobs now require a bachelor's degree or higher. The federal student aid 
system must help the United States meet this increased demand, while 
continuing to ensure access.
    Traditionally, the federal student aid system exclusively focused 
on access, but access alone is not enough, completion must also be a 
goal. Although very well intentioned, the federal student aid system is 
complex, interrelated, and poorly aimed toward the goal of finishing a 
postsecondary program of study.
    Each year there are significant federal investments made in 
students at the K--12 and postsecondary education levels. However, the 
investment at the K--12 level sees little return unless students 
complete a program of study at the postsecondary level. Similarly, at 
the postsecondary level, if students fail to complete a program of 
study, there is little to no return realized other than often times 
unmanageable amounts of debt without a degree.
    Changes to HEA should all be directed at the twin goals of access 
and completion. Higher education for students is an advantage that 
society at large benefits from. However, the reality is that all 
students are not equally financially equipped to take advantage of 
postsecondary opportunities.
    It is critical that public policy remain capable of making higher 
education affordable for the lowest-income and most-at-need students 
that the market might otherwise leave behind. Increased educational 
attainment helps individuals achieve their personal goals, improves 
their surrounding community, and aids the recovery and growth of the 
economy.
    The entire federal student aid system should be thoroughly examined 
with these twin goals--access and completion--in mind. This examination 
must come by recognizing the evolving demands of our global society and 
our nation's current economic status.
    The Alliance for Excellent Education recently released a paper 
based on a comprehensive examination of the federal student aid system. 
The paper includes recommendations for how to change many of the 
existing programs to create a system whose components are purposeful 
toward promoting college completion. The recommendations are arranged 
according to four tenets:
    1. creating institutional supports and accountability;
    2. simplifying the federal student aid system;
    3. focusing aid on the highest need students; and
    4. providing support for middle class families.
    In the paper, the Alliance makes specific proposals in each of 
these areas, but ultimately the goal of these objectives is to ensure 
that students get from high school commencement to postsecondary 
completion.
    The Alliance believes that students and institutions have a mutual 
commitment to each other for success, with the federal student aid 
system helping to frame and support this relationship. Being admitted 
by an institution of higher education is not enough; colleges and 
universities must do their part to provide the ancillary supports and 
services that promote student success from the day they arrive on 
campus to the day they leave with a certificate or degree. At the same 
time, students must be committed to their own personal success. 
Students must work to be prepared, stay enrolled, and receive the 
postsecondary credential that they committed to pursue and were 
supported to receive. These two parties--institutions and students--owe 
it to each other to work collaboratively to cross the finish line.
    The Alliance sought to change the existing student aid landscape 
and focus funding in a way that benefits the most students. For 
example, the Perkins Loan and Supplemental Education Opportunity Grant 
programs currently support a deserving, but ultimately narrow, student 
population. If these funds were redirected toward postsecondary 
programs that better address retention and completion and produce best 
practices for other higher education programs, a larger student 
population could be better served. Similarly, if the current $5 per 
Pell Grant recipient that goes to institutions were redirected toward 
student aid, more grant aid could be provided to the neediest students, 
thereby reducing the need to borrow or at least decrease the amount of 
borrowing.
    It's important to note that these recommended changes are a part of 
a broader package and resulted from thinking about the system in its 
entirety, rather than a single aspect or individual program. The 
Alliance respectfully encourages Congress and this Committee to 
approach these issues in a similar fashion.
    These are undeniably difficult fiscal times. However, there are no 
quick fixes to the nation's unacceptably low postsecondary completion 
rates, soaring borrowing levels, and debt.
    How and why funds are spent deserve careful consideration toward 
what ultimately produces better results, that is, continued access to 
and increased completion of postsecondary education.
    What our nation needs now is a thoughtful and purposeful 
consideration of postsecondary education policies. Students must 
continue to have access to postsecondary education and be provided with 
the necessary incentives to complete higher education, achieve 
individual prosperity, and become an integral part of the nation's 
economy.
    As I have mentioned, students and institutions are equally 
important stakeholders and there is room for appropriate balance 
between accountability and incentives for both groups to change 
behavior for the benefit of the nation.
    I thank the Committee for taking on this important issue and 
focusing attention on keeping college within reach.
                                 ______
                                 
    Chairman Kline. Thank you.
    I think all of the witnesses for excellent testimony and 
observing our sophisticated lighting system.
    Mr. Delisle, you were very clear in what you thought about 
caps in light of the various repayment options, income-based 
repayment options and so forth. You were pretty clear.
    I would like to hear from the other three of you, or just 
sort of quickly, the pros and cons of putting an interest rate 
cap.
    Dr. Lucas?
    Ms. Lucas. Okay. Well, I believe--I agree with Mr. Delisle 
that putting on a tight cap is both expensive and a move back 
to fixed rates.
    However, I think that setting a cap at a relatively higher 
level could be useful in protecting students from periods where 
interest rates are unusually high and they have trouble getting 
out of those loans in other ways.
    So I would say that I would be happy to see no cap. I would 
also be happy to see a cap set at a fairly high rate, say 9 or 
10 percent. I would not endorse a tight interest rate cap.
    Chairman Kline. Okay, thank you.
    Mr. Draeger?
    Mr. Draeger. When we look at an interest rate cap, the last 
time that we had a cap on interest rates when they were 
variable, we were living in a time when we didn't have 
widespread availability of income-based repayment.
    So to us, this gets at basically keeping the cost of the 
loan down and there is a lot of different ways we can do that. 
Whether it is through cap or an upfront subsidy, or whether it 
is by capping the total amount of interest that could ever 
accrue on a loan as has been done in another proposal from a 
member of this committee, there is a lot of different ways we 
can keep the cost of the loan down, and we are open to engaging 
the conversation about any of those ways. It doesn't have to be 
just an interest rate cap.
    Chairman Kline. Dr. Mercer?
    Ms. Mercer. I would say that, first and foremost, it is 
most important that you start from kind of what your policy 
goals are in terms of access and completion. So to the extent 
that a cap would not preclude students from being able to 
enroll in school and complete, if that serves that goal well, 
then that is at least where we should start. I am not sure if 
it is appropriate not to have a cap because I think a safeguard 
in the system needs to be present.
    Chairman Kline. And Mr. Delisle, your thought was that, 
with the income base repayment plan, you were in effect 
addressing the issue of a cap without actually putting interest 
rate cap in? Is that correct?
    Mr. Delisle. Sure, there are about five or six examples in 
my written testimony that people can look at but I just, I will 
give you one for example.
    Consider somebody with $45,000 in debt from undergraduate 
and graduate studies who works in the government or nonprofit 
sector and earns a starting salary of $38,000 with a 4 percent 
annual raise.
    At an interest rate of 4.9 percent on the loan, she pays a 
total of $22,000 on her loan over 10 years and then the 
remaining balance is forgiven under public service loan 
forgiveness.
    At an interest rate of 12 percent she still pays $22,000 on 
her loan. If her interest rate is zero she still pays $22,000 
on her loan.
    Chairman Kline. Thank you. Wow. Somehow it doesn't seem 
possible.
    Going to you Mr. Draeger, you addressed something that I 
hear all the time from institutions where you have advisors who 
say we can't advise the student not to take this maximum loan. 
We know they shouldn't, but we can't do it. Do you think we can 
put into policy here, in a statute, a policy that would allow 
that and still avoid the discrimination?
    Mr. Draeger. Sir, I think we would have to be very careful 
in instituting a policy where schools could limit or at least 
slow borrowing for groups of identifiable students.
    Certainly we wouldn't do that based on any prohibited 
characteristics or classes; race, sex, religion, national 
origin, those things have to be specifically prohibited. But 
there are concrete examples, I think, where schools and 
particularly low cost institutions would very much like the 
ability to at least introduce additional counseling over and 
above the minimum federal requirements or prohibit borrowing, 
perhaps for all students at an institution, for part-time 
students, for students in specific academic programs where we 
know the outcomes may not support the level of debt that they 
are taking on.
    Schools would welcome that authority so that they could 
perhaps be a check and a balance for students to make sure that 
they are not getting in over their head.
    In sort of a conflict, schools are held responsible for the 
number of students that default on their loans and they are 
also held responsible at least in public and in the press by 
how much debt to their students take on, yet they have very few 
if any tools at their ready to address that in any meaningful 
way.
    Chairman Kline. Thank you.
    Mr. Miller?
    Mr. Miller. To continue on that line of question, Mr. 
Draeger, so you would counsel them how? I mean your institution 
is offering this course of study for this credential or this 
degree and you would counsel them, don't do that?
    Mr. Draeger. So, for example, right now, if we look at the 
statistics, the average statistic of a borrower who has 
defaulted, it is not normally what you hear in the press. The 
stories in the press usually revolve on a statistical outlier, 
someone who has racked up tens of thousands of dollars of debt 
and we know the average amount of debt is much less.
    If you look at the defaulted borrower, people in student 
loan default, 70 percent of them have dropped out of school 
normally in the first or second year and it doesn't seem fair 
for students that may not be academically prepared to load them 
up with debt without some additional counseling over and above 
current, minimal federal requirements.
    Right now if an institution tries to institute additional 
counseling over and above what the----
    Mr. Miller. I understand that, but you had suggested also 
that you may not want them to engage in some courses or 
curriculums because they have a high default rate.
    Mr. Draeger. What we would say is----
    Mr. Miller. Why are you offering those?
    Mr. Draeger. If there is a program, for example, where we 
know--let's use teacher education or childcare. In some states 
that is a license requirement that they have to get a 
certification, but the amount of loan debt that they are taking 
on isn't going to be supported by their wages.
    If they could provide some additional counseling----
    Mr. Miller. So it is not a question of whether they pursue 
that occupation or credential, it is a question of what is the 
appropriate loan--or they should certainly be advised of the 
chances of repaying this loan or for getting into trouble given 
the low pay of childcare workers if you will.
    Mr. Draeger. That is correct.
    Mr. Miller. Okay. It is not that you have curriculums out 
there and you don't jettison but you don't think people should 
take them. I wasn't quite sure----
    Mr. Draeger. No. The other example, Mr. Miller, is examples 
of part-time students who may be running up their loan amounts 
at a full-time rate which schools right now can't stop and so 
they run out of loan eligibility.
    Mr. Miller. Why is that happening? Because they are 
working? Because they are doing what?
    Mr. Draeger. It could be because of work. It could be 
because they don't recognize the amount of loan debt that they 
are taking on despite minimal warnings, but right now, those 
students--or it could be because they are transferring in from 
another school where they have taken on a significant amount of 
debt.
    Mr. Miller. I think again, in my state, I think the 
community colleges are getting much more specific about what 
you need to do to complete and what you need to do to complete 
essentially in 2 years. Now whether courses are available or 
not we all know is a problem.
    And the question is, are people borrowing money to follow 
this track to get the lower division requirements taking care 
of so that they can transfer or get a credential or get a badge 
or whatever it is they are pursuing, and are they on track, and 
is this loan amount appropriate.
    Because it goes to what Mr. Mercer raised, this question of 
completion, and I don't think we should punish part-time 
students. I don't think you are suggesting that, but we know 
that some students have to struggle whether they are borrowing 
money or not because they may be supporting themselves, working 
and the rest of that.
    So Mr. Delisle says well if they knew--if they could see--
if they knew more about loan forgiveness up front, they might 
make a different decision. Is that what you are--is that 
correct?
    Mr. Delisle. Yes, and I don't think they need to have very 
optimistic--they can have even very optimistic assumptions 
about their future earnings and still be fairly comfortable in 
borrowing a lot of money and ensure that it will be forgiven.
    I should point out, though, this is only for graduate 
students because there are no limits on how much they cannot 
borrow on the federal student loan program.
    Mr. Miller. We are not going to weave this all in my 
question here, but I think the three of you are hitting 
essentially on the same points. And I am going to start with 
the idea of completion because absent completion then we do 
have a problem. We have high debt and nothing, essentially 
nothing to show for it.
    But the question of then how do you make that flexible 
enough for those students--we will continue to pursue this, but 
you know, I also think the colleges, certainly community 
colleges, have to put more as to what is it that you are doing 
here and what do you want to accomplish.
    Because I think having people wander around and continue to 
borrow money without some sense of a goal--I understand people 
change their majors, their ideas. I did 100 times--of course if 
have any major you can come to Congress, so it worked out well.
    This is how I get myself into trouble. Okay, let's start 
over again. But I think the institutions have to play a role 
here too in terms of guidance about what really happens at the 
end of this process and are you on track or not.
    Are you now borrowing your third--what would be your third-
year scholarship money and you are still about a year--you 
know, you are still 6 months away from completing your second 
year. Is that the kind of counseling are talking about?
    Mr. Delisle. I think that kind of counseling is needed and 
hopefully is occurring on most campuses. What we are talking 
about is saying could we stop somebody from borrowing so that 
they would end up running out of loan funds before they reach 
the end so at least they would have some mandatory additional 
counseling or at least recognize. Right now a school can send 
out a disclosure but that doesn't necessarily mean the student 
has read it.
    Mr. Miller. Okay, thank you.
    Chairman Kline. Thank you.
    Mr. Petri?
    Mr. Petri. Thank you, Mr. Chairman. I would like to commend 
you for scheduling a hearing on this important and pressing 
issue for an awful lot of people in our country.
    We all have far too many constituents, particularly young 
people, struggling with student loans and I am glad that you 
are taking the time to take a look at this important issue.
    As almost everyone is aware, the default rate on federal 
student loans is very high. According to recent statistics, 
roughly 13 percent of borrowers will default within 3 years of 
entering repayment. Default can be financially ruinous for 
anyone, but particularly young people just getting started.
    Mr. Draeger, I was struck by the portion of your testimony 
that was just referred to recently that described the typical 
characteristics of students who default. Though much of the 
media attention is focused on the level of student borrowing, 
no doubt an important issue, it is striking how many students 
default on manageable levels of debt.
    And when one looks at our current student loan system, it 
is easy to see how so many students could fall through the 
cracks. We have rightfully recognized that student loan 
borrowers face many ups and downs during their career. We have 
added a wide array of protections, numerous deferments, 
forbearances, repayment options, and so on in recognition of 
that.
    But in doing so, we have created a system that is so 
complex that it can be baffling even for the policymakers who 
work with it every day, let alone students trying to navigate 
it for the first time.
    While certainly not a solution to all of the problems we 
face with student loans, I have always felt that simple, 
universal income-based repayment has the potential to 
accomplish the goals of the various protections we have created 
but in a way that is intuitive and automatic for borrowers and 
doesn't force them to navigate our current labyrinth of 
paperwork and bureaucracy.
    Many students who will fail to navigate the current 
bureaucracy and fall into default despite the fact that they 
could have repaid their loan under a system that was more 
responsive.
    So Mr. Draeger and Mr. Delisle, in your respective 
organizations, recent reports about reimagining federal student 
aid, each of you recommended making some form of income-based 
repayment as the sole or automatic method of repayment for 
federal student loans. Could you elaborate on the thinking 
behind your respective recommendations and what you think the 
benefits of income-based repayment would be?
    Mr. Delisle. I will go first here. Well we know that 
borrowers currently have a wide range of options that they can 
choose to repay their loans. They can choose consolidation, 
which extends the repayment term all the way up to 30 years. 
There is income-based repayment, income contingent repayment. 
There is 3 years of forbearance for everybody.
    But, when you look at the data of what percentage of people 
are in what repayment plans and they are all repaying their 
loans under this standard 10-year repayment plan which is a 
pretty good signal that people aren't availing themselves of 
all of the benefits of these programs.
    And to the extent that default or difficulty in repaying is 
a function of they don't have the money to pay because of their 
income, then getting people enrolled in income-based repayment 
should address that problem.
    Now I should point out--and that is why we recommended that 
students, everybody be put into income-based repayment and one 
of the reasons why we propose this is that if 10 percent or 15 
percent of income is the right percentage of somebody's income, 
if they are low income, for paying their student loan, then it 
has got to be the right percentage for people who have a high 
income.
    And right now, it is the people who have high incomes who 
don't use income-based repayment because we have other 
repayment plans that are more generous for them. So we have got 
essentially a regressive student loan repayment plan.
    Mr. Draeger. I would say from an institutional perspective, 
it is extremely frustrating is that Congress has put into place 
so many protections to keep students out of default, yet we 
have so many students that default.
    The current national average of defaults in this country is 
around 13 percent, higher if you took the entire portfolio, and 
nearly every one of those students that went into default could 
have avoided it if they had utilized the deferment, 
forbearance, and income contingent options available to them.
    What automatic IBR, income-based repayment, does is place 
students in a situation where their loan payments will always 
be reasonable, they will always be protected from the dire 
consequences that come with student loan default.
    Chairman Kline. Thank you--yes?
    Mr. Miller. May I ask for unanimous consent to include in 
the record of the comments by students from the Association of 
Michigan State University, from American University, and from 
the National Campus Leadership Council?
    [The information follows:]

