[Senate Hearing 113-829]
[From the U.S. Government Publishing Office]
S. Hrg. 113-829
STRENGTHENING THE FEDERAL STUDENT LOAN PROGRAM FOR BORROWERS
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HEARING
OF THE
COMMITTEE ON HEALTH, EDUCATION,
LABOR, AND PENSIONS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING STRENGTHENING THE FEDERAL STUDENT LOAN PROGRAM FOR BORROWERS
__________
MARCH 27, 2014
__________
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COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS
TOM HARKIN, Iowa, Chairman
BARBARA A. MIKULSKI, Maryland LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington MICHAEL B. ENZI, Wyoming
BERNARD SANDERS (I), Vermont RICHARD BURR, North Carolina
ROBERT P. CASEY, JR., Pennsylvania JOHNNY ISAKSON, Georgia
KAY R. HAGAN, North Carolina RAND PAUL, Kentucky
MICHAEL F. BENNET, Colorado ORRIN G. HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island PAT ROBERTS, Kansas
TAMMY BALDWIN, Wisconsin LISA MURKOWSKI, Alaska
CHRISTOPHER S. MURPHY, Connecticut MARK KIRK, Illinois
ELIZABETH WARREN, Massachusetts TIM SCOTT, South Carolina
Derek Miller, Staff Director
Lauren McFerran, Deputy Staff Director and Chief Counsel
David P. Cleary, Republican Staff Director
(ii)
C O N T E N T S
__________
STATEMENTS
THURSDAY, MARCH 27, 2014
Page
Committee Members
Harkin, Hon. Tom, Chairman, Committee on Health, Education,
Labor, and Pensions, opening statement......................... 1
Alexander, Hon. Lamar, a U.S. Senator from the State of
Tennessee, opening statement................................... 3
Reed, Hon. Jack, a U.S. Senator from the State of Rhode Island,
prepared statement............................................. 8
Durbin, Hon. Richard J., a U.S. Senator from the State of
Illinois, prepared statement................................... 10
Warren, Hon. Elizabeth, a U.S. Senator from the State of
Massachusetts.................................................. 20
Baldwin, Hon. Tammy, a U.S. Senator from the State of Wisconsin.. 22
Murphy, Hon. Christopher, a U.S. Senator from the State of
Connecticut.................................................... 24
Franken, Hon. Al, a U.S. Senator from the State of Minnesota..... 25
Murray, Hon. Patty, a U.S. Senator from the State of Washington.. 69
Witness--Panel I
Runcie, James W., Chief Operating Officer, Federal Student Aid,
U.S. Department of Education, Washington, DC................... 12
Prepared statement........................................... 14
Witnesses--Panel II
Cooper, Michelle Asha, B.A., M.P.S., Ph.D., President, Institute
for Higher Education Policy, Washington, DC.................... 27
Prepared statement........................................... 29
Loonin, Deanne, National Consumer Law Center, Boston, MA......... 40
Prepared statement........................................... 42
Johnson, Roberta L., Director of Student Financial Aid, Iowa
State University, Ames, IA..................................... 56
Prepared statement........................................... 58
Dill, Marian M., Director of Student Financial Aid, Lee
University, Cleveland, TN...................................... 61
Prepared statement........................................... 62
ADDITIONAL MATERIAL
Statements, articles, publications, letters, etc.
Additional comments from Marion Dill in response to Senator
Harkin's request (regarding S. 546--Smarter Borrowing Act)
and Senator Alexander's requests........................... 79
Response by James W. Runcie to questions of:
Senator Hagan............................................ 85
Senator Warren........................................... 86
(iii)
STRENGTHENING THE FEDERAL STUDENT LOAN PROGRAM FOR BORROWERS
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THURSDAY, MARCH 27, 2014
U.S. Senate,
Committee on Health, Education, Labor, and Pensions,
Washington, DC.
The committee met, pursuant to notice, at 10:03 a.m., in
room SD-430, Dirksen Senate Office Building, Hon. Tom Harkin,
chairman of the committee, presiding.
Present: Senators Harkin, Alexander, Murray, Franken,
Baldwin, Murphy, and Warren.
Opening Statement of Senator Harkin
The Chairman. Good morning. The Senate Committee on Health,
Education, Labor, and Pensions will come to order. This morning
is another in our series of hearings preparing to reauthorize
the Higher Education Act. This morning, our hearing is on
Strengthening the Federal Student Loan Program for Borrowers.
So we're going to take a look at the whole student loan
program. As I said, this is the eighth in our series of
hearings on this. Today, our primary focus is strengthening our
Federal loan programs to ensure they're working well for
students and families.
Since the passage of the National Defense Education Act in
1958, under which I borrowed money to go to college, the
Federal Government has played a role in helping students fund
their college education through loans and grants. We certainly
have much to celebrate over the last half century when it comes
to expanding higher education access. Yet various new
challenges today demand our immediate attention.
In recent years, several major changes have been made to
the Federal student loan programs to address structural issues
of loan origination, servicing, and repayment options. In 2007,
the income-based repayment was created specifically to help
struggling borrowers repay their loans and avoid the severe
financial consequences of default. In 2010, Congress made the
historic switch from the Federal Family Education Loan lending
program to the Direct Loan program, a process that unfolded
smoothly, according to nearly all accounts.
It's important to take a moment to re-state the importance
of that action and the real impact it has had on students and
families. We achieved the goal of 100 percent direct lending.
This eliminated more than $60 billion in subsidies to banks and
directed the bulk of that money to students and their families.
Despite all the progress made, however, there is still much
work to be done. As the current student loan landscape clearly
illustrates, the stakes have never been higher. To put it in
perspective, our aggregate student loan debt in this country is
now over $1 trillion, and the average student is saddled with
about $29,000 in debt.
There is a growing consensus that we need to address the
impediments to college affordability and the key drivers of
college costs. We've had a hearing on that previous to today to
explore those issues. But we need to examine one central
question: How well is the student loan system, from counseling
to repayment, working for students and families?
I will say at the outset that I am disappointed to report
that all four TIVAS--the title IV servicers, the largest
contractors--were invited, but chose not to take part in this
hearing today, which may directly concern the contracts that
they have with the Department of Education. These servicers,
like Sallie Mae, rely heavily on Federal dollars for their
business and yet could not find the time to put this hearing on
their calendars. I hope we can all agree that students and
taxpayers need to be prioritized.
However, I am excited today for the opportunity to discuss
the state of our Federal loan programs with a distinguished
panel of experts. We'll take a hard look at what's working,
what's not, and what needs to be done to ensure that the dream
of an affordable higher education stays in reach for the
millions of families who rely on student aid.
At the outset, I want to re-state a fact, an economic
statistic that was given to me by the president of Arizona
State University, President Crowe, and it's this: if you are a
high-income, low-performing student, you have an 80 percent
chance of going to college. If you are a low-income, high-
performing student, your chances of going to college are only
20 percent. That needs to be corrected.
Again, as we look at the different choices, students ought
to be able to choose between repayment options and decide which
plan is best for them. I had an interesting conversation with a
young professional this morning. She told me she went to a very
good high school, comes from an upper middle-class family, went
to a great college, and went to a very good law school, and
she's a professional.
She had heard that we were having this hearing today, and
she said,
``You know, the biggest problem is that I went to all
these great schools, and not once did I ever have a
course on personal finance. Not once in high school did
they teach me how to balance a checkbook or how to set
up a budget or what borrowing means. What are loan
rates? What are fees? What are the repayments? How do
you calculate all this? Not once in high school, not in
college, not even in law school.''
And she said,
``So many kids go to college. I remember when I went
to college, I got inundated by people wanting to loan
me money. And it all sounds very good, and it all
sounds very cheap.''
And then she said, ``I must have had at least four or five
credit cards sent to me, just free credit cards.'' And, of
course, when you're young like that, and you don't know what
all that means, it's easy to use a credit card and get yourself
in a lot of trouble.
I wanted to say, again, maybe this is also a part of it,
too, that we're not doing a good enough job in our secondary
schools, and we're not doing enough--and I know some of the
witnesses' testimonies--I read them--talk about the need for
financial counseling when you go to college.
I know that my old alma mater, Iowa State, has started
doing that, and I assume there are others, too. But I wonder if
that shouldn't be an integral part of the loan process for
students when they are going to college.
This, to me, is one of the most important aspects of what
we need to address in the reauthorization of the Higher
Education Act--how we write; how we get more equity in terms of
high-performing, low-income students to go to college; how we
make sure that students know their rights and responsibilities
when they borrow money; and to make sure they have adequate
counseling.
Another aspect that I really believe bears looking into is
the issue of collection agencies and how much money collection
agencies are taking out of the system every year. I'm told it's
been over a billion dollars just for collection agencies.
I've heard a lot of stories--some I know are true. I don't
know all of them--about how these collection agencies operate
and how much money they get for very little work in what they
do to collect this money. So I think this also bears looking
into.
With that, I thank our witnesses, and before we get to
that, I'll turn to Senator Alexander for his opening statement.
Opening Statement of Senator Alexander
Senator Alexander. Thanks, Mr. Chairman.
I want to thank Senator Harkin and his staff and ours for
coming up with some really terrific hearings on the Higher
Education Act. I want the witnesses to know we pay a lot of
attention to what you say and your ideas. There's a risk we'll
actually do what you say, so we're looking forward to your
testimony. This has been very good so far.
I was trying to remember the last person who ever said to
me, ``It's pretty easy to pay for college.'' I don't think I've
ever run into anybody who said that. My own experience is
probably like everybody else's or most other people. I had no
money, so I had two scholarships and five jobs to try to make
my way through.
But I think it's important to put--this subject today is
what we can do, I think, to simplify the various ways--and I
think there are eight of them--that the government has come up
with to help students pay back their student loans, $100
billion of new loans that we make every year. But putting the
loans into perspective accurately, I think, is helpful.
Let me use, rather than my words, the words of one of our
witnesses, Judith Scott-Clayton, Assistant Professor of
Economics and Education at Columbia University in New York. She
talked about a lot of common misconceptions about student debt
when she was here. She said,
``Most people think college is much more expensive
than it typically is. They see stories in the news
media about elite private colleges charging $50,000 for
tuition. They hear about unemployed graduates with
astounding amounts of debt. But most people, in fact,
pay much less.''
Dr. Scott-Clayton said,
``After accounting for grants, the average net price,
the amount students will pay after subtracting
scholarships and grants that the student receives and
doesn't have to pay back--the average net price at a
public 4-year institution is about $3,000 per year. And
at the typical community college, a student who
receives a Pell grant--we have about 9 million students
who do every year--is likely to pay nothing at all and,
in fact, is likely to receive money back to pay for
books, supplies, and other living expenses.''
Those were her words. I took a look at those facts. Three
out of four of our college students attend a public 2- or 4-
year college or university. Of those, about two out of five of
all students attend community colleges where the average
tuition and fees are under $3,300. Those students receive an
average of $4,850 in grants and scholarships. So the average
community college student in America is receiving about $1,500
more in grants and scholarships than what it costs in tuition
and fees to attend college.
Thirty-seven percent of all of our college students attend
public 4-year universities. The average in-State tuition and
fees is about $8,900. Those students receive an average of
$5,800 in grants and scholarships. We're not talking loans. So
they have to pay $3,100, on average, in tuition and fees.
And then we have students who attend 4-year colleges that
are private. That's about 15 percent. Their average tuition and
fees are $30,000, but the scholarships and grants take that
down to $12,500. At the for-profit colleges and universities,
the cost is about $15,000.
According to the New York Federal Reserve, at the end of
last year, or 2012, 40 percent of student loan borrowers had a
debt of less than $10,000, 70 percent had a debt of less than
$25,000, and less than 4 percent had a debt load of over
$100,000. And the College Board says they earn more than a
million dollars over their lifetime with a college degree, more
than if you didn't have one.
So while this hearing is about making it easier to repay
loans, I think it's important for students to know, as they
think about going to college, that it can be affordable, and
that most students don't have to borrow too much money if they
will borrow wisely.
I think, Mr. Chairman, that as we move into other hearings,
we should look at the problem of over-borrowing, which you have
mentioned before. The Wall Street Journal had an article on
March 2d, which I'd like to ask to add to the record, which
talks about the Inspector General's report from the Department
of Education warning that some students borrow excessively for
personal expenses not related to their education, and that's a
growing phenomenon.
[The information referred to follows:]
[The Wall Street Journal, March 2, 2014]
Student Loans Entice Borrowers More for Cash Than a Degree
(By Josh Mitchell)
Some Americans caught in the weak job market are lining up for
Federal student aid, not for education that boosts their employment
prospects but for the chance to take out low-cost loans, sometimes with
little intention of getting a degree.
Some Americans are lining up for Federal student aid, not for
education but for the chance to take out low-cost loans, sometimes with
little intention of getting a degree. Joshua Mitchell reports on
MoneyBeat.
Take Ray Selent, a 30-year-old former retail clerk in Fort
Lauderdale, FL. He was unemployed in 2012 when he enrolled as a part-
time student at Broward County's community college. That allowed him to
borrow thousands of dollars to pay rent to his mother, cover his cell
phone bill and catch the occasional movie.
``The only way I feel I can survive financially is by going back to
school and putting myself in more student debt,'' says Mr. Selent, who
has since added $8,000 in student debt from living expenses. Returning
to school also gave Mr. Selent a reprieve on the $400 a month he owed
from previous student debt because the Federal Government doesn't
require payments while borrowers are in school.
Ray Selent of Fort Lauderdale, FL, who is taking courses for a
degree in theater, says student loans allow him to cover any needs that
arise. Andrew Kaufman for The Wall Street Journal.
A number of factors are behind the growth in student debt The soft
jobs recovery and the emphasis on education have driven people to
attain more schooling. But borrowing thousands in low-rate student
loans--which cover tuition, textbooks and a vague category known as
living expenses, a figure determined by each individual school--also
can be easier than getting a bank loan. The government performs no
credit checks for most student loans.
College officials and Federal watchdogs can't say exactly how much
of the United States' swelling $1.1 trillion in student-loan debt has
gone to living expenses. But data and government reports indicate the
phenomenon is real. The Education Department's inspector general warned
last month that the rise of online education has led more students to
borrow excessively for personal expenses. Its report said that among
online programs at eight universities and colleges, non-education
expenses such as rent, transportation and ``miscellaneous'' items made
up more than half the costs covered by student aid.
The report also found the schools disbursed an average of $5,285 in
loans each to more than 42,000 students who didn't log any credits at
the time. The report pointed to possible factors such as fraud in
addition to cases of people enrolling without serious intentions of
getting a degree.
Capella Education Co., which runs online schools, examined student
costs and debt at institutions--public and private--in Minnesota and
concluded that between a quarter and three-quarters of loans taken out
by students were for non-education expenses. At one of Capella's
master's programs, the typical graduate left with about $30,200 in
student debt even though tuition, fees and book costs totaled roughly
$18,800. Borrowers are prohibited under Federal law, except in rare
instances, from discharging student debt through bankruptcy.
The share of student borrowers taking out the maximum amount of
loans--$12,500 a year for undergraduates--has risen since the
recession. In the 2011-12 academic year, Federal Education Department
data show, 68 percent of all undergraduate borrowers hit the annual
loan ceiling, up from 60 percent in 2008.
Research suggests a fair chunk of that is going to non-education
expenses. In 2011-12, about a quarter of student borrowers took out
loans that exceeded their tuition, after grants, by $2,500, according
to research by Mark Kantrowitz, a higher-education analyst and
publisher of the education site Edvisors.com.
Some students say they intend to get a degree but must borrow as
much as possible because they can't find decent paying jobs to cover
day-to-day expenses.
Tommie Matherne, a 32-year-old married father of five in Billings,
MT, has been going to school since 2010, when he realized the $10 an
hour he was making as a mall security guard wasn't covering his
family's expenses. He uses roughly $2,000 in student loans each year to
stock his fridge and catch up on bills. His wife is a stay-at-home
mother who also gets loans to take online courses.
``We've been taking whatever we can for student loans every
year, taking whatever we have left over and using it to stock
up the freezer just so we have a couple extra months where we
don't have to worry about food,''--says Mr. Matherne, who owes
$51,600 in Federal loans.
Some students end up going deeper into debt. Early last year, when
Denna Merritt lost her long-term unemployment benefits, the 49-year-old
Indianapolis woman enrolled part-time at the Art Institute of
Pittsburgh's online program, aiming for a degree in graphic design. She
took out $15,000 in Federal loans, $2,800 of which went to catch up on
unpaid bills, including utilities, health-insurance premiums and cable.
``Obviously, it's better not to use it that way if you can help it,
because you're just going to owe that much more later,'' says Ms.
Merritt, a former bookkeeper.
The government lets students use a portion of Federal loans for
living expenses on the grounds that it allows students to devote more
time to studying and improves their chances of graduating.
Even when schools suspect students are over-borrowing, they are
restricted by Federal Law and Education Department policy from denying
funds.
College and university trade groups are pushing legislation this
year to set lower maximum Joan limits for some types of students, such
as part-timers. Dorie Nolt, spokeswoman for Education Secretary Arne
Duncan, says the Obama administration is ``exploring alternatives to
see how we might ensure that students don't borrow more than
necessary.''
Mr. Selent, of Fort Lauderdale, knows he is getting himself deeper
in a hole but prefers that to the alternative of making minimum wage.
In his 20's, he earned a bachelor's degree in communications from a
local for-profit school but couldn't find a job in the field after
graduating and began falling behind on his student loan bills. He is
now taking courses for a degree in theater so he can become an actor.
Meanwhile, Federal loans allow him to cover any needs that arise
during the semester. Says Mr. Selent: ``It keeps me from falling
apart.''
Senator Alexander. So over-borrowing may be partly the
result of government policy. And I think we should in future
hearings talk about various ways that have been suggested to
limit the over-borrowing that saddles some students with too
much debt, such as the current practice of allowing students
who are enrolled half-time to take out as much in Federal loans
as a full time student. Or perhaps we should provide colleges
with the authority to set some borrowing limits. These are
things we'll have to discuss.
And, of course, in all this, we're reminded that we do have
a grant program. That's the Pell grant--$33 billion a year--and
we're talking about loans which should be paid back.
In conclusion, what we found in our earlier hearing when we
talked about the application process--and I don't know if we
have that application or not--for loans, we found 100 questions
that you have to--we found that the application for a loan, Mr.
Chairman, was 10 pages and 100 questions, and every student
hates to be presented with this. But the application for making
it easier to pay back your loan is five pages of intimidating
questions.
We're working on finding ways to simplify the application
for grants and loans, of which there are 20 million of those
every year. And maybe as a result of the suggestions we hear
today, we can think of a way to simplify the various ways we've
already come up with to make it easier for students to pay back
their loans.
So I look forward to this, and I hope as we discuss it we
keep a balanced view, and we don't suggest to American students
that you can't afford to go to college when, in fact, for most
students, you can, and that you're borrowing too much when, for
most students, there's no need to do that. And that, I know,
goes against the popular misconception, but I think it's
important that we keep that in balance.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Alexander.
First, I want to recognize Senator Warren for purposes of
introducing some testimony.
Senator Warren. Thank you very much, Mr. Chairman. As you
know, Senator Reed and Senator Durbin are not members of the
HELP Committee and so they're not with us here today. But
they've been working hard on the student debt issue.
So I would ask unanimous consent to submit their statements
for the record about student debt.
The Chairman. Without objection, so ordered.
Senator Warren. Thank you.
[The prepared statements of Senator Reed and Senator Durbin
follow:]
Prepared Statement of Senator Reed
I would like to commend the Chairman and Ranking Member for
the thoughtful, thorough, and collaborative process for
reviewing the Higher Education Act in preparation for its
reauthorization. The Higher Education Act plays a fundamental
role in expanding opportunity, strengthening the middle class,
and securing our future.
Today's hearing on student loans is of critical importance.
The social and economic implications of the rising tide of
student loan debt demand that we take action. I appreciate the
opportunity to share my views and recommendations with the
committee.
As part of the War on Poverty we enacted the Higher
Education Act with the idea that no American should be denied
the ability to go to college because their family lacked the
means to pay. My predecessor, Senator Pell, with the creation
of the Basic Educational Opportunity Grant--later named the
Pell grant in his honor--made that promise of a college
education real for millions of Americans. And as part of the
student aid programs, we invested in offering low-cost loans to
create opportunity, spur innovation, and grow our economy.
Our student loan programs were originally seen as an
investment, not a profit center or even a cost-neutral
proposition. However, today our student aid investment has been
stood on its head.
The Congressional Budget Office estimates that student
loans will generate revenue at least through 2024. The GAO
recently reported that on loans made between 2007 and 2012, the
Federal Government is estimated to make $66 billion.
These record revenues are being generated at a time when
student loan debt has become a serious threat to our ladder of
opportunity. The Federal Reserve Bank of New York and the
Consumer Financial Protection Bureau have raised concerns about
the economic drag of student loan debt on purchasing a house,
buying a car, starting a business, or saving for retirement. As
student loan repayment plans stretch out over 20 years or more,
many in this generation will still be paying off student loans
when it comes time to send their own children to college.
Borrowers are struggling to manage student loan debt. The
delinquency rate on student loans is higher than for other
types of household debt. Default rates are on the rise. For
borrowers who entered repayment in 2010, 14.7 percent had
defaulted by 2013, up from 13.4 percent for those who began
repayment in 2009.
The Federal Government holds an estimated $1 trillion of
the $1.2 trillion in outstanding debt. The Institute for
College Access and Success reported that 71 percent of the
graduating class of 2012 had student loan debt, with the
average amount being $29,400. Between 2008 and 2012, student
loan debt increased by an average of 6 percent per year--
significantly higher than inflation. The New America Foundation
recently reported on the substantial rise in debt for graduate
education. This, too, has serious implications for our economy.
We depend on individuals with graduate education to teach in
our public schools and our colleges and universities.
Researchers, social workers, and health professionals require
graduate education. Our capacity to out-educate and out-
innovate our global competitors will be seriously compromised
if student loan debt puts graduate education out of reach.
We need a multi-pronged strategy to reduce the student loan
debt burden for borrowers past, present, and future. Below are
some actions that we should take:
First, we have to address college costs. That
means engaging States in a true partnership. My Partnerships
for Affordability and Student Success Act (S. 1874) would
reinvigorate the Federal-State partnership in helping low-and
moderate-income students afford college. The legislation would
establish a formula grant to States with a focus on need-based
aid to improve student outcomes and reduce college costs.
Second, colleges and universities must assume
greater responsibility for college costs and student debt. To
ensure that institutions have more skin in the game when it
comes to student loans, I introduced the Protect Student
Borrowers Act (S. 1873) with Senators Durbin and Warren. This
legislation would hold colleges and universities accountable
for student loan default by requiring them to repay a
percentage of defaulted loans. As the percentage of students
who default rises, the institution's risk-share payment will
rise. It also provides incentives for institutions to take
proactive steps to ease student loan debt burdens and reduce
default rates. Institutions can reduce or eliminate their
payments if they implement a comprehensive student loan
management plan. The risk-sharing payments will be invested in
helping struggling borrowers, preventing future default and
delinquency, and reducing shortfalls in the Pell Grant program.
With the stakes so high for students and taxpayers, it is only
fair that institutions bear some of the risk in the student
loan program.
Third, we need to ensure that current and future
Federal and private student loan borrowers are guaranteed basic
servicing and disclosure rights. That is why I joined Senators
Durbin, Warren, and Boxer in introducing the Student Loan
Borrower Bill of Rights Act (S. 1803).
Fourth, we have to provide a real avenue to allow
individuals straining under the weight of the estimated $1.2
trillion in student loan debt--many with loans carrying an
interest rate of 6.8 percent or higher--to refinance those
loans to a lower interest rate. I am pleased to be working with
Senators Warren and Durbin on legislation to enable borrowers
to refinance their loans based on the current rates established
in the bipartisan legislation enacted last summer.
We need to get these student loan policies right: not just
to help those in college, but to boost our economy. If we can
make college more affordable and enable hard working college
graduates retire their student debt in a reasonable fashion,
they can more readily play a needed role in growing our
economy.
I again thank the Chairman and Ranking Member for their
focus on this vital issue and the committee for this
opportunity to share these proposals for addressing student
loan debt. I look forward to working with you on ways to
incorporate them into the reauthorization of the Higher
Education Act.
Prepared Statement of Senator Durbin
I'd like to thank Chairman Harkin and Ranking Member
Alexander for holding this hearing and bringing focus to one of
the major issues facing American students and looming over our
economy today--growing student debt.
Borrowing has long been part of the financial equation to
pay for college for many low- and middle-income students.
Federal student loans have allowed millions to invest in their
futures--taking on debt in return for an education that leads
to a good paying job that allows them to repay their loans.
Unfortunately, the rising costs of college and bad actors
like for-profit colleges mean that students are taking out more
loans than they can often even fathom, let alone ever hope to
repay. In the last decade the number of borrowers and the
amount they're borrowing has steadily increased. The average
debt burden for a graduate in 2012 was $27,850.
For the first time in our history, total student loan debt
now exceeds credit card debt. The cumulative student loan debt
of the 40 million Americans with outstanding loans is estimated
to be near $1.2 trillion.
The Federal Reserve Bank of New York warns that this
growing pile of debt threatens current and future economic
growth. Before 2009, young people with student loan debt were
more likely than others to own homes and more likely to have
bought a new car. Now, the Fed says, the opposite is true.
Increasingly, students are finding the investment is not worth
the return.
While we know that on average those with a college
education earn significantly more and have lower unemployment
rates than those without a college education, recent graduates
are finding that they are unable to make enough at their first
job to pay their monthly student loan payments. Furthermore,
some parents are making hard choices including coming out of
retirement to help another family member with high student loan
debt.
This isn't the system of Federal financial support that was
designed to give everybody a fair shot at a higher education
and better future. While we may disagree about the solutions, I
hope we can all agree that the status quo is not acceptable and
that we can't delay in addressing the rising student loan debt.
Senator Jack Reed, Senator Elizabeth Warren, and I have
committed to doing what we can to promote a national dialog
around these issues--one that recognizes that millions of
borrowers need help now. To help these borrowers, we have
introduced the Student Loan Borrower Bill of Rights, which is
also cosponsored by Senators Boxer, Gillibrand, Murphy,
Blumenthal, and Merkley.
The bill would ensure that borrowers know and understand
their rights when it comes to their Federal and private student
loans. It improves servicing standards for Federal student
loans, making sure that borrowers are aware of Federal programs
like income-based repayment, which provides borrowers a more
reasonable repayment plan for their Federal loans. Too often,
borrowers aren't told of these options or they are
automatically put into forbearance or deferment, which is not
always in their best interest.
Our bill creates servicing standards for private student
loans to ensure that borrower's rights are protected and
borrowers are not subject to increases in loan costs. It would
push lenders and servicers to offer borrowers alternatives to
default. Unlike Federal loans, most private loans don't offer
programs that link loan payments to a person's income. Instead,
if borrowers can't make their monthly payments they have little
choice but to eventually default or to continue racking up
interest in deferment.
Additionally, the bill would implement common-sense reforms
to ensure Federal and private student loan borrowers' rights
are protected. The bill would require that borrowers have
access to basic information about their loans including loan
history and original loan documents as well as notification if
their Federal loan servicer changes or their private student
loan is sold to another lender. If the borrower doesn't know
who to reach out to in times of difficulty, it is nearly
impossible for them to get any help.
The Borrower Bill of Rights also requires servicers to
establish a process to quickly address student loan account
errors and to apply monthly payments to the loan with the
highest interest rate. Borrowers should not be penalized
because they cannot resolve errors related to their student
loan or because their monthly payments are applied to lower
interest loans first.