                                  MEMO

Date: March 12, 2013
To: Andy MacCracken, Executive Director, National Campus Leadership 
        Council
From: Evan Martinak, Chairperson ASMSU
RE: Student Loans and Debts

    Student debt is harmful students in a number of ways. Current 
undergraduate students who are borrowing are faced with annual tuition 
increases and rising costs associated with living expenses. These costs 
can ultimately lead to the accruement of more debt for those who are 
unable to have the full cost of tuition and related expenses covered by 
federal loans.
    Nationally, student debt levels have eclipsed $1 trillion dollars, 
surpassing credit card debt and all other forms of private liabilities.
    As with most schools in the current higher education system, many 
Michigan State University students rely on Stafford loans to carry them 
through their degree attainment. As of 2011, 45% of college graduates 
from Michigan State University have, on average, accumulated $23,725 
worth of college related debt. Such high debt levels can severely 
hinder a student's ability to attend a post-graduate institution or to 
complete any unpaid internship. High levels of unpaid debt also serve 
as a liability in the event of personal bankruptcy, as individual 
college debt is incredibly difficult to reduce in such an instance.
    When parents cannot afford to accept PLUS loans, the standard 
federal loan for parents with dependant children attending college, 
Stafford loans make it possible for thousands of students to attend 
MSU. In FY 2010-2011 and academic year, MSU lost about 40 million in 
funding from the state government. This forced MSU to increase tuition 
by 6.9% to cover the cost of lost funds. With state and federal aid 
decreasing, the availability of loans makes an integral difference to 
overall affordability of an MSU degree.
    All of Michigan State University's current Stafford Loans are 
disbursed with fixed interest rates. Had Congress not acted in 2012, 
interest rates on such loans would have doubled. Yet these interest 
rates and types of loans are not applicable to every student debtor, 
and thus more action would be welcomed in reducing individual student 
debt on an even larger scale. Low and fixed interest rates for student 
loans are better borrowing options than private loans, and with 
interest rates only fluctuating from 1-3% on average, it does seems 
rational to request a continuation of these low, fixed rates.
    The Associated Students of Michigan State University (ASMSU) has 
several initiatives to try and lower costs for MSU students. Currently, 
ASMSU is pursuing legislation that would allow local businesses of East 
Lansing to have no sales tax on textbooks during the beginning of 
semesters, in order to encourage local commerce and lower costs for 
students. ASMSU also offers interest free loans of up to $300, free 
blue books, free iClicker rentals, and free legal services to help 
settle some of the financial burdens associated with college. With 
students being dependent on these services and Stafford loans, it is 
imperative that the student government continues to emphasize the 
importance of low interest rates to provide every student with the best 
educational opportunity and experience.
                                 ______
                                 

                        Office of the President
                               Memorandum

To: Education and the Workforce Committee
From: Emily Yu, President, American University Student Government
Date: 12 March 2013
Subject: Student Loan Interest Rates

    College affordability has been an increasing concern for students 
at American University, and all campuses across the country, since the 
recession. My peers and I all realize that student debt has accumulated 
at unprecedented and uncontrollable rates. This not only poses a 
significant burden on us while we are in school and for our foreseeable 
young adult lives, but it also restricts the opportunities we are able 
to take in our careers, as we must think about finding jobs that will 
support us enough to may our loan repayments.
    Students spoke out last year to keep interest rates from doubling 
for a multitude of reasons: because we realize the growing costs of 
higher education are not sustainable and that the federal government 
should have a key role in providing affordable and accessible 
education. The doubling of the rate would have set an uncertain 
precedent for us and future generations of college students, as we 
would no longer have the option of low interest rate Stafford Loans to 
help us get over financial barriers to our institutions. Additionally, 
students depend on the fixed rate federal loans to make long-term plans 
for their finances. Whereas private loans have shown to contribute much 
more to harmful borrowing for students, this makes fixed rate federal 
loans even more critical in being a financially feasible and healthy 
borrowing option for students.
    Student debt is an issue we must all tackle together; the federal 
government, private institutions, and students alike need to all take 
action because we share the responsibility. American University is one 
such private actor making the hard decisions in order to ensure 
affordable education for our students. This year, the university 
administration, aware of growing national trends and the criticism its 
received in the past of being ranked a high debt school, took serious 
action to correct this wrong and to prevent future accumulation of debt 
on its students parts. The university administration engaged students 
in its budget process for the creation of the FY 2014- 2015 budget. In 
the end, we achieved the lowest tuition rate increase in 40 years and a 
$1.46 million increase in financial aid. When legislators and decision 
makers work with students, we can all achieve our shared goals.
    There are so many reasons as to why ensuring that student loan 
interest rates stay low is important to all parties. For students, loan 
interest rates determine our ability to afford to attend our 
institutions, they impact the quality of our lives after graduation, 
and they affect our abilities to pursue certain careers and other life 
goals for years to come. For institutions of higher learning, their 
efforts to reduce costs, such as those demonstrated by American 
University, need to be matched by federal government action in order to 
have the largest impact possible for its students. And for you, our 
nation's legislators, it is crucial that we invest in opportunities for 
us, the nation's youth, so that we are able to keep moving our country 
forward.
                                 ______
                                 

            Summary of Student Perspectives on Student Loans

       Prepared by the National Campus Leadership Council for the
             House Committee on Education and the Workforce

                              INTRODUCTION

    With student debt skyrocketing, student leaders around the country 
have consistently put college affordability at the top of their campus 
agenda. The National Campus Leadership Council (NCLC) works with 300 
student body presidents, who collectively represent 4.5 million 
students and every state. Over the last year, NCLC has sought to better 
understand prevalent perspectives among campus leaders and help share 
those views to inform policymakers and opinion leaders as they shape 
the national discourse.
    On May 1, 2012, NCLC released a letter drafted by two student body 
presidents and signed by 280 of their peers around the country urging 
action to prevent student loan interest rates from doubling. To our 
knowledge, no other issue has sparked such united action among so many 
student governments nationally. It is important to note that the 
letter's signatories urged the freeze on Stafford loan interest rates 
as a ``first of many steps in a real effort to address the level of 
student debt and reduce the excessive need for borrowing.''\i\
    Our team hopes that the any actions or recommendations by the 
Committee on Education and the Workforce are next steps toward student-
driven, comprehensive improvements to the federal financial aid system. 
Students are particularly interested in helping create a more permanent 
solution to ensure student loans are affordable and open access to 
higher education for more young Americans. Student perspectives on 
student loan reform are summarized below.

Campus Perspectives
    The following are prevalent ideas among student leaders around the 
country, which should be considered as Congress identifies a more 
comprehensive solution to keeping student loans affordable and college 
financially accessible.
            I. The federal financial aid program, including loans, must 
                    be student-driven
    Students leaders have experiences and perspectives that are 
critical to identifying practical steps forward. Most student body 
presidents are working with their university administrations and state 
legislators to keep costs down and public investment high. These 
efforts are important to consider when shaping federal policy. Whenever 
possible, young voices need to be a part of the conversation.
    At public and private institutions alike, high student engagement 
yields decisions that better serve student needs. Emily Yu, student 
body president at American University worked closely with 
administrators this year to achieve the lowest tuition rate increase at 
the school in 40 years and a $1.46 million increase in financial aid. 
She said, ``When legislators and decision makers work with students, we 
can all achieve our shared goals.''\ii\ If these efforts can be 
successful at the campus level, the federal government should work with 
student leaders to make sure programs reflect modern student needs.
            II. Debt burden and repayment options must be clear and 
                    predictable
    A frequent observation among students is that financing college is 
complicated and at times overwhelming. The fixed rates of the Stafford 
loan program have been important to helping students better understand 
their long term finances, while variable rates often offered by private 
lenders are difficult to understand and present significant financial 
challenges to young Americans as they graduate and start repaying 
loans.
    Xavier Johnson, student body president at University of Texas San 
Antonio said, ``Fixed interest rates present an option that is easier 
to plan for, so in the long run, fixed rates will be the most effective 
in keeping the costs to students low.''\iii\ These sentiments are 
echoed around the country among student leaders. Predictability helps 
students plan for repayment long term, which is why private loans, 
which typically have variable rates, result in higher default rates.
            III. Low interest rates make a difference
    When interest rates were scheduled to double in 2012, students were 
at risk to owe an extra $1000 for the same loan and education. The 
intensity of student response demonstrates what $1000 means for a 
college student or recent graduate. As default rates rise and high 
youth unemployment rates linger, the financial aid system should do all 
it can to minimize debt burden and make sure graduates' discretionary 
income is going into the economy instead of repaying loans. Making 
federal loans more attractive than private, sometimes predatory lending 
through low interest rates should be a goal of the Stafford loan 
program, offering safe, viable options for student borrowers.
    At the University of Iowa, where the class of 2012 graduate with an 
average of $26,296, student body president Nic Pottebaum asserts that 
higher interest rates result in reduced graduation rates as students 
take on more debt.\iv\ Indeed, this holds with national data that 
indicate about thirty percent of student borrowers drop out of college. 
As the need for a college education grows with tuition, students are 
forced to work through school.
    The sequester will cut up to 70,000 Federal Work Study positions, 
adding financial stress and creating a greater need for student 
borrowing for lower income students.\v\
            IV. Student debt is not just a student issue
    Student debt negatively affects companies trying to sell goods and 
employers trying to fill jobs. The economy already sees the effects of 
overwhelming debt burden as recent graduates have to pay of loans 
instead of make major life decisions to buy a home or start a 
family.\vi\ A recent Wall Street Journal article described a relatively 
new aversion among young people to any type of debt, including 
liabilities from credit cards, mortgages, and car loans.\vii\ 
Additionally, homeownership among young people is at a thirty year low, 
largely driven by burdensome student debt.\viii\
    Nic Pottebaum, University of Iowa, noted that ``[High debt] can 
permanently destroy these hapless student's credit scores or 
permanently sentence students to a life of disappointment if they 
cannot graduate for financial purposes.''\ix\ These problems, when 
concentrated on our generation, present significant challenges to our 
generation as consumers and affects the rest of the economy. Xavier 
Johnson from UT San Antonio said ``Debt levels can persist well into 
and beyond the time a graduates reaches the age of thirty. This means 
that money that could be going into investments, savings, or 
consumption is instead going to repay debts; which in turn creates a 
lower standard of living for graduates.''\x\

Conclusion
    Student debt is an overwhelming problem for students around the 
country and threatens important aspects of our economy. Accordingly, 
the federal student loan program should reflect student needs, promote 
predictability, and remain affordable. As student leaders noted in the 
2012 open letter urging a freeze on Stafford student loan interest 
rates, ``There has long been a promise that, if a student goes to 
college, works hard, and does well, they will have a more prosperous 
future ahead of them. Student loan debt is severely undermining that 
prospect.'' As young people we need our elected leaders to take steps 
necessary to secure our future prosperity and the long term health of 
the American workforce.

                            ACKNOWLEDGEMENTS

    Several student body presidents sent NCLC memos detailing their 
campuses experiences with student loans. They include Emily Yu from 
American University, Jeanne Wilkes from Delta State University, Evan 
Martinak from Michigan State University, Ryan Beck from Missouri 
University of Science and Technology, Nic Pottebaum from University of 
Iowa, Ashley Mudd from University of Louisiana, and Xavier Johnson from 
University of Texas San Antonio. Their contributions, in addition to 
countless interviews over the last 10 months, shaped this summary.