Finally, the bill would require all Federal and private
student loan servicers to establish a servicemember liaison to
answer questions and help make sure servicemembers get the
benefits they deserve and know about repayment options they
could be eligible for. The Consumer Financial Protection Bureau
issued a report, ``The Next Front? Student Loan servicing and
the Cost to Our Men and Women in Uniform,'' in 2012 which found
that servicemembers often rely heavily on their student loan
servicers to guide them in making decisions about which
repayment options and benefits is best for them. In some cases,
servicemembers were receiving incorrect or confusing
information about available benefits, leading to thousands of
dollars in additional costs.
No matter how many rights and protections we secure for
student borrowers, some people are in such bad shape and so
buried in debt, sometimes several hundred thousand dollars,
that they'll never dig out. But unlike almost every other type
of personal debt in America, student loans are not
dischargeable in bankruptcy. This means that your student loans
will literally follow you your entire life until you pay it
off. That's just not fair when you consider all of the other
debts that are dischargeable in bankruptcy. I've introduced
legislation to fix this problem.
If we are to help ensure that the investments students do
make in their futures are worthwhile, we have to give schools a
greater financial stake in the success of their students.
Senator Jack Reed says schools need to have ``skin in the
game.'' I agree. I support his Protect Student Borrowers Act
that would require schools to pay back some of the Federal
money they receive if large percentages of their students
default on their loans. This will help increase accountability
of all schools, but especially for-profit schools.
We have to get a handle on the for-profit college industry.
This industry only enrolls 10 percent of all college students,
but receives more than 20 percent of all title IV funding and
accounts for 46 percent of all loan defaults. They cost more
than public schools and leave their students with more debt on
average than public or private schools. Yet, their operations
are often subsidized up to 90 percent by Federal taxpayers.
Their investors rake in the profits while taxpayers foot the
bill and students amass the debt.
There is more that could be done and ideas other than those
I've outlined that should be considered, but I commend the
committee for bringing attention to these challenges today. I
encourage the committee to look seriously at these issues and
act quickly. An entire generation of students and the future of
the American economy depend on it.
The Chairman. Thank you all very much. First, let me
introduce our first panelist, Mr. James Runcie. Mr. Runcie
serves at the U.S. Department of Education as the Chief
Operating Officer for Federal Student Aid, a performance-based
organization created to modernize the delivery of student
financial assistance.
In this role, Mr. Runcie advises the Secretary of Education
on matters related to the department's operation of student
financial assistance programs under title IV. Before joining
the department, Mr. Runcie served as co-head of Equity
Corporate Finance of UBS Investment Bank and held numerous
other executive positions with Bank of America Securities
Corporation and the Xerox Corporation.
Mr. Runcie is a graduate of the College of the Holy Cross
with a bachelor's degree in mathematics and earned his master's
in business administration with distinction from Harvard
University's Graduate School of Business.
Mr. Runcie, welcome. Your statement will be made a part of
the record in its entirety. If you could sum it up in about 5
minutes, we'd appreciate it very much.
STATEMENT OF JAMES W. RUNCIE, CHIEF OPERATING OFFICER, FEDERAL
STUDENT AID, U.S. DEPARTMENT OF EDUCATION, WASHINGTON, DC
Mr. Runcie. Chairman Harkin, Ranking Member Alexander, and
distinguished members of the committee, thank you for the
opportunity to discuss the Federal student loan programs. FSA
is responsible for administering and overseeing the Federal
student financial assistance programs. These programs represent
the largest source of student aid in the United States.
Last year, FSA processed more than 21 million applications.
We also delivered more than $137 billion in aid to 14 million
borrowers. Today, our loan portfolio is valued at more than $1
trillion with roughly 40 million recipients. FSA does not work
alone in these efforts. Our workforce of over 1,300 employees
is supported by over 10,000 private sector employees working
for more than 150 private companies with employees in 35
States.
As you are aware, until recently, there were two primary
Federal student loan programs, the FFEL program and the DL
program. In 2007, the DL program's share of annual Federal
student disbursements peaked at approximately 20 percent of
total annual Federal student loan volume. Around that time, the
decline in the financial markets affected student lending by
restricting the availability of capital for private lenders.
Many schools began moving from the FFEL program to the DL
program. In addition, ECASLA authorized the department to
purchase FFEL loans and assume responsibility for servicing
these loans. In 2010, the SAFRA Act ended the origination of
new loans in the FFEL program. FSA successfully implemented the
transition to full direct lending, and since that time, every
eligible student and parent who applied for a loan was able to
receive one.
Let me repeat that. Every eligible student and parent who
applied for a loan was able to receive one. I stress that
point, because since moving to 100 percent direct lending, FSA
has disbursed over $350 billion in loans. In 2013 alone, we
disbursed over $100 billion in direct loans to over 10 million
borrowers. That's an increase of almost 700 percent in 5 years.
Today, FSA contracts with 11 additional servicers. The
competitive structure of the contracts was designed by FSA to
ensure that borrowers receive the highest quality service at
the lowest possible cost to the taxpayer. To accomplish this,
the department analyzes customer satisfaction scores and
default prevention statistics. In addition, the pricing
schedule provides greater compensation for every borrower in a
current repayment status.
We continue to supplement the work of our servicers by
providing innovative repayment options, tools, and resources to
help borrowers manage their financial obligations. For example,
we have launched the Financial Awareness Counseling Tool. This
is an interactive online counseling tool that provides students
with information about managing their student loan debt. Since
inception, nearly 1 million students have used this tool.
Since 2012, we have created new tools. We introduced the
Pay As You Earn repayment plan, which helps DL borrowers manage
their debt by limited monthly payments to 10 percent of income.
Today, over 22 percent of all DL funds in active repayment
status are in income-driven repayment plans. We launched our
repayment estimator, which allows borrowers to view and compare
repayment plans. In the past 4 months alone, over 1 million
borrowers have accessed the tool to research repayment options.
We also updated our entrance and exit counseling for
borrowers. Within the exit counseling module, the borrower is
provided with information on repayment plan eligibility and
estimated repayment amounts. To date, over 1.6 million
borrowers have utilized the tool.
We worked with our loan servicers to enhance loan
counseling for military members to increase awareness of
benefits such as Public Service Loan Forgiveness. We also
mandated all servicers to proactively identify and contact the
pool of military service members to ensure that they're aware
of the benefits they are entitled to under SCRA.
In November 2013, the department conducted a targeted
outreach campaign to over 3 million borrowers informing them of
different repayment options. Almost 150,000 applications for
income-driven plans have been filed as a result of the outreach
campaign.
The department launched an innovative public-private
partnership with the Department of Treasury and Intuit to raise
awareness about income-driven plans to the 18 million users of
Turbo Tax online. Separately, Treasury and Education have also
included a message on the back of envelopes containing this
year's tax refund checks to raise awareness of Federal student
loan repayment options. Approximately 25 million of these
envelopes will be mailed to tax filers in the 2014 tax season.
Finally, earlier this year we launched a new online direct
consolidation loan application. This application makes it
easier for borrowers to consolidate their loans. These
borrowers can choose to upload their income information
directly from the IRS, and in only a few months, over 100,000
borrowers have used this new system to apply for loan
consolidation.
We continue to do all we can to ensure borrowers have the
best possible customer experience and that we are being good
stewards of taxpayer moneys. I appreciate the opportunity to
discuss the Federal student loan programs and welcome any
questions you may have for me.
Thank you.
[The prepared statement of Mr. Runcie follows:]
Prepared Statement of James W. Runcie
Chairman Harkin, Ranking Member Alexander, and distinguished
members of the committee, thank you for the opportunity to discuss the
title IV Federal student loan programs.
Federal Student Aid administers and oversees the Federal student
financial assistance programs, authorized under Title IV of the Higher
Education Act of 1965 (HEA). These programs represent the largest
source of student aid for postsecondary education in the United States.
Last year, Federal Student Aid processed more than 21 million
applications for Federal student aid, the FAFSA, and delivered more
than $137 billion in grant, work-study, and loan assistance to
approximately 14 million postsecondary students and their families.
Today, our loan portfolio is valued at more than $1 trillion, with
roughly 40 million individual borrowers and 178 million loans.
Federal Student Aid does not work alone. Federal Student Aid's
workforce of over 1,300 employees is supported by about 10,000 private
sector contract employees at more than 15 private sector companies with
employees in 35 States plus the District of Columbia.
In administering these programs, our priority is to support
eligible students with Federal financial aid to help them pursue a
postsecondary education and to ensure that they pay their loans back
after completing their education. As you know, the average income for
young adults with a college degree is more than 30 percent higher than
their counterparts with only a high school diploma. Given today's
global economy, having a college degree is critical for the United
States to remain competitive with other countries, and I am proud to be
a part of an organization whose mission is helping our students to
reach their potential.
background on the federal student loan programs
There are three Federal student loan programs--the Federal Family
Education Loan (FFEL) Program, through which lenders using private
capital made federally guaranteed and federally subsidized loans to
students; the William D. Ford Direct Loan Program, where Department of
Education makes loans directly to students; and, the Federal Perkins
Loan Program (Perkins) through which schools make student loans using
Federal and institutional funds. For the remainder of my testimony, I
will focus on the two main loan programs: the FFEL and Direct Loan
Programs.
The FFEL program was established in 1965 as part of the Higher
Education Act and the Direct Loan Program was created in 1993. Between
1994 and 2006, the Direct Loan program's share of annual Federal
student disbursements peaked at approximately 20 percent of total
annual Federal student loan volume.
Beginning in 2008, the decline in the financial markets affected
student lending by restricting the availability of capital for private
lenders to make FFEL loans. The Ensuring Continued Access to Student
Loans Act of 2008 (ECASLA) authorized the Department to implement a
program to ensure credit market disruptions did not deny eligible
students and parents access to Federal student loans for the 2008-09
and 2009-10 academic years. Under this authority, the Department
purchased FFEL loans from private lenders and assumed responsibility
for servicing these loans. As lenders began selling their loans to the
Department, Federal Student Aid also assumed responsibility for
additional Direct Loan volume.
The SAFRA Act, enacted in 2010, ended the origination of new loans
in the FFEL Program and thus made new Federal student loans available
only through the Direct Loan Program. Federal Student Aid successfully
implemented the transition to full direct lending and every borrower
was able to receive a loan without interruption. In fiscal year 2013,
we disbursed approximately $100 billion in Direct Loans to
approximately 10.6 million student and parent borrowers. This is an
increase of almost 700 percent in just 5 years.
Federal Student Aid manages a Federal student loan portfolio of
FFEL and Direct Loans of approximately $1 trillion. We have
successfully managed substantial growth in the title V Federal
financial aid programs and continue to serve our customers--students
and families--by providing information, tools and resources they need
to pursue postsecondary education and manage their repayment
obligations.
student loan servicing
Prior to 2009, one servicer, ACS Education Solutions (ACS),
serviced the entire Direct Loan portfolio. Today the Department works
with and oversees multiple student loan servicing contractors. These
companies manage the borrower's repayment process, including: (1)
providing the borrower with information about repayment options; (2)
billing the borrower monthly; (3) collecting payments from the borrower
and applying those payments to loan fees, interest and principal; and,
(4) if the borrower becomes delinquent, working with the borrower to
get them back into a regular repayment schedule.
In 2009, FSA contracted with four companies to service the growing
government-held portfolio: Great Lakes Educational Loan Services, Inc.
(Great Lakes); Nelnet Servicing, LLC (Nelnet); Pennsylvania Higher
Education Assistance Agency (PHEAA); and SLM Corporation (Sallie Mae).
These four servicers are the Title IV Additional Servicers (TIVAS). The
competitive structure of these contracts is designed to ensure that
borrowers receive the highest quality service at the lowest possible
cost to the taxpayer.
The metrics the Department uses to measure TIVAS performance
include customer satisfaction measured across three distinct groups:
borrowers, financial aid personnel at postsecondary schools, and
Federal Student Aid and other Federal agency personnel who work with
the servicers.
Additionally, we measure the success of the servicer's default
prevention efforts as reflected by the percentage of borrowers and
percentage of dollars in each servicer's portfolio in default. The
Department also compiles quarterly customer satisfaction survey scores
and default prevention statistics for the TIVAS into annual measures to
determine each servicer's allocation of new loan volume. These scores
are published on the Department's Web site.
Finally, the structure of the servicing contract provides higher
levels of servicer compensation for every borrower in a regular
repayment status. Conversely, servicers are paid less for borrowers who
are delinquent, in forbearance or deferment or who ultimately default.
In addition to the TIVAS, the Department has servicing contracts
with certain not-for-profit (NFP) loan servicers. Between October 2011
and February 2013 the Department executed agreements with seven
servicers representing 34 NFP entities. Four additional entities had
their implementations canceled due to the Bipartisan Balanced Budget
Act of 2013 which eliminated the NFP provisions and mandatory funding.
Today, Federal Student Aid has contracts with 11 Federal student
loan servicers: the four TIVAS and seven NFPs.
repayment options
In addition, we also continue our efforts to develop and provide
optimal repayment options, tools and resources to help borrowers manage
their financial obligations and lower delinquency and default. Launched
in March 2013, our ``Repayment Estimator'' allows borrowers to view and
compare repayment plans, providing comparisons of monthly payment
amounts, total amount paid, and total interest paid based on each plan.
Over a 6-week period starting in November 2013, the Department also
contacted borrowers who might benefit from an income-driven repayment
plan to ensure that they have the information needed to determine their
best repayment option. The effort targeted borrowers at key stages in
the repayment process including: those who were about to enter
repayment; delinquent borrowers; borrowers with higher-than-average
Federal student loan debt; and borrowers in deferment or forbearance
because of financial hardship or unemployment.
The Department sent e-mails to over 3 million Federal student loan
borrowers. The effort complimented the work of student loan servicers
and we are currently analyzing the data to provide meaningful insight
into how to design more effective borrower communications to improve
overall student loan servicing activities. As of March 1, 2014,
approximately 30 percent have viewed the email. Borrowers were provided
with different instructions depending on their repayment status. For
example, some borrowers were provided information on how to apply for
an income-driven repayment plan; others were provided a link to the
repayment estimator tool to understand which alternative repayment
plans were available; and others were asked to contact their servicers
to apply for an income-driven repayment plan.
As a result of this campaign, almost 150,000 IDR applications have
been filed and nearly 25 percent of the most delinquent borrowers who
opened the email took an action to avoid default.
The Administration also created the Direct Loan Pay As You Earn
(PAYE) Repayment plan in December 2012, which helps certain eligible
borrowers manage their Federal loan debt by limiting monthly payments
to 10 percent of the borrower's discretionary income. FSA also created
an online application tool for borrowers who want to participate in
this plan or the pre-existing Income-Based Repayment plan. Today, over
22 percent of all outstanding Direct Loan funds in an active repayment
status are in an income-driven repayment plan.
Additionally, we have updated entrance and exit counseling for
borrowers and made our Web site more user-friendly. At the end of the
exit counseling module on StudentLoans.gov, a borrower is provided with
preliminary repayment plan eligibility information and estimated
repayment amounts. The preliminary information is based on the
borrower's loan information in the National Student Loan Data System
(NSLDS) and offers the borrower the opportunity to select a repayment
plan they believe is best for them at the time they are learning about
their repayment options. We then provide loan servicers with borrowers'
repayment plan selection from these sessions.
In July 2012, Federal Student Aid launched the Financial Awareness
Counseling Tool (FACT), an interactive, loan counseling tool on
StudentLoans.gov that provides students with financial management
basics, information about their current loan debt while they are in-
school making year-to-year borrowing decisions, and estimates of
student loan debt levels after graduation. FACT provides students with
five interactive tutorials on topics ranging from managing a budget to
avoiding default. Students can look at their individual loan history
and receive customized feedback to help them understand how to make
responsible financial decisions and manage their financial obligations.
Since its launch, about half a million students have used this tool.
We've also worked to streamline the application process for
borrowers in specific circumstances. Prior to 2013, borrowers wishing
to discharge their student loans due to Total and Permanent Disability
(TPD) had to work with their loan servicers or guaranty agencies, each
with a different set of forms and processes, which often led to
confusion and frustration during the multi-year, multi-step application
process. In July 2013, FSA implemented a new, streamlined process with
a standardized form and a single point of contact for all FFEL and
Direct Loan borrowers throughout the lifecycle of a TPD discharge
application.
Federal Student Aid worked with our loan servicers to enhance loan
counseling for military veterans to increase awareness of benefits such
as the Public Service Loan Forgiveness (PSLF) program.
In January 2014, we made the new Direct Consolidation Loan
Application and Promissory Note available on StudentLoans.gov so that
all our loan applications were in one place for borrowers to access.
Borrowers with non-defaulted Federal loans can submit applications
electronically; confirm loans for consolidation; choose a consolidation
loan servicer; select a repayment plan; and submit an income-driven
repayment (IBR, ICR, or PAYE) plan e-application. Borrowers can choose
to upload their income information directly from the Internal Revenue
Service under an agreement we implemented with the IRS.
conclusion
Working with our servicers, Federal Student Aid strives to provide
borrowers with options to select the best repayment plan for their
needs and tools and resources to assist in managing debt. While I am
proud of the work FSA is doing, we have faced some challenges along the
way. We continue to strive to do all we can to ensure borrowers have
the best possible customer experience and that we are being good
stewards of taxpayer money. My team is continually seeking ways to
improve our services and operations and I am privileged to work with
such a dedicated group of professionals. I appreciate the opportunity
to discuss Federal student loan servicing and repayment options for
borrowers, as well as the programs and services my office administers.
I welcome any questions you have for me.
The Chairman. Thank you very much, Mr. Runcie. Thank you
for your stewardship. We'll start a round of 5-minute questions
here.
Let me talk about servicers. In my opinion, borrowers are
in the best position to know whether their servicer is doing a
good job. I'd like to know how much their opinion counts. For
example, I wish that Sallie Mae would have taken up our offer
to appear today, but they decided not to. But I can tell you we
continue to hear how unhappy people are with Sallie Mae quarter
after quarter, yet the servicer still receives significant loan
volume.
Why is that? Can you walk us through the metrics used to
determine servicers' performance? And how do you plan on
improving these metrics?
Mr. Runcie. One of the metrics that we use is customer--we
have customer surveys, borrower surveys. We also look at
default prevention statistics, and there's also school surveys
as well. So there are a number of different metrics that we
look at for all of the servicers. And because it's a
performance-based structure, and all of the TIVAS compete with
each other for future allocations, we've noticed that the
customer satisfaction scores have all increased over the life
of the contract so far.
In addition, the default metrics have also decreased. So
while that's not saying that there aren't instances where we
can improve our oversight or the customer service operations,
we think that the performance-based contracts have been helpful
in dictating behavior of the servicers.
The Chairman. Can you briefly tell me what you look at in
terms of your contracts with these servicers and how they,
then, subcontract--I guess I'll use that word--with collection
agencies? And I'm going to get into this more with some other
witnesses this morning--but how they deal with collection
agencies and what those collection agencies do and how they
perform and how much money they're making. Do you look at that,
too?
Mr. Runcie. Yes, we do. You know, we have a number of
private collection agencies, about 22 or so, and those
contracts are independent of the servicing contracts. Those
PCAs are reviewed for performance as well. We've recently
increased our monitoring of the private collection agencies. We
monitor them four times a quarter. We listen to dozens and
dozens of calls, and we also have special call monitoring for
the loan rehabilitation program.
So we've been providing some significant level of oversight
with respect to the collection agencies. The collection
agencies--there are some servicers that have collection
agencies, but those are--the contracts are independent.
The Chairman. I guess my question was what is the
Department of Education doing to ensure that they follow the
law--these collection agencies--and that they're not
overcharging borrowers and what fees they collect. Let's say
that a collection agency gets one of these defaulted loans.
They write a letter to the person who borrowed the money. That
person realizes they should pay it. They pay it. How much does
the collection agency get to keep?
Mr. Runcie. It's percentage based--it's based upon
circumstances. But it could be----
The Chairman. I thought it was 20 percent.
Mr. Runcie. It could be as much as 18 percent.
The Chairman. So sometimes they----
Mr. Runcie. Sometimes, depending on the circumstances, it
could be as much as 20 percent.
The Chairman. Therefore, if they wrote one letter and the
debt was paid--a $50,000 debt and they got it paid, they get 18
percent for writing one letter?
Mr. Runcie. Yes. But I think when you look at the millions
of defaulted borrowers, there are going to be instances where
there's a tremendous amount of work to get some of those
borrowers back into rehab--or to rehab those borrowers and get
them to be making payments.
The Chairman. I understand. But it's my understanding that
they still get a high percentage just--if they hardly do
anything but write one letter, they still get a high
percentage.
Mr. Runcie. Yes, it's based on success.
The Chairman. That's right. Does that seem fair?
Mr. Runcie. I think if you look at collection agency
practices across all industries, I would think that our
collection compensation is in line with or better than that
within the industry. Part of it is because the experiences
across collections for different borrowers--there's
variability. Some require a lot more work, and some require
less.
Yes, you're right. If it's just one letter and they make a
payment, then there's a lot more profit, potentially, in terms
of that particular instance.
The Chairman. As I pointed out in my opening statement, the
estimate we have is about a billion dollars a year is what
they're making. But I can tell you, we're going to take a
further look at that.
Senator Alexander.
Senator Alexander. Thank you, Mr. Chairman. With all due
respect, the line of questioning you're using sounded to me
like a line of questioning you might use to question a trial
lawyer who might try a lot of lawsuits and lose them all, but
might win one and get 30 percent or 40 percent of the award.
Mr. Runcie, Secretary Duncan, if I remember correctly,
testified a few years ago before the Senate Appropriations
Committee that if the Federal Government took over all the
student loans, it wouldn't increase the cost of administering
the loans. Yet the statistics I have show that the cost of
administering the student loan program has increased--has
nearly doubled since 2009 by about nearly $700 million. Why
have the administrative costs of the student loan program
nearly doubled since 2009 when Secretary Duncan said it
wouldn't?
Mr. Runcie. That may have to do with the substantial amount
of volume that's occurred since 2007. As I mentioned in the
testimony, between ECASLA and a transition to DL, the overall
volume has increased substantially. But if you look at our per
unit cost for applications or for loan disbursements, all those
per unit costs have actually decreased.
Senator Alexander. So none of the $700 million--you mean
the per unit costs are less today than they were 6 years ago?
Mr. Runcie. The per unit costs for originating, disbursing,
and servicing a loan--all those costs have decreased. Now,
there are additional--we've had more in terms of security, in
terms of compliance. There are other activities, updating some
of our systems that are legacy systems. But the actual
transaction costs have actually gone down.
Senator Alexander. But, overall, the cost of administering
the student loan program has nearly doubled since the
government took them all over. You mentioned in your testimony
that you had a campaign to identify 3 million borrowers who
needed help paying back their loans, and that 150,000
responded. You helped 150,000. That's not a very high
percentage. Why do you suppose that more borrowers didn't
respond to your offer to help them figure out the various
options for repayment of the loan?
Mr. Runcie. I think that 150,000, based upon any industry
standards for mailing or for contacting through that mechanism,
is a very high number. But, obviously, we're looking to make
sure that we maximize the response rates and the amount of
people that take up the plan.
Income-driven repayment plans are very beneficial as a tool
that people can use to address issues around handling
repayment. But those plans may not be for everyone, because
income-driven plans may actually have you pay more over the
life of a loan. So it really has to do with the borrower's
circumstance. But, in addition----
Senator Alexander. I have one other question I'd like to
get in, and my time is about up--if I may.
Mr. Runcie. Oh, I'm sorry.
Senator Alexander. I think it might have something to do
with the complexity of this 5-page set of instructions about
how you sort through your various ways to help. I have one
other question, which is this. According to figures that I
have, two out of five college students go to community
colleges, 2-year schools. And the average tuition and fees are
under $3,300. These students receive $4,850, average, in grants
and scholarships.
So the average community college student is receiving about
$1,500 more in grants and scholarships than it costs them in
tuition and fees during that 2 years. They have extra money.
The college itself is free for the average community college
student. In fact, the Governor of Tennessee is working to
advertise that in our State so that he can encourage more
people to go to college.
But are you concerned that some of the students may be
borrowing the money, taking out these low-cost loans, simply to
get the money, not for education, but for other purposes, and
that many of them have little intention of getting a degree,
and that that might be one of the reasons why we have many
students say that they're over-borrowing more than they should
have? Is that a concern of yours?
Mr. Runcie. Yes, it is a concern, and I think that we've
been, over the course of the last couple of years, looking at
ways to make sure that we verify the intent and the actions of
people who receive grants and loans. We've increased our
verification. We've worked the schools to ferret out situations
where there might be fraud or abuse of the loan and grant
programs. We are very concerned and will continue to look at
ways to mitigate situations like that.
In terms of the limits, those are statutory, and so our
function ends up being more of compliance and trying to
maintain the integrity of the programs versus any structure
around the limits.
Senator Alexander. Thank you very much.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Alexander. I might say
that if I have been taken to task for comparing trial lawyers,
I'll say that----
Senator Alexander. Oh, I just observed----
The Chairman. I'll make this observation, that in terms of
the cost, you said in your statement that the amount has gone
up 700 percent in 5 years. The cost has doubled. That's a 100
percent increase, which means that the cost per loan actually
has come down. If the number has gone up 700 percent, which you
put out, but the cost has doubled, that's 100 percent.
Obviously, the cost per loan has decreased.
Mr. Runcie. That's right.
The Chairman. Let's see. I have Senator Warren, Senator
Baldwin, Senator Murphy, Senator Franken.
Senator Warren.
Statement of Senator Warren
Senator Warren. Thank you, Mr. Chairman.
Mr. Runcie, in January, the Government Accountability
Office released a report on the cost of operating the Federal
student loan program. The report calculated that the break-even
interest rate on student loans--that is, the interest rate
necessary to cover the cost of the program without making a
profit--for the upcoming student loans would be about 2.5
percent.
But instead, we'll be charging students nearly twice that
amount for undergraduate loans and about two and a half to
three times that amount for graduate loans and for PLUS loans.
The GAO acknowledged that this is only an estimate, and
estimates can change. But that is the best estimate we have.
We'll be charging at least twice as much as we need to charge
to cover the cost of the loans. So when we set interest rates
higher than we need to cover the cost, that generates revenue
for the government.
My question, Mr. Runcie, is where do those profits go? Do
they get refunded back to the students who paid more than was
necessary for the cost of their loans, or are they just used to
fund government generally?
Mr. Runcie. Senator Warren, they do not--they're used to
fund government generally. They do not come back specifically
into the program.
Senator Warren. All right. That's the key point I wanted to
make here. We're charging more interest than we need to run the
student loan program, and there's no mechanism to refund that
money to the students. It seems to me we're just taxing
students for the privilege of borrowing money to try to get an
education.
I think that's obscene. I don't think the student loan
program should be designed so that it's making profits for the
Federal Government. As a first step, we could wring some of
those profits out of the system by refinancing those loans and
bringing them down to a break-even point for the government.
Mr. Runcie, I also want to ask about servicer contracts. I
want to pick up where Chairman Harkin went to ask about the
relationship with Sallie Mae. You know, the Department of
Education has multiple contracts outstanding with Sallie Mae.
Sallie Mae has repeatedly broken the rules and violated its
contracts with the government.
I'll give you a few examples. In 2007, Sallie Mae agreed to
a multimillion-dollar settlement with the New York Attorney
General on claims related to improper marketing of student
loans. Both the Treasury Department and the Department of
Education have cited Sallie Mae for failure to abide by the
terms of its Federal contracts.
Sallie Mae is currently under investigation--let's make a
list here--by the FDIC, the Department of Justice, the Consumer
Financial Protection Bureau, and the Utah Department of
Financial Institutions. And yet Sallie Mae continues to make
millions on its Federal contracts with the Department of
Education. Between 2009 and 2011, it made almost $100 million
on just servicing Federal student loans, even while it broke
the rules.