                                ENDNOTES

    \i\ ``Student Loan Interest Rates.'' 2012. http://
www.nationalcampusleaders.org/student-loan-interest-rates
    \ii\ Yu, Emily. ``Memorandum: Student Loan Interest Rates.'' 
American University Student Government. 12 March 2013.
    \iii\ Johnson, Xavier. ``Memorandum: Student Loan Interest Rates.'' 
University of Texas San Antonio Student Government. 12 March 2013.
    \iv\ Pottebaum, Nicholas. ``Student Loan Interest Rates: University 
of Iowa.'' University of Iowa Student Government. 12 March 2012.
    \v\ O'Sullivan, Rory and Brian Burnell. ``Millennial Unemployment: 
Drops to 12.5% but Sequestration Could Increase It.'' Young 
Invincibles. 8 March 2012. http://younginvincibles.org/2013/03/
millennial- unemployment-drops-to-12-5-but-sequestration-could-
increase-it/
    \vi\ Shellenbarger, Sue. ``To Pay Off Loans, Grads Put Off 
Marriage, Children.'' Wall Street Journal. 17 August 2012. http://
online.wsj.com/article/SB10001424052702304818404577350030559887086.html
    \vii\ Shah, Neil. ``Young Adults Retreat from Piling Up Debt.'' 
Wall Street Journal. 6 March 2013. http://online.wsj.com/article/
SB10001424127887323293704578334761823150672.html
    \viii\ Thompson, Derek. ``The End of Ownership: Why Aren't Young 
People Buying More Houses?'' The Atlantic. 29 February 2012. http://
www.theatlantic.com/business/archive/2012/02/the-end-of-ownership- why-
arent-young-people-buying-more-houses/253750/
    \ix\ Pottebaum, Nicholas. ``Student Loan Interest Rates: University 
of Iowa.'' University of Iowa Student Government. 12 March 2012.
    \x\ Johnson, Xavier. ``Memorandum: Student Loan Interest Rates.'' 
University of Texas San Antonio Student Government. 12 March 2013.
                                 ______
                                 