So my question is--I understand that the Department of
Education has already notified Sallie Mae that their contract
will be renewed. Why did the Department of Education decide to
renew Sallie Mae's contracts when it clearly violates the rules
and has done so repeatedly?
Mr. Runcie. In terms of the extension of the contract for
Sallie Mae, it was a part of extending the contracts for all of
the TIVAS. In extending the contract, the contracting officer
looked at a number of different things.
Senator Warren. Including that they've broken the rules
repeatedly and they're under investigation in multiple places
for breaking the rules? Have you done something different with
these contracts to ensure greater accountability, to make sure
that they're not going to continue to break the rules in the
future? I just don't understand this, Mr. Runcie.
Mr. Runcie. We strictly monitor their compliance to the
contracts, and we're very open to looking at those contracts
and seeing if there's additional terms and things that we
should put in there. But in terms of their performance under
the contract, there may be some instances where they are asked
to remedy certain situations, whether it's an employee that
provides the wrong information.
But in terms of a wholesale breach of the contract, that
has not been determined as far as I know. And, again, I'm
speaking about the direct loan servicing contract, not about
private loans or State laws that they might be breaking.
So based upon our current assessment of all the servicers,
we felt that, based upon their performance under the terms of
the contract--and we also felt in terms of dislocations to the
borrowers because we would have to transfer 24-plus million
borrowers if we didn't extend the terms of the TIVAS contracts.
So there are a number of things that we looked at in terms of
extending the contract.
Of course, if they're found to be in violation of any of
the law specific that would be a breach of the contract, we
would address that by taking whatever appropriation actions,
including termination.
Senator Warren. I want to suggest that--we know that there
are problems with Sallie Mae. It has become public, and the
actions you're taking and the oversight that you're exercising
has obviously not been enough to correct the problem. And I'm
very concerned about re-upping a multimillion-dollar contract
with Sallie Mae when Sallie Mae has demonstrated time and time
again that it's not following the rules.
Thank you, Mr. Chairman.
The Chairman. Thank you. I might add that it sounded like
your answer, Mr. Runcie, was that they're too big to fail.
Senator Warren. Yes.
The Chairman. Senator Baldwin.
Statement of Senator Baldwin
Senator Baldwin. Thank you, Mr. Chairman and Ranking
Member.
Mr. Runcie, as you reminded us in your testimony about the
history, in 2008, we worked to cut out the middle man in our
student loans by making the transition from the Federal Family
Education Loan Program to direct lending. I was a member of the
House of Representatives at the time of that vote and was proud
to support a change that resulted in cutting over $60 billion
of waste. I think it was an important step, but certainly work
remains, as we've just heard.
Recently, in meeting with student financial aid
administrators from my State, Wisconsin, they shared an odd
quirk of the student loan origination fee that for many seems
like a relic from the days of the Federal Family Education Loan
program. The fee is usually paid from the loan amount,
resulting in a slightly reduced loan for the student. But, it
places a burden on financial aid administrators who have to
explain why there is this fee in the first place. And it feeds
the perception that the government is making a lot of money off
of these loans.
So now that the Federal Government is in the business of
direct lending, is this fee still necessary? Can the Department
of Education and the loan servicers function properly without
this fee?
Mr. Runcie. The fee is a part of the structure that we
have. And you're right. That is taken out of the loan amount
that is distributed to the student. In terms of what that would
mean from a cost-structure perspective, I don't believe that it
would have--we could still operate and we could still conduct
the loan program without that.
In terms of other considerations, statutory and otherwise,
I can't speak to that. But you're right. There is that fee, and
it results in--it's a very small fee on a per borrower basis.
But when you aggregate it together, it's a meaningful amount.
Senator Baldwin. I appreciated hearing in your testimony
that the Department of Education has worked with loan servicers
to streamline the process for those needing to discharge their
loans due to total and permanent disability. I understand that
discharging loans due to total and permanent disability still
remains cumbersome for many.
I have been working for some time on student borrowers'
bill of rights legislation. It includes the right to discharge
a loan due to total and permanent disability, as well as avoid
the current tax penalty that those who are able to discharge
face.
I want to know if there are further steps that the
Department of Education can take to make the process of loan
discharge in the event of total disability or death easier for
students and families. Are there currently any incentives in
place for servicers to expeditiously serve those students and
families, or could you create some?
Mr. Runcie. That's clearly a major concern and a big issue
that we've been focused on. We have streamlined the process.
Before, we had many different servicers. Now, we have one
servicer so there's an ability to sort of have quality control
around that experience.
We now use the SSA and the Veterans determination for
disability. So the vagueness around, what total and permanent
disability is--that's been addressed. So I think we've improved
the process, but there's probably still work to be done.
It sounds like the issue around the tax at the end of the
forgiveness--that's something that has been discussed a lot,
and I know people are looking at that. We can operationalize
that pretty easy if that comes to fruition. But we have made
some significant improvements, and we're looking for additional
ideas in terms of how we can further improve the total and
permanent disability process.
Senator Baldwin. Thank you.
The Chairman. Thank you, Senator Baldwin. I don't want to
cut anyone off, but I've just been informed that we have three
votes at noon. I think we're going to have to call a halt to
this hearing. We have another panel of experts that we want to
hear from. So I'd ask if you don't really have--Mr. Runcie has
answered a number of questions. I don't want to cut anyone off,
but I'd like to hurry this along so we can get to our next
panel.
Senator Murray. Mr. Chairman, I'll hold my questions until
the second panel.
The Chairman. I appreciate that very much.
Senator Murphy.
Statement of Senator Murphy
Senator Murphy. Thank you very much, Mr. Chairman. I'll ask
one question around this subject.
When an individual goes to buy a house, the bank is going
to assess both their creditworthiness and also the soundness of
the investment that they're making. They're going to do an
inspection of the house. They're going to make sure that it's a
place worth investing in.
For the programs that you run, the assessment on the
borrower is different. It's not really by creditworthiness.
It's about need. But the institution, in this case, the
equivalent of the house, deserves to have the same kind of
rigorous analysis applied to it. Today, we sort of have an all
or nothing approach when we're looking at these institutions as
to whether they are worthwhile investments for the Federal tax
dollars.
I look at an institution like a place called Corinthian
College in California, a school that has revenue of $1.7
billion, and 83 percent of it comes from the programs that you
run. And yet they have default rates in the neighborhood of 36
percent, a 3-year default rate of 40 percent, prices that are
wildly out of step with other competitors in the area.
When they ran afoul of the default rate rules, the way that
they got back in compliance was to call their borrowers, on
average, 110 times a month to convince them to just seek more
deferments and forbearance. They actually didn't do much about
the price of the degree or about the quality. They convinced
students to push their obligations out further.
There are other models out there rather than the all or
nothing approach which would involve much more of a risk-
sharing model, in which schools that aren't performing or
having higher than average default rates or low graduation
rates would share more of a burden of the outstanding loans
rather than just saying that if you don't meet a certain
threshold, you aren't eligible for Federal aid--I think we've
only sanctioned eight schools.
Do you think that the current method by which we judge
institutions' capability to give students a quality degree and
allow them to make enough money to repay loans is working? And
what do you think about some of these other models?
Mr. Runcie. I think some of those other models are
promising. They've been discussed, and we'd be ready to run
compliance activities and input that in, in terms of our
operations. Right now, we look at cohort default rates, as you
know, and to some extent, depending on the utilization of
forbearance and deference, that can be manipulated somewhat.
But forbearance and deferment--those are sort of
entitlements under the program. However, the servicers are
ultimately the ones that can put people in deferment or
forbearance. So the schools may guide them there, but the
servicer also has to have a conversation and work with them to
see if that's the best option for them at that time versus
income-based repayment or something like that.
The other thing is, we're going through the negotiated
rulemaking process for gainful employment, and that would also
have an impact in terms of addressing some of the issues that
you mentioned potentially with the proprietary schools. But in
terms of a wholesale change in model and a way to address those
issues, we're open to operationalizing those.
Senator Murphy. I'm glad to hear that. The idea that we're
spending, in this particular institution's case, $1.4 billion
in taxpayer money all for the benefit of getting a 40 percent
default rate and graduation rates, that are hovering under 10
percent at this institution is mind blowing.
Senator Murray, Senator Sanders, myself and Senator Schatz
have legislation that I hope will take a look at it in the
context of HEA reauthorization that will give you and give the
Department of Education some new tools with which to try to
hold these schools accountable when we're making decisions on
how to allocate $140 billion a year.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Franken.
Statement of Senator Franken
Senator Franken. Thank you, Mr. Chairman.
I want to talk about a tool that students can use early on
in the process of looking at colleges, the Net Price
Calculator. I'm going to introduce some legislation on that to
improve it. The Net Price Calculator allows kids, before they
are even deciding whether to apply to a college, to see how
much it's actually going to cost.
We have a free Net Price Calculator available at the
colleges. Some put their own up. Some are better than others.
You know, the college board did a recent survey, and more than
half of the students ruled out schools based on sticker price
without considering the full effect of financial aid, and it
said that many of them chose to attend less selective colleges
than they were qualified for because they incorrectly believed
they were priced out of the other schools.
I was wondering if you had any thoughts about the net
calculator and what the Department of Education can do to
incentivize colleges to make these calculators more user
friendly for students.
Mr. Runcie. We've been very focused on financial literacy
and outreach in making sure that students are in a good
position from a due diligence and research standpoint to make
good investment decisions. And there have been a number of
items that we've put out, like the Financial Aid Shopping Sheet
that helps students compare loan packages and financial aid
packages across institutions.
But your point is even before that, students make decisions
about colleges because they see the price tag and they don't
have a sense of what the net price is. So we do have
calculators, but I think the promotion of those calculators is
something that we could do better. We could put more into
promoting the calculators, and we could work with institutions
potentially to make the calculators a little bit more user
friendly and more transparent.
Senator Franken. Or just require that they be--for example,
if you're filling out the FAFSA, that can't be completed until
January 1st of the year in which the student seeks to enroll in
a school. Now, by January 1st, you've already done your
applications. You've already--basically, it's all over.
This is an ability to see before or as you're considering.
You can look at a school, and if you have the right calculator
there, it gives kids a real idea of what the real net cost of
the school is going to be, what the possible grants are, what
the aid would cost, et cetera.
When I go to roundtables and talk about college
affordability, the students--very often, I hear, ``Gee, I wish
I had applied to this school'' or ``I didn't really realize how
much this was going to cost.'' And the financial literacy is a
tremendous part of--we need to have these students have their
eyes wide open when they're doing this.
I don't want them foreclosing better options for themselves
because they didn't realize that a school--some schools will
give a full ride to students, and kids will say, ``I'm not
going to apply to Harvard because I couldn't possibly pay for
it because it's so much.'' But they don't understand that
Harvard gives a full ride--or Princeton does, or other schools
do this.
I'd love to work with you on this--but to find a way to let
kids know well beforehand, not let them know after they've
already applied, after they've already been either admitted or
not--let them know beforehand what the net cost of their
college is going to be.
Mr. Runcie. Great. We'd love to work with you and look at
your ideas and see how we can make it better, absolutely.
Senator Franken. Thank you very much.
Mr. Runcie. Thank you.
Senator Franken. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Franken.
Mr. Runcie, thank you very much for being here. Thank you
for your testimony. I'm sure we'll have some follow-ups from
other Senators who are not here today. But thank you.
Mr. Runcie. Thank you, Chairman.
The Chairman. Now we'll turn to our second panel. First,
we'll go from left to right, and I'll introduce you, and then
we'll start our testimony.
I'd like to introduce Dr. Michelle Cooper, president of the
Institute for Higher Education Policy, an organization
dedicated to promoting access and success for all students in
higher education. Most recently, Dr. Cooper led the development
of IHEP's new policy agenda with a focus on increasing degree
attainment, enhancing affordability, and improving
accountability and consumer awareness. She received her
bachelor's degree from the College of Charleston, her master's
from Cornell, and a doctorate from the University of Maryland
at College Park.
I'll turn to Senator Warren for purposes of introducing our
next witness.
Senator Warren. I'm pleased to introduce Deanne Loonin,
director of the National Consumer Law Center's Student Loan
Borrower Assistance Project. At the National Consumer Law
Center, Ms. Loonin assists attorneys representing low-income
consumers and teaches consumer law to legal services
representatives, private consumer lawyers, and other advocates.
She is the author of several reports on student loan law
and the problems inherent in the Federal student loan program.
I worked with Ms. Loonin for many years before I made this
career shift----
The Chairman. You could say that with a little more
enthusiasm.
[Laughter.]
Senator Warren [continuing]. Her work is first rate, and I
appreciate her being here today.
The Chairman. Thank you, Senator Warren.
Our next witness is Roberta L. Johnson, director of student
financial aid at my alma mater, Iowa State University, a land
grant institution. With a two-decade history of handling
student loan operations at the institutional level, Ms. Johnson
has significant firsthand experience in the administration of
loans through both the Federal Family Education Loan program
and the Federal Direct Loan program.
In 2013, Ms. Johnson was appointed vice chair to the
Advisory Committee on Student Financial Assistance, which
provides counsel to Congress and the Secretary of Education on
increasing college access for students from low- and middle-
income families. She is a dual graduate of Iowa State with a
bachelor's degree in elementary education and home economics
and a master's degree in counselor education.
Now, I'll turn to Senator Alexander for our next
introduction.
Senator Alexander. Thanks, Mr. Chairman. We welcome Marian
Malone Dill, director of financial aid at Lee University in
Cleveland, TN.
The only thing that would have been better is if you had
brought the Lee Singers with you. They did so well at the
inauguration, and I hope you'll give them our best wishes.
She is membership chairman of the Southern Association of
Student Financial Aid Administrators. She has been an assistant
director of financial aid at a community college and at
Tennessee Wesleyan in our State. And she is a first-generation
college student and a recipient of title IV aid, so she has a
broad view of the subject we're talking about. We welcome her.
The Chairman. Very good. Thank you all for being here. Your
testimonies will all be made a part of the record in their
entirety. We'll start with Dr. Cooper and go down the line. If
you could sum up your testimony in 5 minutes or so, we'd sure
appreciate it, and then we can get into our questions and
answers.