    Chairman Kline. Without objection.
    Mr. Miller. Thank you.
    Chairman Kline. Mr. Andrews?
    Mr. Andrews. Thank you, Mr. Chairman. One comment I would 
make about the discussion of income contingent repayment is we 
have two federal policies working at cross purposes.
    We claim we want students to take advantage of income 
contingent repayment, but the gainful employment rule that was 
proposed does not give institutions credit for a loan being in 
repayment if the student chooses that option which is I think a 
pretty contradictory view.
    Dr. Lucas, I want to ask you about your proposal to switch 
to a different accounting method for student loans, for direct 
student loans at least, and this is a very abstruse, 
theoretical debate that has enormous consequences in the real 
world in which we live.
    I looked at the chart that you put at the bottom of page 
four. If we stuck to the present system, in the 10-year window 
between 2010 and 2020 the loan program is scored as raising $96 
billion, reducing the deficit by $96 billion.
    If we switch to your method, it would be scored as adding 
$140 billion to the deficit. So this is a very big deal. It is 
a quarter of a trillion dollar difference over a 10-year 
period, which has profound policy implications for how much we 
charge students and families and what impact it has on 
taxpayers. So I wanted to get into and understand the 
theoretical underpinnings of this.
    You say that the present system fails to account for the 
full cost of the risks associated with government credit 
assistance. That is the core of your argument. So in a sense, I 
think you are arguing that the projections that we make based 
upon present discount rates and default rates and whatnot 
understate the cost and overstate the benefit which therefore 
makes them inaccurate.
    But we don't really have to have a theoretical argument 
about this. Since 1993, at least a third of the loans in the 
system have been direct student loans. What has that 20 years 
of history actually produced on a cash basis with respect to 
direct student loans?
    In other words, if we added up the defaults that the 
taxpayers had to cover, the administrative costs the taxpayers 
have borne, and then subtracted from that or I guess subtracted 
from that, the revenues that have been collected on direct 
student loans and also the interest cost--we have to subtract 
that out--what is the cash scoreboard over the 20-year basis?
    Ms. Lucas. Okay. So to address the general issue, I just 
want to say a word about the concept----
    Mr. Andrews. If I may though----
    Ms. Lucas. Okay, on the cash basis I can't give you the 
number. It is certainly true that the cash payments have 
probably covered the cash outflows from those programs.
    Mr. Andrews. Well, if we just go back to that than for a 
minute. If you have that information, if any of you have that 
information, it would be great if you could supplement it for 
the record.
    I truly appreciate the fact that there is a theoretical 
difference between cash and an accrual basic counting. I don't 
quite understand it, but I know there's a theoretical 
difference.
    But I think I just heard you say that if you add up over 
the 20-year period, the revenues that came into the federal 
treasury on direct student loans and subtracted from that the 
loan defaults the taxpayers had to cover, the administrative 
costs we had to cover, and the interest we paid to acquire the 
funds to make the loans, that we are running a surplus on that. 
Is that right?
    Ms. Lucas. When the government makes a loan, they are 
incurring a liability to taxpayers and that liability has a 
cost today. That is the logic of the accrual accounting.
    Mr. Andrews. If I may, I get the theory, but my narrow 
question here was on a cash basis, I think I just heard you say 
that the direct loan program has produced more dollars in 
income than it sent out in spending. Is that correct?
    Ms. Lucas. I don't have those numbers before me. I believe 
that if you were to account for credit on a cash basis, which I 
think would be a bad idea and it is not the law you would come 
to a different conclusion, but that accrual is the right way to 
think of it.
    Mr. Andrews. I understand--no, I appreciate the theoretical 
difference. Just for those of us who are not economics 
professors, one way I would look at this is that the core of 
your position as I understand it is that it costs us really 
more to run this program then the present accounting method 
reflects.
    Well, I would like to look at what the actual facts are in 
that over a 20-year period. And it is my understanding--and I--
again, please supplement the record, but it is my understanding 
if you add up the loan payments received and you subtract from 
that the cost of acquiring the capital, the administrative 
costs of running the program, and the defaults taxpayers had to 
cover, the treasury has come out ahead on that. Is that true?
    Ms. Lucas. The fact is that the government gives students 
loans on terms that are far more favorable than what the 
private sector is willing to offer them, but at the same time, 
the government books those loans as showing a significant 
profit. And so there is a disconnect between thinking that the 
market price of the loan is one thing and the cost to the 
taxpayer is another thing.
    If we were to buy a tank for $50 instead of $1 million we 
can't set the price of tanks--we can't set the price of loans.
    Mr. Andrews. I will say I know the Defense Department is 
glad that we don't use that in accounting. I am not sure we 
should use it on students either.
    Chairman Kline. Dr. Foxx?
    Ms. Foxx. Thank you, Mr. Chairman.
    Mr. Draeger, what is the most important benefit for 
students in the federal student loan programs? A low interest 
rate on the front end, or repayment options and other 
assistance on the backend?
    Mr. Draeger. Unfortunately, we would have to go off of 
anecdotal information on this because we don't have any 
statistical studies that show what is most important to 
students beyond the fact of the availability of the dollars.
    That is what is covering the cost of their education. So 
there is little evidence to prove that interest rates, 
particularly since half of our subsidized Stafford loan 
borrowers are also borrowing unsubsidized Stafford loans at 
double the rate, or that interest subsidies in and of 
themselves up front are really driving college access.
    More it seems to be that it is the availability of the 
dollars which is, that is what is most important to them up 
front and then our job is to figure out how we implement some 
sort of safeguards to make sure that those students stay on the 
straight and narrow path of repayment.
    Ms. Foxx. Thank you very much.
    Mr. Delisle, you look like you wanted to make some comment 
after Mr. Andrews' comments and I wondered, did you want to 
respond?
    Mr. Delisle. I did and I now have the distinct advantage of 
making those comments now that he has left the room.
    What Congressman Andrews was essentially purporting is that 
we should measure risk looking backwards when we know what 
already happened. That is a ridiculous concept. Most of the 
cost to the federal student loan is the risk of that they might 
not be repaid or we might not know how much they will be 
repaid.
    And by saying, well, can't you just look at what happened 
and then value it? That is essentially--you wouldn't value the 
cost of insurance going forward based on essentially that 
happened--something that did or did not happen in the past.
    This is another example for--you can look at a well-known 
program, the troubled asset relief program. So going forward, 
we know when we made those loans, when Congress made those 
loans to investment banks, we knew that we were subsidizing 
them. We were making rates at half the going rate in the market 
at a time of incredible market turmoil.
    When looking backward, we got all the money back. So was it 
a cost or was it not cost? I would imagine most people here 
would say making loans to investment banks at half the going 
market rate is definitely a cost even if you collect everything 
they said they would pay you.
    Ms. Foxx. Thank you very much.
    Now I would like to ask each witness if you would answer 
this question: as the committee begins to reauthorize the 
Higher Education Act, what are some key principles that should 
guide how we review and reform federal student aid programs?
    Please keep in mind we probably have about 3 minutes and 
there are four of you. So if you could do about 40 seconds, 
maybe we could get to everyone and we will start with Dr. Lucas 
and go down.
    Ms. Lucas. Thank you. I will say very briefly that I think 
what is important is to maintain the broadest of access to 
higher education and affordability.
    In the interest of maintaining affordability, it is 
important to rethink student loans as well as other assistance. 
I think we have to think about controlling costs in a way that 
is not so prescriptive as it diminishes the high quality of 
higher education in the United States, which has really been an 
engine of mobility and growth in this country.
    Ms. Foxx. Thank you.
    Mr. Delisle. I will be very brief. I would say do not allow 
graduate and professional students to borrow an unlimited 
amount of money with the option for loan forgiveness on the 
backend.
    Ms. Foxx. Very good. Thank you.
    Mr. Draeger?
    Mr. Draeger. The principal that we adhere to when examining 
the student financial aid programs is that no qualified student 
be denied access to higher education due to lack of financial 
resources.
    It may not mean choice to every school, that we will pay 
for every school, but basic access to postsecondary education.
    Ms. Foxx. Thank you.
    Dr. Mercer?
    Ms. Mercer. Thank you. I would say the twin principles are 
both access and completion; focusing on one without the other 
doesn't serve us well. Students reap the biggest benefits, the 
nation reaps the biggest benefits when students enroll and 
complete college.
    Ms. Foxx. Thank you, Mr. Chairman. I yield back.
    Chairman Kline. Thank you.
    Mr. Scott?
    Mr. Scott. Thank you, Mr. Chairman.
    I would warn the witnesses that there is a monitor in the 
back so that somebody who has left may still be able to hear 
what is being said.
    Mr. Draeger, following up on your statement about denying 
access, what portion of students now do you think cannot attend 
college because they can't afford it?
    Mr. Draeger. The number one cited reason in study after 
study of why students don't go to college, whether I think both 
perceived and real, is lack of funding to attend.
    So students either feel that they don't have enough money 
to attend, they come from a background that won't allow them to 
attend, and even if they are academically prepared, the number 
one obstacle that is cited over and over again is the cost.
    And so whatever we can do to let students know about the 
availability of funds like the Pell grant program, student 
loans, Federal work-study, supplemental grants, I think we will 
continue to make strides in college going rates.
    Mr. Scott. What portion of students would like to be on the 
work-study program that can't get on because of insufficient 
funding?
    Mr. Draeger. The work-study program is a very popular 
program on college campus. And a couple of years ago we saw an 
increase in work-study dollars. Schools were very excited to be 
able to put that to work.
    Work-study has the added benefit of helping students 
complete because it actually integrates them into the campus. 
So it is one of the more popular programs that schools like to 
administer.
    Mr. Scott. And are Pell grants at a sufficient level to 
guarantee access?
    Mr. Draeger. Our supposition is that we have appreciated 
the bipartisan support for the Pell grant funding. We think 
Pell grants could always see an increase. They have not kept 
pace with the cost of college and in the past have not kept 
pace with basic costs of inflation; recognizing that you all 
have to balance understanding balancing of budgets along with 
that.
    Mr. Scott. Several months ago, there was a change in the 
PLUS Loan Program. Can you tell me the effect that had on 
student financial aid administrators?
    Mr. Draeger. In the fall, we understand that the Department 
of Education introduced an additional underwriting criteria 
that looked back approximately 60 days to see if there were any 
delinquencies in a parent's credit or if they were delinquent 
on any other federal loan payment.
    That resulted in denials of PLUS Loans for students who 
were already admitted and enrolled, and I think this gets to 
the point if we want to continue to not disrupt students and 
their ability to attend college, any changes, dramatic changes 
we make in the availability of financial aid ought to be done 
in the future for new students who are getting aid or new 
borrowers.
    Mr. Scott. What portion of students were adversely affected 
by that change?
    Mr. Draeger. I don't have those numbers at my disposal, but 
I can look to submit them for the record.
    Mr. Scott. Thank you.
    There are a number of proposals on the table. Do any of 
them allow you like a mortgage to midstream lock-in a set flat 
rate, a fixed rate, like you can a mortgage rather than a 
variable rate that fluctuates with the market? And would that 
be a good idea?
    Ms. Lucas. I believe that the proposals for introducing 
market-based rates would preserve the fixed rate. Many of those 
proposals would preserve the fixed rate nature of the loans so 
if the student had 20 years to pay it would be at a fixed rate 
that was determined in the year they took out the loan.
    The change would be that loans that were originated in 
different years would bear different interest rates that moved 
along with market interest rates.
    Mr. Scott. But there would not be a variable interest rate 
on the individual loan? It wouldn't go up and down with the 
market?
    Ms. Lucas. No, just like you said, as with a mortgage, 
students would get a fixed rate and they would have the option 
to prepay it. So if they had the opportunity to refund at a 
lower rate----
    Mr. Scott. How do mortgages reset their interest rate every 
couple of years?
    Mr. Delisle, if you don't have a discharge at the end of 
income based repayment, wouldn't some people be paying 
virtually for the rest of their lives?
    Mr. Delisle. Oh, sure, and we haven't recommended that you 
do away with loan forgiveness. We said it's the combination of 
unlimited borrowing authority for graduate students plus three 
limits on repayment.
    One of them is loan forgiveness at 20 years or 10 years. 
Another is between zero and 10 percent of their adjusted gross 
income, and the other limit is another limit for high income 
earners that the payment stops going up.
    If you have unlimited borrowing up front, three separate 
limits on the back, that is essentially a great big moral 
hazard and a message to students to borrow away.
    Mr. Scott. Thank you, Mr. Chairman.
    Chairman Kline. Thank you.
    Dr. Roe?
    Mr. Roe. Thank the Chairman for having this and the members 
for being here.
    I am gonna--there are some of us that are the same vintage 
that I am here and I want to go back in time a little bit and 
just express to you I came from a family that, my father worked 
in a factory, my mother was a bank teller. I was able to go to 
college. I worked. Remember the time when you worked your way 
through college? I was able to go to college and medical school 
and graduate in 7 years from both of those with no debt.
    Now think about that today. I have served as a foundation 
board member of two colleges where I attended--the one where I 
attended and was president of the foundation board to help 
students make it more affordable and I continue to serve on the 
foundation board now.
    And I think it is one of the greatest challenges we face in 
America today are the student loans and the cost of college and 
I don't know what is causing it to go up at seven, eight, and 
10 percent per year, but it is unsustainable. I can tell you 
that.
    You cannot go out and see young people--I see students 
graduate from graduate school and law school and medical school 
with $200,000, $250,000, $300,000 in debt. It is unbelievable 
and they will be 50 years old or older paying that off.
    Where we live in Tennessee you can certainly buy a very 
nice house for what the cost of many student loans are today 
and these--and I see them in people who are teachers that are 
going out with $50,000 and $60,000 and $70,000 loans. I don't 
know how they ever get out of that and I think your point about 
no--on the other end--I think you made your point very, very 
well.
    I am going to ask a couple questions. One, we have got a 
trillion or so--y'all have told us approximately $1 trillion 
which now exceeds credit card debt in student loan debt. Is the 
bubble out there? And the number I read, 35 percent of students 
who are paying those, or loan recipients it says here, are 
paying those back are 90 days and above in arrears now.
    Is that bubble real? And what happens when it collapses to 
the taxpayers? Any of you can take that.
    Mr. Delisle. Well, I will point out of that trillion 
dollars that is outstanding, the median monthly payment is 
$190. That is from the Federal Reserve Bank. The median monthly 
payments on student loans is $190, monthly payment $190.
    But, I also want to point out that you talked about 
somebody with $200,000 in debt paying for 30 years. Not under 
current policy. That person wouldn't pay for longer than 20 
years under the income-based repayment plan.
    They could choose to pay for 30 years by not enrolling in 
income-based repayment, but I think that the program is set up 
now where you can even earn a very high income and have that 
debt forgiven.
    So our proposal was to essentially move the loan 
forgiveness for people who borrow more than $40,000 from 20 
years to 25 years. It doesn't sound like a big change, but it 
is a really big change for people who go to graduate school and 
it essentially requires them to pay a little bit more because 
they borrowed a little bit more.
    Mr. Roe. I guess the problem I have with that is to--here 
you are at 50 years old paying off a student loan that you 
acquired and I think certainly from the standpoint of the 
counselors at the school is to let the students know what you 
are getting into, what you are going to pay off later.
    There is a cost out there and I certainly think you need to 
do a better job of allowing an 18-year-old, a 19-year-old, or a 
20-year-old say, hey, look, this money is going to have to be 
repaid and that colleges are going to have to do a better job 
in controlling the cost because as I said, no one, including 
Bill Gates, is not going to be able to go to college if it 
keeps going up like this.
    Mr. Draeger. I think one of the concerns that is often 
overlooked in the whole college debt conversation as Jason 
pointed out, is the loan payments seem manageable for most 
graduates who graduate with an average of $25,000 in loan debt.
    There is a whole another part of this which is the amount 
of debt that parents take on to send their students. So when 
you talk about those who are in their 40s, 50s, these are folks 
who are also probably parents who took on a substantial amount 
of loan debt.
    One of the things that is missing in terms of safeguards, 
particularly on parent PLUS loans, is a simple assessment of 
their ability to repay the loan based on their current income.
    So there is no, for example, debt to income ratio on parent 
PLUS loans. Again, we don't want to disrupt current 
enrollments, but for new borrowers or students down the road I 
think it makes sense to examine additional safeguards.
    If the mortgage bubble taught us anything, it is that 
appropriate underwriting not only protects lenders, it also can 
protect borrowers.
    Mr. Roe. Mr. Draeger, one of the things that happened too, 
I think, is the economy hasn't done well. It has encouraged 
students to stay in college longer and acquire more debt.
    I thought for a minute, Mr. Draeger, you brought the health 
care bill with you when you have had that stack of papers out 
front of you when you first brought that here. I thank you for 
your testimony and I certainly appreciate the concern and I 
think we certainly can work on this.
    I yield back.
    Chairman Kline. Thank the gentleman.
    Mrs. McCarthy, you are recognized.
    Mrs. McCarthy. Thank you, Mr. Chairman. I appreciate the 
hearing.
    Dr. Mercer, I want to follow up with something that you 
have talked about in your testimony. You mentioned in your 
testimony that there have been a number of changes in the last 
decade to student aid that have occurred outside of 
reauthorization. Can you identify one or two of the changes 
that you believe has done the least amount to help stem costs 
of college for the average student?
    Ms. Mercer. I am sorry, you said that has done the least to 
help stem the cost of----
    Mrs. McCarthy. Right.
    Ms. Mercer. I am--well I would say probably limiting the 
number of semesters that a student can actually use their 
Pell--they can have--receive Pell to go to college. If 
anything, that is a policy that was actually intended to help 
students expedite the time that it took for them to complete 
their degree, and thereby controlling for costs both at the 
institutional level but more from the student perspective, for 
them to be able to move through the system.
    So undoing that, in effect, leads to increased costs more 
so on the student perspective and it had no impact on the 
institution for them to change their policies in terms to 
helping advance students and move them through the system.
    Mrs. McCarthy. One of the things I wanted to follow up on 
as we talk about these loans and it was just talked about as 
far as parents being able to carry that loan. We are talking 
about one student. What happens when there are two or three 
students in college? They might be stepped, but there is still 
three students.
    I mean, you know, unless you are extremely wealthy, that is 
a little bit steep for a parent and certainly the goal is to 
have their children go to college if that is what they want to 
do. So I mean, technically, the parents are looking for 
everything they can, obviously the children are doing what they 
need to do, but I don't know whether anybody has actually 
really thought about that on what the loan is on for the 
parents.
    I know things are better today. Grandparents can help 
technically. I guess that is what I am supposed to be doing, 
but I mean, when you think about it, it is mind boggling as far 
as that goes. Just to follow up on you, Mr. Draeger. When I 
hear everybody talking about also that these loans that are 
being taken out, Mr. Hinojosa and I, for years, we have been 
pushing financial literacy.
    Now you said that the colleges can't give certain 
information to the student or to the parent. Would they be able 
to work it under the--a way of financial literacy to have them 
understand what they are actually getting into?
    Mr. Draeger. So schools aren't prohibited from delivering 
information. The real problem is that we have a lot of 
information that we give them.
    Mrs. McCarthy. Right.
    Mr. Draeger. The issue is really that the school is 
prohibited from requiring any additional steps that is not 
mandated in legislation before a student gets their loans. So 
to require a student, for example, to build out a budget to say 
why is it if you are, for example, a part-time student 
borrowing at a full-time rate, let's walk through this and make 
sure that you understand why you need this money before we 
approve the loan.
    Right now, schools aren't able to introduce or mandate 
those types of steps. So I think financial literacy is a huge 
part. In fact, many schools are partnering with former state-
based agencies that operated in the Federal Family Education 
Loan Program that were part of the state or part of another 
nonprofit to try to develop and deliver more meaningful and 
engaging financial literacy to students, but again, unless it 
has teeth, I think we are always--it appears we are just 
delivering more information that they might not pay attention 
to.
    Mrs. McCarthy. So let me ask you, why do you think the 
language is in there that the college can't give more 
information?
    Mr. Draeger. I think at the time, when student loans were 
developed, this was viewed as entitlement aid and that the 
school should not come between a student and the total amount 
of financial aid that they are entitled to, and that includes 
loans.
    But as demonstrated by this hearing and a lot of the things 
we see in the press, there is rising concern about the amount 
of family debt as you talked about the parents--the family debt 
that is being taken on and I think from the school perspective, 
we are questioning can we play a better and a more significant 
role with some teeth to be able to stop and ask students do you 
really need this much, this money in loan debt. Let's think 
through this together.
    Mrs. McCarthy. Because one of the things I know--and this 
committee certainly worked on that--is educating especially new 
college students on when they went to register on all the 
credit cards that were available for them.
    It was a big debate here because a lot of them were not 
prepared to pay those particular debts down. So it is 
complicated, but thank you.
    I yield back.
    Chairman Kline. Thank you.
    Mr. Walberg?
    Mr. Walberg. Thank you, Mr. Chairman. It is a bit surreal 
to be sitting here on a committee talking about student loan 
debts and trying to come to a solution when we are having a 
great deal of difficulty in dealing with $16.5 trillion debt 
that we have the with no real activity that we see in the 
pipeline to accept proposals that would reduce that debt and 
balance, but that is another point.
    Right now in my home state of Michigan we are facing an 
unemployment rate of just below 9 percent, and though I 
represent Hillsdale College, that really doesn't find any 
involvement in our topic today. Yet I do represent some of the 
students from the some of world's greatest research 
universities like the University of Michigan, Michigan State, 
private religious-based institutions like Spring Arbor and 
Siena Heights University, Adrian Olivet Colleges, and community 
college systems in Lansing, Jackson, and Monroe that are models 
of academic and employer cooperation. I am pleased with that.
    But right now, we are working with all hands on deck to 
keep our graduates in the state employed and primarily because 
of student debt and limited job opportunities.
    The federal student loan program was created to help 
students pay for the high cost of tuition, but over the last 20 
years, students in Michigan have seen their federal government 
gradually move to overtake all aspects of the student loans 
which has gotten us into a mess where we find ourselves now. It 
is my opinion.
    We know that the student loan interest rates are not the 
sole issue facing Michigan students and other state students; 
however, as college tuition continues to skyrocket and students 
face staggering amounts of debt, we must enact comprehensive 
solutions that put our schools and our parents and our 
communities and next-generation on a path to prosperity.
    So following in Mrs. Foxx's questioning, just briefly, I 
ask of all of you, if any of you know of any state or any--
excuse me--any study showing the relation between the ever 
increasing higher education costs and the lack of any real 
present disincentive to student debt. Any studies that show any 
comparison, any relation of high cost of education versus the 
student debt?
    Mr. Draeger. I would be happy to submit some of these 
studies to the record. The ones that we have looked at have 
shown that that even in periods where financial aid wasn't 
increased, grants or you kept the annual and aggregate loan 
limits steady college costs have continued to go up and so the 
function between financial aid and debt which is a function of 
cost just doesn't seem to correlate.
    We haven't seen that corollary function. So I would be 
happy to submit that, those studies, for the record.
    Mr. Walberg. Well, I would appreciate that.
    Mr. Delisle. I mean this is a pretty difficult thing to pin 
down but I think that there is a couple things we should keep 
into context. You know, an undergraduate, a dependent 
undergraduate in their freshman year can borrow $5,500 through 
the federal student loan program.
    It is hard to imagine that that amount of subsidized credit 
really moves the needle on tuition, but now if you look at 
graduate programs where the student can borrow up to the full 
cost of attendance as set by the institution for as many years 
as they want to, you can get two, three, four, five graduate 
degrees and just keep borrowing and pay for your cost-of-living 
while you are there.
    My guess is if there is a place where loose and very 
cheaply available federal credit is pushing up the price of 
college education, it is definitely in the graduate programs.
    Mr. Walberg. I appreciate that. That is probably an area we 
ought to look to find disincentives to encourage our costs of 
education to moderate at some point and that probably ought to 
be part of our quest.
    I also would guess that providing further incentives to 
families to save for college education would be helpful in the 
process.
    Mr. Draeger, about how many students are benefiting from 
the subsidized Stafford loans currently being offered a 3.4 
percent rate?
    Mr. Draeger. By our estimates, looking at NPSAS data, about 
7.5 million.
    Mr. Walberg. How many of these students also obtained 
subsidized loans with PLUS and Stafford?
    Mr. Draeger. Just about half of them. So 4 million of our 
subsidized borrowers are also borrowing in the unsubsidized 
Stafford loan program.
    Mr. Walberg. Are there any private lenders able to offer 
loans to Michigan or other state students at significantly 
lower rates?
    Mr. Draeger. We have seen private lenders who are currently 
marketing rates lower than the federal loan limit--or excuse 
me, federal interest rates, particularly for Stafford and PLUS.
    The unknown question, the answer that I can't give you, is 
what the distribution is; how many people who apply for those 
private loans are actually getting them.
    What makes it difficult for financial aid administrators is 
trying to explain the benefits of staying in the safety of the 
federal loan programs when private loans are being marketed at 
a lower rate.
    Mr. Walberg. Thank you.
    Chairman Kline. The gentleman's time has expired.
    Mr. Tierney?
    Mr. Tierney. Thank you, Mr. Chairman, and thank you for 
having this hearing, Mr. Chairman. I think it is good to begin 
the discussion and certainly we have to address the doubling of 
the subsidized Stafford loan, but we have to go on beyond 
there. Obviously we can't stop there. We have to think a little 
bigger. We have to look at the responsibility over the whole 
realm of that.
    But I wanted to try to put this conversation in a little 
context. Most of my constituents think it incredibly unfair 
that Wall Street banks can go to the Federal Reserve and borrow 
money at almost no interest rate at all, yet they turned around 
and look what they have tomorrow to go to college and they find 
that comparatively exorbitant compared to that.
    Now, the people on Wall Street are the ones that just about 
wrecked our financial system taking these reckless risks and 
yet they can go it get a deal. All that the people who are 
trying to do when they graduate is added to the nation's 
productivity, innovation, and creativity, but they get a bad 
deal in comparison on that.
    So that is the context in which I work. A lot of people 
coming into my office and wanted to know what the heck is going 
on.
    Dr. Lucas, you mentioned that one of the reasons--and 
correct me if I got this wrong--but one of the reasons why 
interest rates should increase and not be fixed is that lenders 
need to be assured their return on capital will increase to 
account for that inflation. Is that fair?
    Ms. Lucas. I said that if inflation were higher that is 
what the market would require.
    Mr. Tierney. It would. All right, and you are saying if 
that doesn't happen that it is a cost to the taxpayer.
    Ms. Lucas. I am saying that when you fix loans as they are 
now when inflation goes up you are still charging students the 
same rates, which makes the loans further below market rates.
    Mr. Tierney. Below market rates on that. But what if the 
lender was a not-for-profit? What if the lender was somebody 
that said, you know, I am happy to cover my costs? And I think 
that there is a value to covering my costs and not getting that 
profit back or on that basis because I think it is good public 
policy to have more people graduate from school, increase our 
productivity, our creativity, and all of that going forward, 
then that is a whole different consideration, right?
    Ms. Lucas. I agree with you completely that it may be good 
public policy to keep the interest rates on student loans low. 
My comments about changing the accounting for them had to do 
with the transparency and recognition of the true costs which 
would make it easier for Congress to decide to use student 
loans in judicious proportion to other types of aid, but as far 
as----
    Mr. Tierney. So we would get to see--so we would get to see 
what our public policy was is what you are saying. You get 
transparency and you know what profit you weren't making and be 
able to decide whether or not that was commensurate with the 
policy plusses that you thought you might get. So they can make 
that kind of decision on that basis.
    And I think that is great, but--and I think that is the 
kind of discussion we ought to have around here but I don't 
think we ought to lose sight that it is--you know, we are not a 
for-profit organization and we talk all the time about--our 
rhetoric speaks to the idea of needing more college graduates 
and all of our employers need it and we need it for our 
productivity and for our creativity and our innovation, but our 
policies and our interest rates still counter to that.
    You know, making it difficult for people to pay off loans. 
Some people don't even go to college because they see the 
frightening costs going forward. So I think we ought to have 
that discussion but not lose sight of the fact that there is a 
value to not making a profit so much.
    And if we thought we had to make up that money somehow, 
maybe we wouldn't give billions of dollars in tax subsidies to 
oil companies every year. So basically shoveling money out the 
door to them as a gift with no real public policy plus back on 
the other side, or if we thought we had to make it up, maybe we 
would put a transaction tax on those very Wall Street people 
that almost drove us into ruin and slow down the volatility of 
the electronic trades and at the same time for the value of 
what the proposal I have seen is the cost of about 1 cup of 
coffee, one dollar for every 800 cups of coffee and we get a 
plus on the way the market runs and also get them to start 
contributing to fixing what is going on in the country and get 
us more graduates on that.
    That is all I really wanted to cover on that, but I do 
think on the other part of that, Mr. Chairman, is that at some 
point we have to start looking at making sure that the people 
that have these college loans and they are getting collections 
on the other end get treated the same as people that have 
borrowed for other purposes.
    I mean, Donald Trump can walk into bankruptcy, clear his 
record, and go out and start investing the next day, but a 
student that falls on some calamity and can't repay their loans 
cannot go into bankruptcy at all and never gets a restart. I 
have a number of people that come into my office that just keep 
having trouble with the collection process, penalties, interest 
going up and up on them and they seem to never be able to get 
out.
    So I think we need some consumer protections. We need to 
take a look at why students are one of the very few groups that 
can't get the protection of bankruptcy that our Constitution 
generally affords everybody else, and then we will have truly 
looked at this on a larger scale on that basis.
    So I thank you, and I yield back.
    Chairman Kline. Thank the gentleman.
    Mrs. Roby?
    Mrs. Roby. Thank you, Mr. Chairman. I would like to thank 
all of the witnesses for being here today and just want to talk 
about--last district work week I organized a roundtable 
discussion with Alabama's Department of Postsecondary Education 
Chancellor, Mark Heinrich, and presidents of Alabama's 
community colleges in my district.
    And we had a great discussion about the impact that federal 
policies and regulations have on their colleges in addition to 
college affordability and as you can all agree, here in the 
United States we are fortunate to have a diverse educational 
system.
    Students can use federal financial aid and many other 
scholarships and funding sources to attend their school of 
choice; public, private, proprietary, 2-year, 4-year, 
certificate, undergraduate, graduate, et cetera.
    And for these student loan programs to remain available, we 
have got to strengthen them. So I just have a couple of 
questions.
    Mr. Delisle, historically the interest rate for PLUS loans 
are often a little bit higher than the rates of the Stafford 
loans. So my question is do you believe that the higher PLUS 
loan interest rates deters graduate students or parents from 
borrowing and obtaining a postsecondary education?
    Mr. Delisle. Well, I do think on the parent side, I think 
there something that you might want to be concerned with which 
is there is a little bit of an adverse selection issue where 
the interest rate on a parent's PLUS loan, the APR, is 9 
percent.
    I know we talk about the 7.9 percent, but the APR is really 
9 percent once you add in the 4 percent origination fee. 
Department of Education, by the way, I think is the only 
financial institution that can tell you what the interest rate 
is on your loan without telling you what the APR is.
    So the APR is 9 percent. So parents, the people who think 
that is a bad deal can go somewhere else and borrow--they can 
get a home equity loan or they can use savings or they could 
borrow in the private market and get a variable rate.
    People who are stuck paying the high rate are people who 
can't find any other means of credit, people who are those that 
are probably most likely to find that repaying a loan at 9 
percent APR is difficult.
    Then on the back end, if you look at graduate students who 
borrow those loans, they will get out of school, say they find 
a job and they find a high-paying job; who is going to pay back 
the loan first? The person who is making the money that can pay 
back that Grad PLUS loan or refinance it in the private market 
frankly. There are companies out there that are doing that.
    So what is left in the loan pool? It is people who can't 
pay quickly. You have essentially on the front end you have 
selected out the good risk and then on the back end you are 
further selecting out the good risk and you are left with a 
pool that is most risky.
    Combine that with the generally, you know, I think, 
mischaracterization that the program makes money for the 
federal government when you have those kinds of dynamics going 
on, I think it is unusual. So this is one of the problems with 
the interest rates in the PLUS program.
    Mrs. Roby. Okay. Thank you.
    And Dr. Lucas, what factors do banks consider when they 
look to originate student loans versus the factors that the 
federal government takes into account?
    Ms. Lucas. Yes, well the federal government treats student 
loans as an entitlement, so they basically don't take into 
account any financial factors of the student but rather the 
costs of attendance.
    A private lender would look at credit history, credit 
ratings, whether income is sufficient to afford the repayments, 
wealth, and so forth. So it is quite different.
    Now student loans are valuable just because they don't look 
at those things. The justification for student loans is a 
student might have no credit history, no credit score, so the 
government is stepping in and providing credit where it might 
not be available in the private sector, and the government is 
purposely doing it at a rate that isn't attainable in the 
private sector because that is what students need to have the 
opportunity to pursue an education.
    So there is certainly a justification for the way the 
government has structured the program. Just to repeat, I feel 
that those kinds of subsidies are completely appropriate and 
they are the role of the government and credit markets. It is 
problematic when you make these below-market loans and you 
claim that not only have you helped the students but you have 
created profits that the government can spend elsewhere.
    Mrs. Roby. Thank you.
    My time is running out. I have one more question for Mr. 
Draeger, but I am going to submit it to the record for an 
answer.
    So thank you, Mr. Chairman. I yield back.
    Chairman Kline. Thank the gentlelady.
    Mr. Holt?
    Mr. Holt. Thank you, Mr. Chairman.
    I think the witnesses.
    You know, there are lots of details that I would like to 
get to about whether low income borrowers are more likely to be 
harmed by being locked into a higher interest rate if we have 
variable interest rates. There is a lot to be said about--or a 
lot to be discussed about income-based repayment, but I have 
got to get to the basic question here that has not been cleared 
up this morning.
    And that has to do with--let me ask you to get that for me 
there again--whether this actually costs taxpayers or not, and 
if it does, whether this is something that we want; whether 
this is a public good that we are requiring here.
    The CBO issued a paper this year that says CBO estimates 
that new loans and loan guarantees issued in 2013 in the amount 
of $635 billion would generate budgetary savings of $45 billion 
over their lifetime, thereby reducing the budget deficit.
    However, using a fair value approach, which we have heard 
discussed this morning, CBO estimates that those loans and 
guarantees would have a lifetime cost of $11 billion, thereby 
adding to the deficit.
    Now the witnesses here seem to be, at least Mr. Delisle in 
particular, seem to be offended that the federal government 
might consider offering risky loans at better rates more 
favorable than the market, then the private sector would offer.
    In fact, Mr. Delisle, you said it was ridiculous to look 
backward to see whether we might recover--the taxpayer might 
recover money. It seems offensive that the government might be 
pursuing an interest that the private lenders were not willing 
to pursue.
    That is why we are here. We are trying to look after the 
public good, not just the return on investment for a particular 
bank, and therefore we don't need to match what they do.
    We may be better, as Mr. Tierney has said and others, we 
may be better off as a nation to have more people educated in 
college and educated in graduate school and so it is 
interesting--you use the phrase ``moral hazard.''
    Now, you know, for oil companies or financial businesses 
who are encouraged to shift more and more risk to other people 
while they make out like bandits--and I use that term 
advisedly--that is a moral hazard--that is not a moral hazard, 
but for students to shift some of the risk to society at large 
is a moral hazard, where you seem to be putting an emphasis on 
the word moral as if the shame here is that we are creating a 
generation of scofflaws.
    No, what we are trying to do is create a generation of 
innovators, a generation of doers and makers, a generation of 
educated people, and until we face that point and get that 
question out from under this, it doesn't make sense to talk 
about whether we want variable loan repayments or income-based 
loan repayments.
    And I think we are just talking past each other here this 
morning. I realize--I don't know how to put this into a 
question, but I just was so frustrated to hear this, this 
morning. Did you really mean, Mr. Delisle that it was 
ridiculous to look historically whether the taxpayer gets the 
money back and not at the rate that a bank would have gotten it 
back?
    Mr. Delisle. I think it is ridiculous to value risk when 
you know what happened. That was my point of view. There is no 
way, if you were going to make a bet on a coin toss and then 
place your bet after you knew the results, there is no more 
risk in the transaction. That is essentially the issue, but I 
did say that I do support----
    Mr. Holt. With all respect, you make a bet on a coin toss 
after you have seen that coin tossed 1,000 times and you know 
how biased it is, then you make your bet.
    Mr. Delisle. And there is still some chance going forward.
    Chairman Kline. The gentleman's time has expired.
    Dr. Heck?
    Mr. Heck. Thank you, Mr. Chairman.
    Again, thanks all of you for being here and I approach this 
debate from somebody who is still paying off their student 
loans. I don't know how Dr. Roe did it, but I am still in 
repayment and from somebody whose daughter just began her 
student loan repayments, so I see it from both sides.
    Mr. Delisle, you suggested that a fixed rate at some index 
plus a percentage, I think you said 3 percent at the time of 
issue, that would remain constant and I am assuming that is 
even into the repayment period, so that is fixed. And I think 
that potentially has some merit because I get periodic notices 
of my student loan payment changing by plus or minus $5, but 
there is always a question as to what the rate is going to be.
    But as was mentioned by Dr. Lucas, if loans are disbursed 
by semester, theoretically you could have a situation where you 
might have eight or more student loan rates depending on how 
long it takes you to complete your education. Is there a 
downside to the fact that you are going to have eight or more 
separate loans at different interest rates during the course of 
your academic career and then into repayment?
    Mr. Delisle. That is true. That is what would happen. Under 
the proposal that we have discussed though, the rate would only 
readjust once a year. So wouldn't happen in the middle of the 
course of your school year, but theoretically, yes, you could 
have multiple loans.
    Now you can consolidate and them so that you get one 
weighted average interest rate on the loan. But that is a 
downside that people will have different rates, but there is 
really no way around that. You can't give people fixed rates 
that are based on something that are then always the same. They 
are mutually exclusive qualifications on what you are trying to 
do.
    Mr. Heck. And at risk of bringing up the term ``moral 
hazard'' again, but I believe that you mentioned moral hazard 
in a context of a system that is actually encouraging people to 
borrow more money than they need to borrow and if that is the 
case, would you believe that there is also a moral hazard in 
the loan forgiveness at 10 or 20 years and that the fact that 
we are having people sign a contract or a promissory note with 
the idea that after 10 or 20 years they may not be liable for 
the amount that they signed for on the bottom line? Is that not 
another potential moral hazard?
    Mr. Delisle. Yes, and that is what the moral hazard is and 
the moral hazard is not in the undergraduate programs because 
we subject borrowers to a strict loan limit. They can't borrow 
an unlimited amount of money, so on the front end--you have 
either--you have capped it--essentially how much they can 
borrow on the front end.
    And if there are, you know, sort of well-founded public 
policy rationales for having an undergraduate loan program and 
Dr. Lucas mentioned them which is that these are people who you 
won't get a fully functioning credit market.
    So I you know, I reject a little bit the way that 
Congressman Holt characterized my earlier testimony in that I 
fully support a federal student loan program and one that makes 
subsidized credit available to all students, but the issue is 
on loan forgiveness and the Grad PLUS program where you can 
borrow an unlimited amount of money and not have to pay it all 
back any longer than 20 years and then it is forgiven.
    That is where the moral hazard is and we have run the 
numbers with a calculator that we developed at the New America 
Foundation that is publicly available, and we have run 
literally thousands of income scenarios and borrower debt 
scenarios through this, and word will get out. This is a newly 
available program but people will soon figure out that there is 
really no difference in repayment between borrowing $100,000 or 
$150,000. There is really no difference. So what would you do?
    Mr. Heck. Mr. Draeger, you mentioned earlier that you 
referred to the safety of staying within the federal student 
loan system versus going outside to private loans. Can you 
explain what safeties there are within the federal student loan 
system that are not out with the private-sector loans?
    Mr. Draeger. Essentially, the federal loan programs provide 
safeguards and checks available for students and parents to 
ensure that if their loan payment is ever more than their 
income that they can remain within an income-based repayment 
currently.
    There is loan forgiveness so that people who enter aren't 
deterred from entering public service or other nonprofit 
service where they are not going to have a large income. There 
are protections against death and disability so that your loan 
debt isn't passed on to others in your family or doesn't 
persist after you are permanently disabled.
    So those are the protections that are available to 
students. It is difficult to point those out to them when they 
are seeing advertised rates that just aren't aligning up with 
the federal interest rates.
    Mr. Heck. And then if you could, just very briefly in the 
time remaining, as the representative of more than 17,000 
financial aid administrators, what singular change to the 
federal financial aid system should be this committee's 
priority to strengthen the federal student loan program?
    Mr. Draeger. We think going back to something that was 
mentioned earlier, we would love to see a comprehensive 
discussion on reauthorization of the Higher Education Act 
because it is difficult to make an adjustment to one program 
and not expect unintended consequences in another. So the 
piecemeal approach that has been taking place through budget is 
less desirable than taking these as a whole.
    Mr. Heck. Thanks, and I am hopeful that we will reauthorize 
it before its 2014 expiration date.
    Thank you, Mr. Chair. I yield back.
    Chairman Kline. Thank the gentleman.
    Mr. Courtney?
    Mr. Courtney. Thank you, Mr. Chairman, for holding this 
hearing.
    And again, I want to thank Mr. Delisle actually for your 
testimony which sort of walks through the history of Stafford 
student loan and again, I think, you know, in response a little 
bit to the Chairman's opening comments, the box we are in right 
now in terms of fixed rate Stafford loans was created in 2002, 
and I realize that there is frustration about the fact that the 
cut to 3.4 percent in 2007 was kind of a piecemeal solution, 
but the fact is, is it was an attempt to try to ameliorate the 
fact that 6.8 by the time 2007 rolled around was out of sync 
with the market which a number of the members have pointed out 
and certainly that was the case last year.
    I think frankly that was the power of the President's 
message when he was on the road which is that people were 
seeing home mortgage rates at 3 percent and kids were going to 
see their rates go up to 6.8 percent. Hopefully we can find 
that sweet spot to try and adjust the system.
    But again, it is a challenge because of that 2002 budget 
baseline that everything costs money when you are trying to 
sort of fix this thing and--but I think again, we have got to 
sort of step back and recognize there is a social value here 
about making higher education affordable.
    I was with the Connecticut Department of Labor last week. 
We have about an 8 percent unemployment rate in our state, but 
for people with 4-year degrees it is 4 percent. People who have 
a high school degree it is 12 percent and that shows why, you 
know, we, all of us as Americans have skin in the game in terms 
of trying to come up with a system that again tries to create 
opportunity because we all benefit from it and it is a social 
benefit that we shouldn't allow arbitrary budget rules to 
necessarily interfere with. We should try and sort of get it 
right.
    Mr. Delisle, your sort of concern about graduate education 
being sort of too--lacking in skin in the game for students; I 
am just trying to just sort of understand--we had a hearing a 
couple days ago in the wake of Newtown where we had school-
based mental health testimony about the fact that there is a 
crisis right now in terms of finding pediatric psychiatrists 
and adolescent psychiatrists.
    I mean, the cost of medical education, which is certainly 
part of that graduate school tier that you are focused on is 
too high for a lot of critical professions like pediatric 
psychiatry to be affordable.
    So if we have a policy for loan forgiveness that again is 
trying to address critical workforce needs in this country, 
which again, the mental health system we all know in the wake 
of December 14, is desperate for help.
    I mean, do you include those types of initiatives in terms 
of criticizing loan forgiveness?
    Mr. Delisle. Well, what we suggested is that the timing of 
the loan forgiveness be somehow linked to the amount that you 
borrowed. So if you borrow more, that the loan forgiveness 
would happen after 25 years of payments rather than 20.
    We haven't made any sort of statement on the loan 
forgiveness provision for nonprofit government and religious 
employees at 10 years of payments. Obviously, the graduate 
students are going to benefit quite a bit from that because 
they are going to have the most debt, but, I mean, I see that 
as a slightly separate issue since that is a program that 
essentially is providing a subsidy in one way or another to 
people who are working in jobs that Congress believes are 
valuable.
    I do think, however, though, that it is a very, very un-
transparent way to provide a subsidy to those people. I am not 
even sure that they know they are getting it.
    Mr. Courtney. So for a medical student right now who maybe 
would aspire to going into a specialty area that frankly does 
not compensate as well as being an orthopedic surgeon or 
whatever, you know, we have, I think, a duty to make sure that 
we are helping people make that choice and loan forgiveness 
when you are talking--I mean, medical students are coming out 
with $200,000 or $300,000 in debt.
    And if you are saying well be a, you know, pediatric 
psychiatrist where you are going to be basically you know 
living you know a pretty meager existence, that is just not an 
option for people--and I--so where does that fit in to your 
sort of critique?
    Mr. Delisle. Well, I mean, I would say right now under 
current policy, it is not an issue. I mean, and you have made 
recommendations to changing current policies----
    Mr. Courtney. Actually, the Affordable Care Act has a loan 
forgiveness program for adolescent psychiatry and pediatric 
psychiatry which expires this year.
    Mr. Delisle. Well, the student loan program though is 
permanently authorized, loan forgiveness for public service, 
nonprofit----
    Mr. Courtney. Wait a minute.
    Mr. Delisle [continuing]. It is permanently authorized.
    Mr. Courtney. But a pediatric psychiatrist is not a 
nonprofit----
    Mr. Delisle. Oh, if they are not--oh, so if they are 
working in a for-profit, then they get loan forgiveness after 
20 years.
    Mr. Courtney. I mean, that is the way the professions are 
structured.
    Mr. Delisle. And then they--so if it is in a for-profit, 
that they get loan forgiveness after only 20 years' payments--
--
    Mr. Courtney. Well, I----
    Mr. Delisle [continuing]. Regardless of their income.
    Mr. Courtney. I just think, you know, that is a blind way 
to----
    Chairman Kline. The gentleman's time has expired.
    Dr. DesJarlais?
    Mr. DesJarlais. Thank you, Mr. Chairman.
    There are so many things about this issue that are 
troubling to me and I feel like we have just been kind of 
missing the point as we talk about what the federal government 
should do, what the interest rates should be, and that is just 
the personal responsibility of the students.
    I, like my colleague Dr. Roe, am a little more seasoned, 
maybe not quite so much as him, but I graduated medical school 
in 1991 with $120,000 in debt. My lowest interest on my loan 
was 9 percent. My highest was 18 percent. And I couldn't have 
gone to college and medical school without Pell grants and 
loans so I am very much in favor of the programs, but they have 
to be managed properly.
    You know, this ship is sinking because of mismanagement and 
educational institutions continue to raise costs because we 
continue to throw money at that.
    Pell grants just 6 years ago helped 5 million students at 
the cost of $12 billion. Now we are helping 9 million students 
at the cost of $43 billion. So that ratio isn't working. We are 
subsidizing student loans. Student loans have almost become an 
entitlement and as Mr. Draeger said, I don't think we are 
educating students and Mr. Delisle also. There is no 
disincentive for kids to be responsible.
    It is very easy for us to be cavalier up here when we talk 
about federal government or federal loans, but all you out 
there are taxpayers, and the federal government is made up of 
taxpayers. There aren't federal loans; there are taxpayer 
loans. We are paying these loans and we should be able to get a 
return on investment.
    If you educate a student and they get a good job, then they 
should be able to come back, pay off these loans, become a 
taxpayer, and this should all work out, but it is not working 
out because we are not looking at the real problem.
    When a lot of us went to college, you went to sign up and 
it was a 4-year plan. You were going to graduate in 4 years. 
You took 16 credit hours. I have got a senior graduating right 
now that is looking at his colleges, almost every one of them 
starts at a 12-credit hour program. There is no way to finish 
in 4 years.
    So are we creating lazy kids? Have we gotten to the point 
that we want so much for our future generations to have it 
better than we did that we have handicapped ourselves and we 
have done that through spending?
    You look at the federal government debt, and it is at 
almost $17 trillion and it is rising. These student loan debts 
now surpass--I think as Dr. Roe said, auto loan and credit card 
debt combined in this country, and we are making it a situation 
where they don't have to pay these back in a reasonable 
fashion.
    When I got out of medical school with 18 percent interest 
loans, I didn't want to go buy a new house and car, I wanted to 
get those loans paid off and did so in 7 years because I was so 
privileged, in my mind, to get those loans and have the ability 
to go to college and go to medical school, but now I don't 
think kids have that same level of education and we are failing 
at a bunch of levels.
    The institutions are failing by looking at the money they 
can make with prolonged student participation and the 
graduation rates are abysmal. I mean, I think that right now in 
a 4-year institution, if you go back to the 2004 class, only 38 
percent are graduating 4 years, 53 percent at 5 years, and 58 
percent at 6 years.
    So your taxpayer dollars are not being invested wisely and 
the problem I think is in the education of the students, the 
responsibility of the educational institutions, and then the 
good proper parenting of the federal government to use the 
money wisely.
    If you all were private lenders right now, were going to 
take over this program, you would look at it like we are all 
looking at it today. You would look at it cannot lose money and 
I think that that is what we need to be focusing on to fix this 
problem.
    So, Mr. Draeger--someone brought up earlier work-study too. 
I did work-study and that was great. What if we shifted some of 
this Pell Grant money into work-study and people actually 
learned responsibility and worked?
    When you go to college, you are poor; I mean, you are poor 
in college and not just, I mean, that is actually part of the 
fun of it. If you are not poor, then you have money and the 
student loans shouldn't be an issue anyway.
    So, you know, we have got to be realistic in what we 
expect. We have kind of created this false sense of prosperity 
in our country here today with the federal government and that 
is why we have this debt problem.
    So is there a way that we can start to push for a 4-year 
program again, more responsibility, and is there a way to shift 
study funds? Mr. Draeger and Mr. Delisle, you both had great 
comments. I will give you just a few seconds to chime in on all 
that philosophy.
    Mr. Draeger. So to answer the question about can we do more 
particularly with financial aid to push students through 
college at a faster rate, one of the things that was rescinded 
fairly recently without a lot of study was year-round Pell 
grants; the ability for students to attend all the time 
throughout the year as opposed to a traditional academic year.
    And there were concerns about the cost of the program, 
there were concerns about misestimates on how many students 
would utilize it, but that was a good example of how we can 
make financial aid more agile to meet the needs of modern 
students, which is allow them to enroll ongoing so they can get 
through their program at a lower cost and become productive 
members of society.
    Mr. Delisle. Well, one of the things that we proposed in a 
paper that we recently released at The New America Foundation 
is that you time limit loan eligibility. Right now, loan 
eligibility is just an aggregate and annual number mostly 
pulled out of thin air. So you could borrow essentially for 7 
years to complete a 2-year degree.
    And that is an area where you might want to align the 
amount you can borrow or for how long you can borrow with the 
types of programs you are pursuing.
    Chairman Kline. The gentleman's time has expired.
    Ms. Bonamici?
    Ms. Bonamici. Thank you very much, Chairman Kline and 
Ranking Member Miller, for holding this important hearing 
today.
    I have a group of students visiting today from the great 
city of Hillsboro, Oregon, they are with the Mayor's Youth 
Advisory Council, and I assure you they are very interested in 
this topic, so thank you.
    Before I ask my question, we have a letter here from Robert 
Reischauer, the former director of the CBO, stating opposition 
to the fair value accounting, and I would like to make sure 
that that is entered into the official record.
    [The information follows:]

                              Robert D. Reischauer,
                                         5509 Mohican Road,
                              Bethesda, MD 20816, January 23, 2012.
Hon. Chris Van Hollen,
1707 Longworth HOB, Washington, DC 20515.
    Dear Representative Van Hollen: I am writing in response to your 
request for my views on the desirability of adopting ``fair value 
accounting'' of federal direct loan and loan guarantee costs in the 
budget as proposed in H.R. 3581. I strongly oppose such a change.
    The accounting convention used since enactment of the Credit Reform 
Act of 1990 already reflects the risk that borrowers will default on 
their loans or loan guarantees. Under Credit Reform, costs already are 
based on the expected actual cash flows from the direct loans and 
guarantees (with an adjustment to account for the timing of the cash 
flows). H.R. 3581 proposes to place an additional budgetary cost on top 
of the actual cash flows. This additional cost is supposed to reflect a 
cost to society that stems from the fact that, even if the cash flows 
turn out to be exactly as estimated, the possibility that the credit 
programs would cost more (or less) than estimated imposes a cost on a 
risk-averse public. Under the proposal, this extra cost would be the 
difference between the currently estimated cost of direct loans and 
loan guarantees to the federal government and the cost of those loans 
and loan guarantees if the private market were providing them.
    A society's aversion to risk may be an appropriate factor for 
policymakers to take into account in a cost-benefit assessment of any 
spending or tax proposal but adding a cost to the budget does not make 
sense. Nor is clear that the cost of societal risk aversion should be 
based on individual or institutional risk which is what the private 
market reflects. Inclusion of a risk aversion cost for credit programs 
would be inconsistent with the treatment of other programs in the 
budget (many of which have costs that are at least as uncertain as the 
costs of credit programs--for instance, many agriculture programs and 
Medicare) and would add a cost element from a traditional cost-benefit 
analysis without adding anything based on the corresponding benefit 
side of such an analysis. It would also make budget accounting less 
straightforward and transparent.
    H.R. 3581 represents a misguided attempt to mold budget accounting 
to facilitate a cost-benefit analysis, with the result that neither the 
budget nor the cost-benefit analysis would serve their intended 
purposes well.
    I would be glad to discuss these issues in more detail if you would 
like. With best wishes.
                                      Robert D. Reischauer.
                                 ______
                                 