Dr. Cooper, welcome and please proceed.
STATEMENT OF MICHELLE A. COOPER, B.A., M.P.S., Ph.D.,
PRESIDENT, INSTITUTE FOR HIGHER EDUCATION POLICY, WASHINGTON,
DC
Ms. Cooper. Chairman Harkin and Ranking Member Alexander
and other committee members, good morning and thank you for
this opportunity. Like you heard, I am Michelle Asha Cooper,
and I am president of the Institute for Higher Education
Policy, an organization that we simply refer to as IHEP. At
IHEP, we focus on issues related to college access and success,
with a focus on emphasis on underserved student populations.
Today, I speak to you in my role as president of IHEP. But
just a few decades ago, I was simply a kid from South Carolina
who had the opportunity to finance my college degrees with
title IV financial aid. So I can say with confidence that
financial aid and the ability to access it made a difference in
my life, and I firmly believe that it still can make a
difference in the lives of today's students.
But the realities of today's students are very different
than previous generations, and earning a college degree or
credential is much harder now. So in re-examining the title IV
programs, I would encourage you to be mindful of today's
context and also be mindful of the realities and the needs of
today's students. So we should recognize that one-size-fits-all
approaches probably won't work, and neither will layering new
policy ideas over old outdated ones.
So, in turning to the issue of student loans, our goal must
be to help the millions of student loan borrowers, who we
currently have graduate with manageable debt levels that can be
repaid in an affordable, easy, and timely manner. With this
goal in mind, we at IHEP recommend that there be three types of
improvements, improvements that will lead to more informed
choices, improvements that will lead to more simplified
options, and improvements that will lead to better shared
accountability.
For informed choices, we have two recommendations. One is
about better information, and the second is about better
student loan counseling. When it comes to the issue of better
data and better information, I'm sure you've heard, like I've
heard, that people believe that there is more than enough
information out there. There certainly is information out
there, but the information is not always of high quality.
The information is not always presented in a way that
allows students to use it in a productive, consumer-friendly
way, and it usually sometimes does not help them to make good,
sound, informed choices. So in our written comments, we
recommend some very detailed but straightforward fixes to
existing data in IPEDS and the National Student Loan Data
System that would better help students gage the quality and the
outcomes that they can likely experience at some institutions.
We suggest improvements to the information around college
costs, around debt repayment, and about student outcomes, in
particular. We also hope that this information can be made
available for students for multiple years and multiple cohorts.
We also believe that student loan counseling needs
improvement. So I'm encouraged that we've already had some good
conversation about that, and we would actually agree that there
needs to be counseling on student loans and financial literacy
that happens before students even get to college. We have some
Federal programs like the TRIO programs and the GEAR UP
programs where we could easily incorporate financial literacy
and student loans into that structure.
Also, we believe that existing Federal tools like the
College Score Card and the Net Price Calculators and the
Financial Aid Shopping Sheets should be made to be more
applicable and more accessible and, in some cases, even
mandatory.
And, third, we believe that there is much that can be done
to improve the student loan counseling. It should be more than
just a checklist, and we can make some improvements to the
timing, the content, and the frequency of the counseling. It
shouldn't just happen at the beginning and the end. We can do a
lot more with students throughout their entire college career.
Our second category of recommendations represent simplified
options for loan repayment. At present, there are many options
that we have outlined in our appendix, and we believe that the
number of repayment options can and should be reduced. We
believe if they were reduced, it would minimize complexity and
help to make the loan terms more transparent and accessible. We
suggest having a single standard repayment plan as well as
offering a single income-based repayment plan.
The final category of recommendations relates to shared
accountability. Now, as State appropriations decline and
tuitions have increased, students have been taking on more debt
to pay for college. As a result, they have been bearing an
increasing proportion of that risk. While students should bear
some responsibility, so should the institutions.
In thinking about shared accountability, we recommend
investigating options that would lead to more meaningful
accountability, such as risk-sharing. While the specifics of an
appropriate risk-sharing model need to be tested and vetted
with institutional leaders, we don't believe we have to start
from scratch, as there are some models and proposals that
already exist.
In closing, I'm happy to talk more about these
recommendations in greater detail. But I do want to stress that
if we really want to have real, longstanding change, and we
want to do more than simply tinker at the margins, I encourage
you to remember that the student loan issue must be looked at
within the broader issue of college costs, which you've already
begun to do, because student loans and student debt are simply
symptoms of this bigger college cost problem.
Thank you.
[The prepared statement of Ms. Cooper follows:]
Prepared Statement of Michelle Asha Cooper, B.A., M.P.S., Ph.D.
Chairman Harkin, Ranking Member Alexander, and Members of the HELP
Committee: I am deeply appreciative of the opportunity to participate
in this hearing discussing strategies for strengthening the Federal
student loan programs.
My name is Michelle Asha Cooper, and I am president of the
Institute for Higher Education Policy (IHEP). IHEP is a nonpartisan,
nonprofit organization committed to promoting access to and success in
higher education for all students, with a focus on students who have
been underserved by our postsecondary educational system. Based in
Washington, DC, we believe that all people, regardless of background or
circumstance, should have the opportunity to reach their full potential
by participating and succeeding in higher education. And working
together, we can do more to make that dream a reality.
We believe that institutional leaders and policymakers must support
strategies that enhance the quality of the postsecondary experience in
ways that are appropriate and relevant to the demands of the 21st
century. As such, it is necessary to reassess and, in some cases,
redesign our policies to ensure that they open doors and facilitate the
success of today's students--a growing percentage of whom are low-
income, first-generation, students of color, and returning adults.
The reauthorization of the Higher Education Act is an opportunity
to examine title IV financial aid programs, including student loans,
within this context. In seeking to improve these programs, we must
ensure that our policies and strategies help today's students complete
college with manageable debt levels that can be repaid in an
affordable, easy, and timely manner. In support of this goal, IHEP
offers the following recommendations for Federal policymakers that
reflect three strategic areas:
Informed Choices
Provide students with better information--more
useful data presented in a useable format--that can inform
decisionmaking about how to choose and how to pay for colleges
that offer real value.
Improve student loan counseling--the timing,
content, and delivery--so that it helps more students make
better borrowing and repayment decisions, which may help them
avoid delinquency and default.
Simplified Options
Streamline Federal loan repayment options and ensure
that information about eligibility and terms are sensible and
simple.
Shared Accountability
Improve the shared accountability framework used in
college finance by holding States and institutions more
responsible for high loan debt and defaults.
Details about each of these recommendations are provided in this
testimony. As background on these recommendations, we provide the
following overview of recent trends in student aid.
i. trends in student aid
Programs authorized under title IV of the Higher Education Act (as
amended in 2008) include all Federal grant, loan, and work study
programs, as well as various eligibility and accountability criteria
and authorizations for Federal higher education data collection. In
2012-13, approximately $185 billion was provided in undergraduate
student aid--including Federal grants, loans, work-study, and tax
benefits, as well as State, institutional, private, and employer
grants; an additional $53 billion supported graduate student aid. For
undergraduates, Pell Grant funding comprised 17 percent ($32.3 billion)
of the total, while Federal loans represented 37 percent ($67.8
billion). Over the past decade, the Federal Government has increased
total financial aid for undergraduates and graduates by 105 percent
overall, and this Federal aid composes more than two-thirds of the
total aid to students from all sources.\1\
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\1\ ``Trends in Student Aid 2013'' (New York, NY: College Board,
2013). Retrieved from: http://trends.collegeboard.org/sites/default/
files/student-aid-2013-full-report.pdf.
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While the overall increase in Federal student aid is significant,
it must be understood in the proper context. Increases in Federal aid
have occurred simultaneously to decreases in per-student State support
for higher education\2\--which has led to increases in tuition\3\--
while family incomes overall have stagnated, with low- and middle-
income families actually witnessing declines over the past decade.\4\
---------------------------------------------------------------------------
\2\ ``State Higher Education Finance Fiscal Year 2012.'' (Boulder,
CO: State Higher Education Executive Officers, 2013). Retrieved from:
http://www.sheeo.org/sites/default/files/publications/SHEF-FY12.pdf.
\3\ ``Trends in College Pricing 2013.'' (New York, NY: College
Board, 2013). Retrieved from: http://trends.collegeboard.org/sites/
default/files/college-pricing-2013-full-report.pdf.
\4\ ``Trends in College Pricing 2013.'' (New York, NY: College
Board, 2013). Retrieved from: http://trends.collegeboard.org/sites/
default/files/college-pricing-2013-full-report.pdf.
---------------------------------------------------------------------------
Together, these trends help to explain why, over time, Federal aid
has covered less and less of college costs. Despite an increase in the
overall maximum award for the Pell Grant, the current purchasing power
of the grant has declined because college costs have increased. In
2012-13, the maximum Pell Grant covered 32 percent of the cost of
attending the average 4-year public institution; whereas it represented
77 percent of these costs in 1979-80.\5\
---------------------------------------------------------------------------
\5\ IHEP calculations using ``Digest of Education Statistics 2013''
Table 330.10. Retrieved from: http://nces.ed.gov/programs/digest/d13/
tables/dt13_330.10.asp.
---------------------------------------------------------------------------
With tuition increasing and grant aid failing to keep pace, more
and more students face the need to work while enrolled and/or acquire
student loans. As such, 60 percent of Federal aid is disbursed now in
the form of student loans\6\--with more than 16 million students
receiving Federal loans in 2012-13\7\ and 37 million holding
outstanding debt.\8\ Nationally, the Federal Government holds over $1
trillion in student debt.\9\
---------------------------------------------------------------------------
\6\ ``Trends in Student Aid 2013'' (New York, NY: College Board,
2013). Retrieved from: https://trends.collegeboard.org/sites/default/
files/student-aid-2013-full-report.pdf.
\7\ IHEP calculations on data from the Federal Student Aid Data
Center, 2012-13 Award Year Direct Loan Volume by School, http://
studentaid.ed.gov/about/data-center/student/title-iv.
\8\ Meta Brown, Andrew Haughwout, Donghoon Lee, Maricar Mabutas,
and Wilbert van der Klaauw, ``Grading Student Loans.'' (New York, NY:
Federal Reserve Bank of New York, 2012). Retrieved from: http://
libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans
.html.
\9\ Rohit Chopra, ``Student Debt Swells, Federal Loans Now Top a
Trillion.'' (Washington, DC: Consumer Financial Protection Bureau,
2013). Retrieved from: http://www.consumer
finance.gov/newsroom/student-debt-swells-Federal-loans-now-top-a-
trillion/.
---------------------------------------------------------------------------
Impact Of Student Loans On Today's Students
Over the years, the increase in college costs has affected all
students, but the shift from grants to loans as a primary mechanism for
financing college disproportionately hinders the access and persistence
of low- and moderate-income families.\10\
---------------------------------------------------------------------------
\10\ Mark Huelsman and Alisa F. Cunningham. ``Making Sense of the
System Financial Aid Reform for the 21st Century Student.''
(Washington, DC: Institute for Higher Education Policy, 2013).
Retrieved from: http://www.ihep.org/assets/files/publications/m-r/
reimagining-aid-design-and-delivery-final-january-2013.pdf.
---------------------------------------------------------------------------
Despite the commonly held myth that the Pell grant program ``takes
care of needy students,'' Pell grant recipients--with average family
incomes near $20,000\11\--are actually more than twice as likely as
other students to have loans. Of those who complete a bachelor's
degree, their average debt at graduation is $3,500 higher than their
peers.\12\ (Note: In 2012, average student loan debt among graduates
who borrowed for a bachelor's degree was $29,400).\13\
---------------------------------------------------------------------------
\11\ IHEP calculations on data from the U.S. Department of
Education, National Postsecondary Student Aid Study, 2011-12.
\12\ ``Pell Grants Help Keep College Affordable for Millions of
Americans.'' Save Pell Coalition, 2013. http://www.edtrust.org/sites/
edtrust.org/files/Overall%20Pell%20one-pager%20FINAL
%2011-25-13.pdf.
\13\ ``Student Debt and the Class of 2012,'' (Oakland, CA: The
Institute for College Access and Success, 2013). Retrieved from: http:/
/projectonstudentdebt.org/files/pub/classof2012.pdf.
---------------------------------------------------------------------------
Federal loans do provide a better value to students relative to
those found on the private market, but they still represent a means of
financing college through future earnings, rather than simply lowering
the overall cost to the student. The best way to reduce student debt
burdens would be to lessen the need to borrow by encouraging colleges
and universities and States to reduce the cost of attendance, while
maintaining access and quality. At the Federal level, it is critical
that the Federal Government maintain its commitment to the Pell grant,
which serves as the bedrock source of financial aid for more than 9
million low- and moderate-income students. Pell grant funding should be
made entirely mandatory in the Federal budget, the maximum award should
be increased to make up for its lost purchasing power and reflect the
realities of college costs today, and the maximum award should remain
indexed to inflation.
And while student loans can be a useful college financing strategy,
it is important to note that they are not a risk-free or even risk-
neutral investment. In fact, for some students borrowing comes with
considerable risk, and current policies are placing more of this burden
on the student and less on States and institutions. For the student,
the impact of overwhelming debt, alongside a degree/credential with
minimal personal or professional value, or no credential at all, can be
devastating.
As the number of student borrowers has increased and their
cumulative indebtedness has grown, so too have concerns about whether
the resulting debt levels are manageable and what the long-term impact
of student loan debt will be on their life choices and chances. The
fact that more than two-fifths (45 percent) of all college entrants--
and 59 percent of low-income students--do not graduate within 6 years
centralizes the importance of this issue.\14\ Borrowers who leave
postsecondary education without graduating are more likely to
experience difficulty in repaying their loans. In fact, 59 percent of
undergraduate borrowers who left without a credential became delinquent
or defaulted,\15\ and default is more likely among low-income students,
who have fewer family resources upon which to fall back.\16\ Default
and delinquency also is more common among students who attend for-
profit institutions.\17\ The consequences of default are severe,
particularly because student loans are not dischargeable in bankruptcy.