    Chairman Kline. Without objection.
    Ms. Bonamici. Thank you, Mr. Chairman.
    I appreciate the discussion that we have had about 
financial literacy and making sure that students and their 
families understand what they are undertaking when paying for a 
college education. And Mr. Draeger you talked about disclosure 
and you have your big, big binder with disclosures in front of 
you.
    But we have also talked about what has happened in the 
financial markets and drawing some analogies there, certainly 
with mortgage brokers having more of a fiduciary responsibility 
to make sure that their customers or clients get the best deal 
possible. I think we need to have a discussion about making 
sure that students really understand what is the best package 
before them and it is my understanding that at the height of 
the private loan market in 2007 and 2008 about half of the 
undergraduate private loan borrowers still had capacity to take 
out additional federal loans.
    So I wonder how we could better ensure that students 
understand the differences between private and federal loans 
and ensure that they are really made aware if there are federal 
loans that are available to them, that they have that 
information, that they really exhausted all of the federal 
options.
    And Mr. Draeger, if you would like to take that, please.
    Mr. Draeger. Be happy to. I think you will find widespread 
agreement amongst institutions, student advocates, students, 
and even loan providers that the best way to do that is to 
require school certification on private education loans.
    That no private education loan should be made without the 
knowledge and the certification of a financial aid office; that 
the student is indeed enrolled, and if they are considering a 
private loan that they fully understand the terms and 
conditions and disparities between the private education loan 
and the federal loans.
    Ms. Bonamici. And how much more work is there to do 
probably some institutions are already doing that but not all.
    Mr. Draeger. The work would be minimal because they are 
already doing this on all federal loans. So it is basically a 
duplication of a process that they have already mastered and 
one that I think most private education lenders, reputable 
ones, would welcome as well because they want to make sure 
those students are in fact enrolled for the period of time that 
they are taking the loan for.
    Ms. Bonamici. Thank you so much.
    I wanted to turn to Dr. Mercer. I appreciate your attention 
to the issue of access and completion because completion is an 
important part of getting through our investment, and our 
taxpayers' investment in education.
    I had to Oregonians visit my office yesterday and they both 
went through school with the support of Trio programs and they 
talked about how TRIO had changed their lives and really played 
a critical role in making sure that they ultimately succeeded.
    So access was crucial, but they wouldn't be here today 
without the support of the programs that break down the 
barriers and help them continue and complete their studies.
    So Dr. Mercer, what are the biggest barriers to completion 
that college students face? And what role do loans play in the 
challenges to degree completion? And if you could distinguish 
between private loans and federal loans in talking about that. 
Thank you.
    Ms. Mercer. Thank you. I think as one of the panelists 
indicated before, most students generally report that cost of 
going to school as the biggest challenge that they tend to 
experience and our conversation today has largely focused 
exclusively on obviously the acquisition of loans and the 
impact that that has.
    What we haven't really touched upon obviously is the role 
of grant aid and how that makes a difference as well as how you 
can incorporate an appropriate amount of work into a student's 
schedule to ensure because there is research that substantiates 
that an appropriate amount of work actually does encourage 
students to move through and complete degree.
    The pivotal part and as you mentioned, TRIO, is the lack of 
the institution's role in terms of not just counseling because 
that is obviously is a part, but supporting students to move 
through the system. By definition, most of the individuals who 
are receiving this aid have need. Often times they come with 
other indicators of risk such as probably low preparation or 
being married, having children, things that make it more 
difficult for them to move through the system and not less.
    So failing to provide them with support outside of just 
counseling and understanding the amount of loans one is 
borrowing is really a critical piece of that. And that is one 
of the parts in the report that the alliance recently released 
talking about student aid, is that it needs to be comprehensive 
and there needs to be appropriate amount of institutional 
supports built in to make sure that students are able to move 
through the system.
    With respect to loans, I would say loan volume obviously 
and keeping that appropriately managed for students as they 
move through the system is critical whether that be private or 
the federally supported program. I am not sure the distinction 
really exists except for the fact that there are many 
safeguards built into the federal program that don't exist in 
the private market.
    Ms. Bonamici. Thank you.
    Chairman Kline. The gentlelady's time has expired.
    Mr. Grijalva?
    Mr. Grijalva. Thank you, Mr. Chairman. I appreciate the 
hearing. I appreciate the time.
    I am still trying to get my head around some concepts that 
I heard today. That irrespective of the amount of money you 
borrow or the interest rate that you still ended up paying the 
same amount. I am going to have to work on that one a little 
bit.
    And also what a horrible and ridiculous idea that students 
might get a better deal from a government administered loan as 
opposed to a private sector loan. Those two concepts are things 
that I am still having trouble understanding fully; or why 
there is opposition.
    Mr. Draeger, you recommended I think that colleges be--you 
are recommending that colleges be given greater authority, to 
limit students eligibility for loans, and the monitoring of 
those loans; however, your organization's recent RAD white 
paper said, and I quote--``Restrictions on federal loan 
borrowing could drive students to borrow under less 
advantageous private loan programs, discourage some students 
from enrolling, or cause more enrolled students to drop out due 
to lack of funds.''
    Given that statement in your white paper, what evidence can 
you point to that would outweigh the risks of forcing all of 
those three bad consequences and the statement about the 
limitation that you have been talking about.
    Mr. Draeger. I appreciate you bringing up our ``Reimagining 
Aid Delivery and Design'' paper where we put forth ideas that--
--
    Mr. Grijalva. I know, answer that part of the question.
    Mr. Draeger. Well, my answer is that we recognize the 
limitations of our own proposals. If you had a requirement for 
private student loan certification, then all of that would be 
running through the financial aid office and you could mitigate 
the risk of students going into the private market without the 
knowledge of----
    Mr. Grijalva. And in that report, if I may, sir--and in 
that report you also I am sure have provided data documenting 
the over borrowing problem that has been mentioned here today, 
that the committee would--that you could share with the 
committee. Do you have that data?
    Mr. Draeger. Sure. We can submit that.
    Mr. Grijalva. Okay. That would be great.
    I also--one kind of general question, you talked about the 
13 percent default and the focus being on the graduate student, 
let me, for anyone that wants to respond, in that 13 percent 
default on loans, are you making a distinction between for-
profit colleges and not-for-profit colleges and public colleges 
and institutions of higher learning and community colleges?
    Is there a distinction being made and is the gravity of the 
default higher in one area than in another? And if so, what 
restrictions or strategies in terms of student loans would you 
recommend to this committee in order to bring let's say--let me 
guess that the for-profit college has a higher default rate--
how would you bring those----
    Let me begin with Dr. Mercer, if she has a comment.
    Ms. Mercer. I am sorry, from what my limited research on, 
in this area, is that default rates do generally tend to be 
higher at for-profit institutions. Often times, you have to 
look at the reasons why students are defaulting on their loans.
    Obviously, a lot of it is simply that students don't have 
money whether they are aware or knowing that they should----
    Mr. Grijalva. If I may, doctor. I think a part of it is 
that the point that the revenue source is part of the profit 
line. And so recruitment strategies and obligating students to 
a certain amount of loans does increase the likelihood, and as 
all the witnesses said, you know, pre-counseling, post 
counseling in terms of loan acquisition is very important 
points that have come up in this hearing, but when the bottom 
line is at stake here, does that ethic follow as closely as it 
should be?
    Ms. Mercer. Right. There probably needs to be much greater 
attention paid to how these students are being selected and 
moving through the system and the aid that they are receiving.
    I think you also have to consider the quality of degrees 
that students are receiving, or if they are receiving degrees 
at any institution, to ensure that the amount of loan that they 
have assumed positions them once they complete, if they 
complete, to be in a position to be able to repay.
    Mr. Grijalva. I don't know how much time I have. I don't 
think I have much time.
    Thank you, Mr. Chairman. I yield back.
    Chairman Kline. Thank the gentleman.
    Mr. Polis?
    Mr. Polis. Thank you. Am I the last speaker, Mr. Chair?
    Chairman Kline. You are the cleanup batter, sir.
    Mr. Polis. Excellent. It is a long-standing tradition of 
this committee to save the best for last. So I am very exalted 
to be in this position.
    My first question is about online education. My district is 
the home to the global program of Colorado State University, 
University of Colorado also has an online programs; students 
across the country.
    One concern I have is that federal loan programs are still 
oriented towards the bricks and mortar model with regard to 
cost of living and other requirements which aren't really 
applicable for online universities.
    How do we make sure that federal loans for online courses 
are treated the same as loans for traditional classes and don't 
deal with them in a discriminatory way just because some of 
their cost factors are different? I will open it up to whoever 
wants to comment on it.
    Mr. Draeger?
    Mr. Draeger. Can I ask one clarifying question? Do you mean 
discriminated in terms of limiting them, making them smaller 
even though they still have educational expenses?
    Mr. Polis. Exactly. Currently, a component of the loans are 
designated for cost-of-living which is not necessarily an 
appropriate restriction for online; however, they have other 
expenses that are not appropriate for the off-line.
    Mr. Draeger. Right. So I think there is an idea that if you 
are taking an online course that doesn't require as much time, 
and so therefore you must be working a full-time job and 
therefore don't need living expenses built into your cost of 
attendance.
    The truth of the matter is, a rigorous online course is 
going to require the same amount of time that a blended or 
brick-and-mortar course would. So I think it is important that 
we continue to examine online courses in the context of these 
folks may not be doing a full-time job and a full online course 
and be able to do those things simultaneously just like brick-
and-mortar.
    Mr. Polis. So would you recommend considering either making 
the definition of some of the cost of living requirements more 
general or simply having less restrictions on it to ensure it 
doesn't discriminate against innovative curriculum delivery 
methods?
    Mr. Draeger. My sense is that that is--some of those 
decisions are best left at the institution, which is why we are 
asking for broader authority to be able to adjust some of 
those--the limits of borrowing based on academic program or 
enrollment so that schools can take a look at their student 
populations and adjust accordingly.
    Mr. Polis. And the next question is for Mr. Delisle. To 
avoid accountability and oversight, I have heard of several 
examples where colleges might be masking high default rates by 
grouping campuses for purposes of reporting that a high rate at 
one campus might be masked by a low rate at another. What 
should be done to prevent colleges from using this kind of 
tactic to evade responsibility and prevent transparency around 
student debt?
    Mr. Delisle. Well, we actually prefer repayment rate to 
default rate for----
    Mr. Polis. Whatever term you use.
    Mr. Delisle [continuing]. Assessing because it is going to 
show you even though people who don't default, but graduate 
with a high debt to income ratio or are struggling to repay 
their loans in that their loan balance is growing and not 
shrinking, which is something we allow to happen in the student 
loan program and still be in good standing.
    We think that those types of measures are more robust and 
better accountability measures than the cohort default rate. 
And I should point out that this--the cohort default rate that 
everybody is referencing is the 2-year and sometimes 3-year 
cohort default rate--is not the lifetime default rate on these 
loans. The lifetime default rate on federal student loans is 
somewhere around 20 percent.
    Mr. Polis. But the issue I am trying to get at is how do we 
avoid masking through combining campuses so that it is reported 
in a way that may look optimal on paper but may mask 
deficiencies at some campuses vis-a-vis others.
    Mr. Delisle. I mean, it is something I guess the Department 
of Education would have to look at and how they allow 
institutions to define with what is their ID, what is the 
actual jurisdiction of a particular campus, but I am sure that 
they are able to get around that in some way.
    Mr. Polis. Any other comments on that issue?
    And finally, last year I introduced a ``Know Before You Owe 
Act'' which would require private lenders to certify borrowers 
are enrolled in school and also it would require higher 
education institutions to inform students about their federal 
financial availability and eligibility. What we found is that 
some students were actually buying--while they had extra 
federal capacity, were still borrowing at higher commercial 
rates.
    Briefly, for Mr. Draeger for the remainder of the time, how 
can we help students who are stuck in private loans make sure 
that they are aware of the opportunities that exist in low-
interest federal loans?
    Mr. Draeger. The best way to do that is by ensuring that 
the financial aid office has a comprehensive understanding of 
all of the offerings that a student has. That includes from the 
private markets. So a private student loan certification would 
ensure the financial aid office is brought into that decision.
    Mr. Polis. Thank you.
    And I yield back.
    Chairman Kline. I thank the gentleman. I want to thank the 
witnesses for excellent testimony in answering our questions. I 
think you cleared up some things and frankly for some of us, we 
are more confused. But that is okay. We are going through a 
process here where we are addressing a problem that is 
increasingly recognized as a problem for our country, for 
students, for schools, and so we are going to continue to press 
on with this.
    Mr. Tierney, any closing remarks?
    Mr. Tierney. Just very briefly, Mr. Chairman. Again, I want 
to thank you for having this hearing and beginning the 
discussion.
    I want to thank all of our witnesses for their 
contribution. It was valuable to all of us. We shouldn't lose 
sight of the fact, obviously, that were really looking at 
students and their families and trying to reach a policy goal 
here of graduating people with the appropriate credentials and 
abilities to help drive our economy forward and to give us a 
competitive advantage amongst other countries on that and to be 
innovative and creative on that.
    So in that context, in the context of what is a good 
investment for this country and for the taxpayers, is I think 
the basis which we ought to consider all of the things that we 
heard today and I think we made a good start.
    So thank you.
    Chairman Kline. Thank the gentleman.
    There being no further business, the committee stands 
adjourned.
    [An additional submission of Chairman Kline follows:]