Defaulted borrowers suffer from reduced credit scores and can have
their wages garnished, their income tax refunds intercepted, and even
their social security payments withheld.
---------------------------------------------------------------------------
\14\ IHEP calculations on data from the U.S. Department of
Education, Beginning Postsecondary Students study 2003/09. In this
analysis, students are considered low-income if their family income is
below 200 percent of the poverty line.
\15\ Alisa F. Cunningham and Gregory S. Kienzl, ``Delinquency: The
Untold Story of Student Loan Borrowing.'' (Washington, DC: Institute
for Higher Education Policy, 2011). Retrieved from: http://
www.ihep.org/assets/files/publications/a-f/delinquency-
the_untold_story_final
_march_2011.pdf.
\16\ Jacob P.K. Gross, Osman Cekic, Don Hossler, and Nick Hillman,
``What Matters in Student Loan Default: A Review of the Research
Literature.'' Journal of Student Financial Aid, 39:1 (2009). Retrieved
from: http://www.nasfaa.org/research/Journal/subs/What_Matters_in_
Student_Loan_Default_A_Review_of_the_Research_Literature.aspx.
\17\ Alisa F. Cunningham and Gregory S. Kienzl, ``Delinquency: The
Untold Story of Student Loan Borrowing.'' (Washington, DC: Institute
for Higher Education Policy, 2011). Retrieved from: http://
www.ihep.org/assets/files/publications/a-f/delinquency-
the_untold_story_
final_march_2011.pdf.
---------------------------------------------------------------------------
ii. recommendations for strengthening student loans
The reauthorization of the Higher Education Act is an opportunity
to reassess student loan policies with an eye toward addressing the
needs and challenges of today's students. We offer these
recommendations for strengthening the student loan program:
Informed Choices
Provide students with better information--more
useful data presented in a useable format--that can inform
decisionmaking about how to choose and how to pay for colleges
that offer real value.
Improve student loan counseling--the timing,
content, and delivery--so that it helps more students make
better borrowing and repayment decisions, which may help them
avoid delinquency and default.
Simplified Options
Streamline Federal loan repayment options and
ensure that information about eligibility and terms are
sensible and simple.
Shared Accountability
Improve the shared accountability framework used in
college finance by holding States and institutions more
responsible for high loan debt and defaults.
These recommendations--reinforced by numerous studies written by
IHEP and others--could make the financial aid process more equitable
and efficient, while simultaneously making the best use of taxpayer
funds to better support students.
1. Informed Choices
Policy Option 1.1: Provide students with better information--more
useful data presented in a useable format--that can inform
decisionmaking about how to choose and how to pay for colleges that
offer real value.
Students need better information to help them make more informed
postsecondary decisions. At a time when college tuitions and fees are
increasing faster than inflation and family income, data on college
costs are critical. As it stands, too many of today's college students
are paying far too much at institutions that offer them far too few
chances for success.
Finding answers to students' basic questions about how much college
will cost--not just in their first year, but their entire time at an
institution--and how much they could end up borrowing would be a simple
way to start. Existing data provide a useful picture of the tuition and
fees, cost of attendance, and net price that students will face their
first year. However, students are left to guess about how much they
will pay in subsequent years and how much debt they will likely accrue
during their college career.
We recommend amending the Integrated Postsecondary Educational Data
System (IPEDS) to include college-level cost information--tuition and
fees, cost of attendance, and net price--not just for freshmen, but
also for continuing and transfer students. Also, we recommend adding to
IPEDS data the amount of student loan debt accumulated for a
certificate, associate's degree, bachelor's degree, or graduate degree,
and the amount accumulated by non-graduates. Current debt data on the
College Scorecard can produce confusing results by combining completers
and non-completers, which allows colleges with high churn rates to
appear more affordable than those where more students graduate.\18\
---------------------------------------------------------------------------
\18\ Mamie Voight, Alegneta Long, Mark Huelsman, and Jennifer
Engle. ``Mapping the Postsecondary Data Domain: Problems and
Possibilities.'' (Washington, DC: Institute for Higher Education
Policy, 2014). Retrieved from: http://www.ihep.org/assets/files/
publications/M-R/mapping_postsecondary_data_part_1_final_march_2014-
v2.pdf.
---------------------------------------------------------------------------
Data on cost are important, but data on outcomes also are necessary
to provide an understanding of students' chances of success in college
and beyond. We recommend that the U.S. Department of Education begin
collecting graduation rates for Pell grant recipients, non-Pell grant
recipients who receive subsidized Stafford loans, and students who
receive neither Pell grants nor subsidized Stafford loans, so students
can gauge their chances of success at an institution. Also, we
recommend that the U.S. Department of Education release data on
repayment rates by institution on an annual basis (using the National
Student Loan Data System, NSLDS) and disaggregate data on student loan
volume and default by undergraduate/graduate status. Furthermore,
technical issues currently make it difficult to combine and match data
from Federal Student Aid with data from IPEDS. We recommend that the
U.S. Department of Education further study the scope and magnitude of
these limitations and develop strategies for addressing them, including
a crosswalk tool.
As stated, much of the relevant cost data is already in IPEDS or
can be attained through modifications to current data collection. Table
2 in the Appendix provides a comprehensive overview of currently
available cost data and recommendations for improvement to better aid
consumer choice, policymaking, and institutional improvement.\19\
---------------------------------------------------------------------------
\19\ Ibid.
Policy Option 1.2: Improve student loan counseling--the timing,
content, and delivery--so that it helps more students make better
borrowing and repayment decisions, which may help them avoid
---------------------------------------------------------------------------
delinquency and default.
Better information (see Policy Option 1.1)--when consumer-tested
and presented accurately and simply--can help nudge students toward
better choices. However, far too few students, especially low-income
college goers, have access to the high-touch, data-driven counseling
they need to help them interpret information about college outcomes and
costs, and student loans in particular. In fact, high school counselors
spend, on average, only 38 minutes per student per year on college
counseling.\20\ Even the perfect tool likely will suffer from limited
use and effectiveness, unless it is put into the hands of counselors,
teachers, aid administrators, and others who can spend adequate time
directly advising students.
---------------------------------------------------------------------------
\20\ Patricia M. McDonough. ``Counseling and College Counseling in
America's High Schools. (Alexandria, VA: National Association for
College Admissions Counseling, 2005). Retrieved from: http://
www.inpathways.net/McDonough%20Report.pdf.
---------------------------------------------------------------------------
Student loan counseling needs to begin early (i.e., pre-college
level) and continue throughout college (i.e., entrance counseling,
annual aid renewal periods) and graduation/departure (i.e., exit
counseling). At the pre-college level, this type of counseling can be
required of TRIO and GEAR UP programs, for example, including the
Educational Opportunity Centers program focused on returning adults.
Four tools--the College Scorecard, net price calculators, the Financial
Aid Shopping Sheet, and the Financial Awareness Counseling Tool--
already developed by the Federal Government can also be improved to
facilitate counseling at this level.
Table 1.--Summary of Financial Aid Tools to Facilitate Student Decisions
------------------------------------------------------------------------
Recommended
Existing Federal tools Objectives changes
------------------------------------------------------------------------
College Scorecard............... Examines average More comprehensive
costs and student data needed,
outcomes at including the
nearly 4,000 percent of
degree-granting students who
colleges that borrow, as well
participate in as
Federal student recommendations
aid programs and suggested in
operate on a Policy Option 1.1
traditional and Table 2
calendar system. (Appendix) and
Helps students more
and families comprehensive
understand the coverage of
typical amount schools needed
borrowed and the (such as
chances of including those
completing and/or that do not
defaulting at a operate on a
particular traditional
school.. calendar system);
Conduct more
consumer-testing
to ensure
usability.
Net Price Calculators........... Mandated to appear Need to be more
on colleges' Web accessible and
sites, these understandable
reflect estimates for students,
of what students allow for easy
pay for college comparison of
after grant and results across
scholarship multiple
awards at institutions, and
individual prominently
institutions. identify the net
Puts the sticker price figure in
price in context the results.\21\
and provides a Conduct more
more realistic, consumer-testing
early estimate of to ensure
what college usability.
costs..
Shopping Sheet.................. Model financial Require all
aid award letter colleges
that makes it receiving Federal
easier for aid to use the
students and standardized
families to format. Conduct
understand and more consumer
compare the real testing to ensure
cost of usability.
attendance and
available aid
options,
including loans..
Financial Awareness Counseling Offers tutorials Integrate this
Tool (FACT). to increase information into
financial other tools and
literacy, college access
including a walk- programs to
through on the streamline
basics of student offerings. Ensure
loans.. usability through
consumer testing.
------------------------------------------------------------------------
While counseling at the pre-college level is designed to help
students access and understand the information needed to make informed
choices, at the undergraduate level the goal is different as it should
help students understand their available aid, make wise decisions
(i.e., at entrance and annually), and select appropriate repayment
options (i.e., exit counseling). Both entrance and exit counseling are
already mandatory for Federal student loan borrowers, and can be
provided in person, in writing, or online, although an expert in
financial aid is required to be available to answer questions.\22\
However, in a recent survey, about 40 percent of high-debt borrowers
reported that they did not receive (or did not recall) student loan
exit counseling. Also nearly two-thirds of private loan borrowers
indicated that they did not understand the differences between their
private and Federal student loan options.\23\ This lack of awareness
and understanding signal a need to improve the process.
---------------------------------------------------------------------------
\21\ For detailed recommendations on how to improve net price
calculators, see ``Adding it all up 2012: Are college net price
calculators easy to find, use, and compare?'' (Oakland, CA: The
Institute for College Access and Success, 2012). Retrieved from: http:/
/www.ticas.org/files/pub/Adding_It_All_Up_2012.pdf.
\22\ In 2010-11, about 6.4 million borrowers received entrance
counseling through the Department's online tool. ``Memo: Framework for
testing the effectiveness of and improving student loan counseling.''
(Oakland, CA: The Institute for Access and Success, November 22, 2011).
\23\ Jen Mishory and Rory O'Sullivan. ``The Student Perspective on
Federal Financial Aid Reform.'' (Washington, DC: Young Invincibles,
2012). Retrieved from: http://younginvincibles.org/wp-content/uploads/
2012/11/Student-Perspective-on-Federal-Financial-Aid-Reform.pdf.
---------------------------------------------------------------------------
To improve student loan counseling, it must be seen as an essential
component of the aid process, instead of an item on a checklist. We
recommend improving the timing of counseling, presenting borrowers with
customized information relevant to their particular situation, and
increasing the frequency of loan counseling. For example, the entrance
session should occur before a student signs the promissory note. At the
entrance session, counselors may incorporate some of the tools and
resources referenced in Table 1, but go into more detail about terms in
these tools and implications of them. For example, counselors--or a
personalized, online counseling module--can use the shopping sheet to
explain the difference between grants and loans and between types of
loans, including subsidized Stafford loans, unsubsidized Stafford
loans, and private loans. Counselors, counseling tools, and counseling
materials also should explain the benefits of using Federal student
loans instead of private loans and/or credit cards to finance college
costs, while also communicating to students that they are not required
to borrow the full amount offered to them if they do not need it. And
at the exit session, the advantages and disadvantages of various
repayment options should be discussed carefully, alongside personalized
data and guidance on the implications of different repayment plans
based on individual student's circumstances. At present, loan
counseling is required twice during a student's academic career;
however, we recommend that colleges and universities send students
annual updates on their balance, interest rates, and repayment options.
Additionally, students should be required, as a part of the financial
aid renewal process, to review their loan balance, available through
the NSLDS. While reviewing this information, students also could be
provided an online tutorial on loan terms, interest rates, and
repayment options. Loan counseling, including new tools and delivery
methods, should be consumer tested and refined to be as applicable and
useful for students as possible.
More research is needed to understand fully the most effective
strategies in student loan counseling. While better information and
improved counseling offer no guarantee that all students will make
better decisions, it does offer a significant improvement over current
practice, as it allows for more nuanced data to be integrated into
existing tools that can easily be improved for usability. These
recommendations operate in tandem, as we need both better data and
better loan counseling supports. After all, in the end, data do not
counsel people on how to get into, pay for, and graduate from college;
people do.
2. Simplified Options
Policy Option 2.1: Streamline Federal loan repayment options and
ensure that information about eligibility and terms are sensible and
simple.
At the Federal level, we have made significant contributions to
simplifying the Federal aid process through HEA reauthorizations. For
example, in the 1992 reauthorization, the financial aid application was
redesigned, application fees were eliminated, and a single need
analysis formula was developed. Subsequent reauthorizations (e.g.,
Higher Education Opportunity Act, 2008) and other legislation (e.g.,
College Cost Reduction and Access Act, 2007) have been important steps
in helping reduce the barriers of confusion and complexity that
confront hopeful students. Yet despite these advances, some areas of
simplification are still needed, as in the case of the student loan
repayment options.
At present, there are many repayment options (see Table 3,
Appendix), not including deferment and forbearance. For each plan,
there are different eligibility criteria and a different payment
formula. There are currently four income-driven repayment options--
income-based repayment, Pay As You Earn, income-contingent repayment,
and income-sensitive repayment, with another slated to begin in July
2014. While well-intentioned, these programs are unnecessarily
confusing, and despite their benefits to borrowers, they are
underutilized. According to the Federal Student Aid's data, only about
11 percent of Federal loan borrowers are enrolled in some type of
income-driven repayment program.\24\
---------------------------------------------------------------------------
\24\ Analysis of ``Direct Loan Portfolio by Repayment Plan,''
Federal Student Aid, U.S. Department of Education, Retrieved from:
http://studentaid.ed.gov/about/data-center/student/portfolio.
---------------------------------------------------------------------------
Reducing the number of repayment options would reduce complexity
and make loan options (and terms) more transparent to borrowers. We
recommend maintaining the standard repayment plan and offering a single
income-based plan, which would allow borrowers to benefit from more
manageable monthly payments and the assurance of loan forgiveness if
they experience extended financial hardship.
This single income-based plan should aim to target protections to
borrowers in most need of support, while not offering large forgiveness
benefits to high-income, high-debt borrowers.\25\
---------------------------------------------------------------------------
\25\ Jason Delisle and Alex Holt. ``Safety Net or Windfall?''