          Prepared Statement of the Education Finance Council

    The Education Finance Council is the trade association representing 
nonprofit and state agency student loan organizations across the 
country. EFC commends the Committee for examining the current federal 
student aid system in order to benefit students and families. The 
members of EFC share this goal and believe there are several short- and 
long-term solutions to improve the system. In the short term, the 
student loan experience for borrowers can be enhanced through 
improvements to the Not-for-Profit (NFP) servicing program. Over the 
long term, the PLUS loan programs must be eliminated so students can 
choose consumer friendlier loans and fair value federal budget 
accounting must be implemented to provide an accurate account of the 
impact of federal student lending on the federal deficit, and 
ultimately, taxpayers.
    The NFP servicing program, created by Congress, allows eligible 
not-for-profit student loan organizations to provide high quality loan 
servicing under the Direct Loan Program. NFP servicers that are under 
contract have been working closely with staff from Federal Student Aid 
and are taking extraordinary steps to ensure their borrowers are 
getting the best possible loan servicing experience. Customer service 
has been a focus of all NFP servicers and despite the difficult 
accounts they have been allocated to date, the NFP servicers have 
received customer service survey results and produced delinquency 
results that approximate those of the other, larger servicers. The 
benefits borrowers and the federal government are realizing can be 
enhanced by allocating more loans to the NFP servicers. Increasing 
allocation of loans, including newly originated Direct Loans, provides 
a reliable source of accounts NFPs can receive so that they can supply 
the high quality of service that Congress expects them to bring to more 
Direct Loan borrowers. The federal government benefits by increasing 
the allocation because any additional accounts beyond the initial 
100,000 allocation means pricing equal to what is paid to Title IV 
Additional Servicers.
    Improving the NFP serving program provides near-term efficiency for 
the Direct Loan program, but Congress must look beyond programmatic 
enhancements to the current federally-based student aid system and 
consider significant policy changes to truly create a better student 
aid system. Congress should eliminate both the graduate and parent PLUS 
programs and encourage schools to shift borrowing to consumer-friendly 
programs offered by nonprofit and state agency providers. As college 
costs continue to climb, students and parents need to be provided with 
alternatives to high interest rate loan products, such as the PLUS 
programs. Current policies that favor steering borrowers who need 
reasonable financing options beyond grant aid and Stafford loans into 
7.9 percent PLUS loans are depriving them of options that will lower 
their debt burden. Nonprofit alternative loan programs feature fixed 
interest rates below the percent rate for PLUS loans and have consumer-
friendly features such as low or no fees, institutional certification 
and flexible repayment terms. Moreover, nonprofit and state agency 
alternative loan programs have default rates that range from less than 
one percent to three percent. Finally, information available on 
nonprofit and state agency loans programs far exceeds what the 
Department provides for PLUS loans. For example, as the Chronicle of 
Higher Education reported ``U.S. Department of Education doesn't know 
how many parents have defaulted on [PLUS loans]. It doesn't analyze or 
publish default rates for the PLUS program with the same detail that it 
does for other federal education loans.'' \1\ By contrast, nonprofit 
and state agencies actively monitor and disclose default rates and 
employ a range of steps--including reducing the amount borrowed from 
the outset, to ensure that students and parents are not taking out more 
than they can handle.
---------------------------------------------------------------------------
    \1\ The Parent PLUS Trap, accessed March 11, 2013 at http://
chronicle.com/article/The-Parent-Plus-Trap/134844.
---------------------------------------------------------------------------
    Finally, Congress must accept fair value rather than the current 
Federal Credit Reform Act (FCRA) method of estimating costs and savings 
for federal student aid programs. Adopting fair value accounting will 
allow policy makers to accurately evaluate new student aid programs 
that provide value to students, parents and taxpayers.
    The debate about government accounting for student loans is not 
new. Dating back to 2005, the flaws of estimating costs under the FCRA 
method have been detailed. GAO pointed out:
    ``Additional federal costs and revenues associated with the student 
loan programs, such as federal administrative expenses, some costs of 
risk associated with lending money over time, and federal tax revenues 
generated by both student loan programs are not included in subsidy 
cost estimates.\2\
---------------------------------------------------------------------------
    \2\ GAO-05-874 `Federal Student Loans: Challenges in Estimating 
Federal Subsidy Costs', October 26, 2005/
---------------------------------------------------------------------------
    The Kansas City Federal Reserve Bank has acknowledged the benefits 
in utilizing fair value accounting to assess the cost to the federal 
government of the Direct Loan program. In their 2012 report Student 
Loans: Overview and Issues, Kelly D. Edmiston, Lara Brooks and Steven 
Shepelwich point out:
    ``Fair value estimates, which make additional adjustments for risk 
and also include administrative costs, provide a more complete picture 
of the cost of federal student loan programs. Fair value estimates 
calculated in March, 2010 CBO report projected a net cost of about 11 
percent of lending for 2012. New direct loan volume is projected to be 
$121 billion in FY2013, yielding a net budget cost of $13.3 billion. 
About $28 billion in consolidation loans is expected, which would 
likely add an additional $3 billion. Using fair value accounting 
principles, the student loan program would account for about 0.4 
percent of the president's FY2013 budget outlay request of $3.8 
trillion.'' \3\
---------------------------------------------------------------------------
    \3\ Student Loans: Overview and Issues, RWP 12-05 at p. 15.
---------------------------------------------------------------------------
    Fair value accounting gives Congress the ability to effectively 
consider alternatives to the Direct Loan program including securitizing 
loans held by the government and allowing the private sector to 
originate and service loans to credit worthy borrowers.
    There is room for much improvement in the federal student aid 
system. Programmatic changes to certain elements such as the NFP 
servicer program can provide immediate benefits, however broad policy 
changes such as the elimination of the PLUS programs and a shift to 
fair value accounting are needed to create a fundamentally better, more 
sustainable system. EFC members have played a significant role in 
helping students and families finance higher education for decades and 
stand ready to help coordinate and implement beneficial changes to the 
student aid system.
                                 ______
                                 
    [Additional submissions of Mr. Draeger follow:]
    [The report, ``Reimagining Financial Aid to Improve Student 
Access and Outcomes,'' may be accessed at the following 
Internet address:]

       http://www.nasfaa.org/advocacy/RADD/RADD_Full_Report.aspx

                                 ______
                                 
    [The report, ``Report of the NASFAA Task Force on Student 
Loan Indebtedness,'' dated February 2013, may be accessed at 
the following Internet address:]

            http://www.nasfaa.org/EntrancePDF.aspx?id=13507

                                 ______
                                 
    [The report, ``Report of the NASFAA Award Notification and 
Consumer Information Task Force,'' dated May 2012, may be 
accessed at the following Internet address:]

             http://www.nasfaa.org/EntrancePDF.aspx?id=9992

                                 ______
                                 
    [Questions submitted for the record and their responses 
follow:]

                                             U.S. Congress,
                                     Washington, DC, April 3, 2013.
Mr. Justin Draeger, President and CEO,
National Association of Student Financial Aid Administrators, 1101 
        Connecticut Avenue NW, Suite 1100, Washington, DC 20036-4303.
    Dear Mr. Draeger: Thank you for testifying at the March 13, 2013 
hearing on ``Keeping College Within Reach: Examining Opportunities to 
Strengthen Federal Student Loan Programs.'' I appreciate your 
participation.
    Enclosed are additional questions submitted by members of the 
committee after the hearing. Please provide written responses no later 
than April 16, 2013 for inclusion in the final hearing record. 
Responses should be sent to Amy Jones or Emily Slack of the committee 
staff who can be contacted at (202) 225-6558.
    Thank you again for your important contribution to the work of the 
committee.
            Sincerely,
                                      John Kline, Chairman,
                          Committee on Education and the Workforce.
                  representative richard hudson (r-nc)
    1. There has been a lot of talk about a ``student loan bubble.'' Do 
you think we are about to see the collapse of student loan programs 
because too many people are borrowing to pay for college? What would 
the collapse of this bubble mean for the economy and for the students 
who are preparing for college now?
                   representative martha roby (r-al)
    1. I know financial aid administrators are concerned about the 
impact of sequestration on student financial aid programs, particularly 
right now as campuses are starting to put together financial aid 
packages for incoming students. How forthcoming has the Department of 
Education been with the campus community about the impact of the cuts?
                  representative raul grijalva (d-az)
    1. NASFASS'S Debt Task Force recently recommended allowing colleges 
to limit students' eligibility for loans based on things like their 
program length or program type and allowing professional judgment to 
approve increased borrowing on a case-by-case basis (flipped from 
current policy that allows for limiting borrowing on a case by case 
basis). However, NASFAA's recent RADD white paper said ``Restrictions 
on federal loan borrowing could drive students to borrow under less 
advantageous private loan programs, discourage some students from 
enrolling, or cause more enrolled students to drop out due to lack of 
funds.'' What evidence can you point to that would outweigh the risk of 
forcing students to drop out, not enroll, or turn to riskier forms of 
borrowing?
                                 ______
                                 

      Mr. Draeger's Response to Questions Submitted for the Record

                  representative richard hudson (r-nc)
    1. There has been a lot of talk about a ``student loan bubble.'' Do 
you think we are about to see the collapse of student loan programs 
because too many people are borrowing to pay for college? What would 
the collapse of this bubble mean for the economy and for the students 
who are preparing for college now?

    Draeger: The size of the mortgage market at the height of the 
housing bubble in 2006 dwarfs the current student loan market. Using 
rough estimates, the current student loan market is valued at roughly 
$1 trillion. At the height of the housing boom in 2006, the residential 
housing market was worth $22 trillion--more than 22 times larger. When 
the mortgage bubble burst, it lost nearly $8 trillion in value (Baker, 
2012). Even if every borrower defaulted on his or her student loan at 
the exact same time (an impossibly unlikely scenario), it wouldn't have 
the same impact on the economy as the housing collapse.
    However, it stands to reason that as students and parents take on 
more debt to pay for college, they could be delaying other financial 
decisions such as purchasing a home, buying a car, or otherwise 
participating in the economy through consumer purchases. Still, federal 
student loans bet on the likelihood that the borrower's financial 
circumstances will improve through the education or training being 
financed, and that as a result the borrower will repay the loan over 
time. For most students and for society in general, this is a good risk 
to finance.
    Systemic economic risk is further reduced by the fact that federal 
loans make up the large bulk of the student loan market and collection 
rates are much higher than private sector collections. As long as the 
program contains reasonable and effective repayment terms like income 
based repayment--which act as safety valves--the loan program should 
remain healthy. The loss of the student loan program would be 
disastrous: without student loans, higher education in this country 
would be impossible for many low- and middle-income students. The loss 
of a broadly educated work force is untenable in today's world economy.
    But more can be done to strengthen the programs and protect 
borrowers. Underwriting standards might need to be examined for parent 
borrowers to see if they provide adequate protections to both the 
borrower and the government as lender. For undergraduate borrowers, 
there are loan limits in place to ensure borrowers stay within 
permissible amounts, but aid administrators need broader authority to 
limit indebtedness for students whose borrowing is not-on-pace with 
their program. Such a proposal is included in my written testimony.

                   REPRESENTATIVE MARTHA ROBY (R-AL)

    1. I know financial aid administrators are concerned about the 
impact of sequestration on student financial aid programs, particularly 
right now as campuses are starting to put together financial aid 
packages for incoming students. How forthcoming has the Department of 
Education been with the campus community about the impact of the cuts?

    Draeger: Financial aid administrators are always concerned when 
cuts are made to the federal student aid programs, including the cuts 
imposed by sequestration. The impact of sequestration has been 
especially difficult given the timing--some of the scheduled cuts were 
occurring at the same time aid administrators were delivering award 
letters to new and continuing students based on non-sequester estimates 
previously delivered by ED.
    It is unclear to us why OMB did not release more specific estimates 
that would have allowed ED to provide schools allocations at a post-
sequester amount given that the sequester was in the law and everyone 
knew its effective date. In fact, institutions across the U.S. relied 
on rough estimates created by us to construct their awarding packages. 
If NASFAA could create fairly reliable estimated campus-based cuts 
assuming sequestration, certainly the government could have done the 
same.
    Since the sequester went into effect March 1, ED has provided 
regular communication and guidance about how to implement sequester 
cuts and/or how to temporarily proceed until final implementation 
instructions could be made. ED has also been responsive to NASFAA's 
requests and questions since March 1.

                  REPRESENTATIVE RAUL GRIJALVA (D-AZ)

    1. NASFASS'S Debt Task Force recently recommended allowing colleges 
to limit students' eligibility for loans based on things like their 
program length or program type and allowing professional judgment to 
approve increased borrowing on a case-by-case basis (flipped from 
current policy that allows for limiting borrowing on a case by case 
basis). However, NASFAA's recent RADD white paper said ``Restrictions 
on federal loan borrowing could drive students to borrow under less 
advantageous private loan programs, discourage some students from 
enrolling, or cause more enrolled students to drop out due to lack of 
funds.'' What evidence can you point to that would outweigh the risk of 
forcing students to drop out, not enroll, or turn to riskier forms of 
borrowing?

    Draeger: The passage being referenced from our Bill and Melinda 
Gates Foundation-funded Reimagining Aid Delivery and Design paper was 
offered as a ``possible unintended consequence'' of giving aid 
administrators the authority to limit loans for specific categories of 
students. We offered this thought as part of making an intellectually 
honest policy argument that examines all sides of an issue. The 
simplest and most effective way to deal with such an unintended 
consequence is to require that all private education loans be certified 
through the financial aid office just like federal loans. That would 
ensure students are having conversations with financial aid 
administrators before dipping into the private market and would further 
ensure that students borrow within the federal loan programs before 
turning to riskier private loans.

                               REFERENCES

Baker, D. (2012, March 11). Student Loan Bubble. Retrieved From http://
        www.cepr.net/index.php/blogs/beat-the-press/student-loan-
        bubble-nonsense-peter-peterson-and-the-washington-post-mess-up-
        on-the-economy-yet-again
                                 ______
                                 
                                             U.S. Congress,
                                     Washington, DC, April 3, 2013.
Mr. Jason Delisle, Director,
Federal Education Budget Project, the New America Foundation, 1899 L 
        Street, NW, Suite 400, Washington, DC 20036.
    Dear Mr. Delisle: Thank you for testifying at the March 13, 2013 
hearing on ``Keeping College Within Reach: Examining Opportunities to 
Strengthen Federal Student Loan Programs.'' I appreciate your 
participation.
    Enclosed are additional questions submitted by members of the 
committee after the hearing. Please provide written responses no later 
than April 16, 2013 for inclusion in the final hearing record. 
Responses should be sent to Amy Jones or Emily Slack of the committee 
staff who can be contacted at (202) 225-6558.
    Thank you again for your important contribution to the work of the 
committee.
            Sincerely,
                                      John Kline, Chairman,
                          Committee on Education and the Workforce.
                  representative richard hudson (r-nc)
    1. There has been a lot of talk about a ``student loan bubble.'' Do 
you think we are about to see the collapse of student loan programs 
because too many people are borrowing to pay for college? What would 
the collapse of this bubble mean for the economy and for the students 
who are preparing for college now?
                                 ______
                                 

      Mr. Delisle's Response to Questions Submitted for the Record

                  REPRESENTATIVE RICHARD HUDSON (R-NC)

    Nearly all outstanding and newly-issued student loans are federal 
loans. It would be hard to imagine that program ``collapsing'' because 
the funding for it is provided directly by the federal government. That 
is, this source of financing for higher education would only become 
unavailable if lawmakers made it so. In that regard the student loan 
program cannot collapse unless Congress and the president enacted a law 
forcing it to collapse. I see that issue as a separate one from whether 
students are borrowing too much to pay for college.
    Nevertheless, rising levels of outstanding total federal student 
debt (somewhere around $1 trillion, nearly all federal) have raised 
concerns that students are borrowing too much and that will have 
economy-wide effects. I believe that matter is best discussed by 
focusing on undergraduate students and graduate students as two 
separate groups.
    For undergraduates, while are greater share of students are leaving 
school with some debt, the amount of debt that they leave with on 
average has not risen in real, inflation-adjusted terms by much in the 
past 10 years. The figure is somewhere around $25,000 today. 
Furthermore the federal government limits the amount undergraduates can 
borrow in federal loans to about $30,000 for dependent undergraduates.
    A borrower could make payments as low as $143 per month on a loan 
of $25,000 with a 6.8 percent interest rate under the consolidation 
repayment plan. His payment could be lower, even $0, under the Income 
Based Repayment plan, and he can postpone payments for up to 3 years 
under the forbearance terms if he is having financial difficulties. In 
short, an undergraduate with the average amount of debt can make very 
affordable monthly payments on his loan under the federal student loan 
program. They are hardly figures that one would equate with a bubble.
    Graduate student debt is a different story. Over 30 percent of 
outstanding and newly-issued loan volume is for graduate and 
professional education (although only 10 percent of borrowers are/were 
graduate students). These borrowers can accumulate very large balances 
mainly because the federal government allows them to borrow to finance 
the entire costs of their educations as defined by institutions of 
higher education, including living expenses. There is no annual, 
aggregate, or lifetime limit. When we hear stories about graduates with 
$100,000 in student loan debt, but earnings prospects that cannot 
service such a debt level, the stories are almost always about graduate 
students, not undergraduates. This is where there is a bubble in the 
student loan market--but it is not a loan bubble, it is a cost bubble. 
Unlimited federal student loans let graduate schools charge sums that 
are not justified given the future incomes that their graduates may 
earn.
    I should stress, however, that this system will not necessarily 
collapse. Again, the federal government makes the graduate student 
loans available as an ongoing entitlement. Absent a change in law, 
students can continue to borrow at current rates. Worse yet, recent 
changes to the Income Based Repayment program (Pay As You Earn), which 
allows for low payments and unlimited loan forgiveness, gives students 
an incentive to borrow more, not less. That suggests that the graduate 
school cost bubble will not burst anytime soon.
                                 ______
                                 
    [Whereupon, at 12:11 p.m., the committee was adjourned.]

                                 