(Washington, DC: New America, 2012). Retrieved from: http://
edmoney.newamerica.net/publications/policy/safety_net_or_
windfall.
---------------------------------------------------------------------------
Simplifying student loan repayment options will not only minimize
confusion and complexity for students, if students are aware of and
counseled about these options using the strategies outlined in Policy
Option 1.1 and 1.2, they could realize debt relief. Offering debt
relief to borrowers, in the aggregate, has the potential to
significantly decrease defaults.
3. shared accountability
Policy Option 3.1. Improve the shared accountability framework used
in college finance by holding States and institutions more responsible
for high loan debt and defaults.
Historically, postsecondary college financing has benefited from a
model of shared responsibility, with the Federal Government, State
governments, and students all bearing some of the cost. Given the
substantial taxpayer investment, the Federal Government and State
governments are accountable to their constituents for their roles in
this financing scheme. For their part, students are held accountable
for making continued academic progress toward a degree/credential.
Current policies tie eligibility for Federal aid to ``satisfactory
academic progress,'' which means students need to exhibit minimal
progress toward a credential, including maintaining adequate academic
standing. Recent changes to Federal aid programs have mandated
additional requirements for students, including limitations on the
length of time they are eligible for aid. And, as noted previously,
students bear considerable risk when their investment in higher
education through loans does not work out given the severe consequences
of default. Yet, the role of the institution in this partnership is
understated.
The investment in higher education is not a risk-neutral
proposition for any party, but as it stands, the governments and
students shoulder a significant, increasing proportion of the risk. HEA
reauthorization provides an opportunity to redesign this partnership to
reflect more accurately current realities. To do so, we suggest
bolstering the use of accountability metrics for institutions at the
Federal level. The current mechanism used by the Federal Government is
the application of cohort default rates to determine continued
institutional eligibility for title IV financial aid. Cohort default
rates (CDR) reflect whether an institution's borrowers are successfully
avoiding default. The U.S. Department of Education's most recent update
to the cohort default rates found that they have increased from the
previous year (9.1 percent to 10 percent for 2-year CDRs and 13.4
percent to 14.7 percent for 3-year CDRs). The direction of this trend
line is troubling, especially since the increase has been steady over
several years and that 2-year default rates have now reached their
highest point since 1995.\26\
---------------------------------------------------------------------------
\26\ ``National Default Rate Briefings for Fiscal Year 2011 2-Year
Rates and Fiscal Year 2010 3-Year Rates.'' Federal Student Aid, U.S.
Department of Education. Retrieved from: http://www.ifap.ed.gov/
eannouncements/093013CDRNationalBriefings2YRand3YR.html.
---------------------------------------------------------------------------
Despite this available lever, very few institutions are sanctioned
(i.e., cutoff from Federal financial aid) using existing thresholds. In
the most recent release of 2-year CDRs, only eight schools were subject
to sanctions based on the 25 percent threshold for 2-year CDRs, and 218
were required to develop default prevention plans for having a 3-year
rate of at least 30 percent.\27\ CDRs provide some measure of
accountability by spotlighting the worst offenders. The all-or-nothing
approach, however, allows other poor performing schools to hide in the
shadows.
---------------------------------------------------------------------------
\27\ ``National Default Rate Briefings for Fiscal Year 2011 2-Year
Rates and Fiscal Year 2010 3-Year Rates.'' Federal Student Aid, U.S.
Department of Education. Retrieved from: http://www.ifap.ed.gov/
eannouncements/093013CDRNationalBriefings2YRand3YR.html; and Rachel
Fishman. ``Shape Up or Lose Out: The 218 Institutions that Must Develop
Default Prevention Plans.'' (Washington, DC: New America, 2012).
Retrieved from: http://higheredwatch.new
america.net/blogposts/
2012shape_up_or_ship_out_the_3218_institutions_that_must_
develop_default_prevention_plans_.
---------------------------------------------------------------------------
We suggest broadening accountability beyond the all-or-nothing
approach, and risk sharing could be a useful tool for doing so. This
idea, highlighted in different variations by The Institute for College
Access and Success (TICAS)\28\ and partners in the Redesigning Aid
Design and Delivery (RADD) consortium on student loans,\29\ could
refine and expand to institutions the model already established for
guarantee agencies in the Federal Family Education Loan Programs. In
this case, institutions would be held liable for some portion of the
school's loan balance based on their performance on a repayment measure
like cohort default rates (although other measures like repayment rates
might also be explored given the limitations of CDRs\30\. Another
possibility would be to require institutions--on a sliding scale--to
pay a penalty that is proportional to their defaulted debt.
---------------------------------------------------------------------------
\28\ ``Aligning the Means and the Ends: How to Improve Federal
Student Aid and Increase College Access and Success.'' (Oakland, CA:
The Institute for College Access and Success, 2013). Retrieved from:
http://www.ticas.org/pub_view.php?idx=873.
\29\ ``Automatic for the Borrower: How Repayment Based on Income
Can Reduce Loan Defaults and Manage Risk.'' RADD consortium on student
loans. (Washington, DC: Young Invincibles, 2014). Retrieved from:
http://younginvincibles.org/wp-content/uploads/2014/03/Automatic-for-
the-Borrower-3.19.14.pdf.
\30\ See IHEP's recent report for an in-depth discussion of the
limitations of cohort default rates as well as possible fixes and
alternatives such as repayment rates. Mamie Voight, Alegneta Long, Mark
Huelsman, and Jennifer Engle. ``Mapping the Postsecondary Data Domain:
Problems and Possibilities.'' (Washington, DC: Institute for Higher
Education Policy, 2014). Retrieved from: http://www.ihep.org/assets/
files/publications/M-R/mapping_postsecondary_data_
part_1_final_march_2014-v2.pdf.
---------------------------------------------------------------------------
For example, institutions could be required to pay into a risk-
sharing fund an amount equivalent to a proportion of their total loan
portfolio, with that proportion determined based by the loan repayment
rate of their students. As a simple illustration, a 20 percent cohort
default rate may translate to a risk-sharing payment equivalent to 20
percent of the loan portfolio, or less stringently, of the loan
portfolio not in repayment. The funds paid into the risk-sharing pot
could provide direct debt relief for struggling borrowers or be
reinvested into loan forgiveness or the Pell grant program.
Some argue that a risk-sharing mechanism could lead institutions to
pass the added expense along to students through higher prices.
However, tying the size of the risk-sharing payment to the amount
students are borrowing and/or the rate at which they are successfully
repaying could help mitigate the risk of rising costs. Care must also
be taken to protect access alongside a risk-sharing mechanism--or any
institutional accountability system, for that matter--to prevent
institutions from meeting performance benchmarks by limiting access.
For instance, the system could prevent a risk-sharing payment from
being reduced if an institution improves its cohort default rate, but
decreases its enrollment of Pell grant recipients.
iii. conclusion
In closing, I wish to thank you again for providing this
opportunity to offer strategies to strengthen the Federal student loan
programs. The recommendations outlined above are important both for
helping students meet individual postsecondary and economic mobility
goals and for meeting the Nation's economic competitiveness goals. High
student debt loads affects the U.S. economy in that they may force
students to delay full participation on other key economic activities
such as home-buying and saving for retirement. Student loan delinquency
and default lead to further negative economic consequences in that
students are left with poor credit ratings, limited future borrowing
options, and additional financial penalties, while the Federal
Government loses critical revenue and must spend additional resources
to try to recover some of its initial investment.
As we move forward to reauthorize HEA, please know that I, along
with my team at IHEP, are happy to serve as a resource and partners in
this effort. Working together, will help us better serve students by
offering them the tools and services they need in support of college
access and success. By crafting a system that helps student borrowers
make more informed decisions, leverage streamlined repayment options,
and benefit from greater institutional accountability, Federal student
loan programs are better positioned to serve their intended role--to
provide students with the financial resources necessary to successfully
complete a postsecondary degree and fully participate in the U.S.
economy.
______
Appendix
Table 2.--Cost: Data Availability and Recommended Improvements \31\
[Cost: Data availability and Recommendations for Improvement]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Are the data available? How can the data be
---------------------------------------------------------------------- collected? (Already
Which measures will available, Amend
What questions need answers? answer these Partially available IPEDS, Add to IPEDS,
questions? Yes or needs improvement No or Link to other data
source)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cost: How much do students invest Tuition and Fees...... .................... Tuition and fee data ................... Amend IPEDS: Collect
in college?. are reported in the data for transfer
IPEDS Institutional and continuing
Characteristics (IC) students.
Survey. In-state, in-
district and out-of-
state tuition and
fees are reported
for first-time, full-
time undergraduates.
Average tuition and
fees are reported
for all
undergraduates.
Tuition and fee are
not disaggregated
for transfer or
continuing students..
Consumers need to know how much Cost of attendance.... .................... In-state, in- ................... Amend IPEDS: Collect
they will pay and borrow to attend district, and out-of- data for transfer
an institution. state cost of and continuing
attendance are students.
reported for first-
time, full-time
degree/certificate-
seeking
undergraduates by
living status (such
as on-campus, off-
campus with family,
and off-campus not
with family) In the
IPEDS Institutional
Characteristics
Survey..
Policymakers need to know the cost Net Price by Income... .................... Average net price ................... Amend IPEDS: Collect
and debt burden that students must data are available data for transfer
undertake to access and succeed in for first-time. full- and continuing
college, which reflects on how time under- students and out-of-
institutions invest public graduates who state students at
dollars.. receive grant or public institutions.
scholarship aid. Net Collect net price by
price data are income for non-title
disaggregated by IV recipients, and
income bands for calculate overall
first-time full-time net price including
undergraduates who non-grant
receive title IV scholarship
aid. Both of these recipients.
net price data point
and omit students
paying out-of-state
tuition (or publics)
transfer and
continuing students,
and students who do
not receive
financial aid
(either title IV or
grant/scholarships)..
Institutions need to monitor the Cumulative Debt .................... The College Scorecard ................... Link to other source:
impact of cost and debt on access (disaggregated by reports total After the completion
and completion for students.. loan type, income or Federal loan debt flag has been tested
financial aid (including Parent and verified, use
category, and PLUS loan) among NSLDS to
completion status. students leaving an disaggregate debt by
and ideally race/ institution, using income or financial
ethnicity; also NSLDS. It does not aid category
accompanied by the separate completers completion status,
percentage who from non-completers, and loan type.
borrow).. disaggregate by type Add to IPEDs: Until
of Federal loan NSLDS completion
debt, include data are verified,
private loan debt, report to IPEDS.
or report the Continue collecting
percentage of the percentage of
students who borrow.. students who borrow
in IPEDS.
Explore: Options for
institutions (or
lenders) to collect/
report data on
cumulative private
loan debt and
percentage who
borrow private
loans.
--------------------------------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\31\ Mamie Voight, Alegneta Long, Mark Huelsman, and Jennifer
Engle. ``Mapping the Postsecondary Data Domain: Problems and
Possibilities.'' (Washington, DC: Institute for Higher Education
Policy, 2014). Retrieved from: http://www.ihep.org/assets/files/
publications/M-R/mapping_postsecondary_data_part_1_final_march_2014-
v2.pdf.
Table 3.--Overview of Student Loan Repayment Options \32\
----------------------------------------------------------------------------------------------------------------
Monthly payment and
Repayment plan Eligible loans time frame Quick comparison
----------------------------------------------------------------------------------------------------------------
Standard Repayment Plan.............. Direct Subsidized and Payments are a fixed You'll pay less
Unsubsidized Loans; amount of at least $50 interest for your loan
Subsidized and per month; up to 10 over time under this
Unsubsidized Federal years. plan than you would
Stafford Loans; all under other plans.
PLUS Loans.
Extended Repayment Plan.............. Direct Subsidized and Payments may be fixed Your monthly payments
Unsubsidized Loans; or graduated; Up to 25 would be lower than
Subsidized and years. the 10-year standard
Unsubsidized Federal plan; If you are a
Stafford Loans; all Direct Loan borrower
PLUS Loans. or FFEL, you must have
more than $30,000 in
outstanding debt in
that respective
program; You'll pay
more for your loan
over time than under
the 10-year standard
plan.
Graduated Repayment Plan............. Direct Subsidized and Payments are lower at You'll pay more for
Unsubsidized Loans; first and then your loan over time
Subsidized and increase, usually than under the 10-year
Unsubsidized Federal every 2 years; Up to standard plan.
Stafford Loans; all 10 years.
PLUS Loans.
Income-Based Repayment Plan.......... Direct Subsidized and Your maximum monthly You must have a partial
Unsubsidized Loans; payments will be 15 financial hardship;
Subsidized and percent of Your monthly payments
Unsubsidized Federal discretionary income, will be lower than
Stafford Loans; all the difference between payments under the 10-
PLUS Loans made to your adjusted gross year standard plan;
students; income and 150 percent You'll pay more for
Consolidation Loans of the poverty your loan over time
(Direct or FFEL) that guideline for your than under the 10-year
do not include Direct family size and State standard plan; If you
or FFEL PLUS loans of residence; Your have not repaid your
made to parents. payments change as loan in full after
your income changes; making the equivalent
Up to 25 years. of 25 years of
qualifying monthly
payments, any
outstanding balance on
your loan will be
forgiven; You may have
to pay income tax on
any amount that is
forgiven.
Income-Contingent Repayment Plan.... Direct Subsidized and Payments are calculated You'll pay more for
Unsubsidized Loans; each year and are your loan over time
Direct Plus Loans made based on your adjusted than under the 10-year
to students; Direct gross income, family standard plan; If you
Consolidation Loans. size, and the total do not repay your loan
amount of your Direct after making the
Loans; Your payments equivalent of 25 year
change as your income of qualifying monthly
changes; Up to 25 payments, the unpaid
years. portion will be
forgiven; You may have
to pay income tax on
the amount that is
forgiven.
Income-Sensitive PRepayment Plan..... Subsidized and Your monthly payment is You'll pay more for
Unsubsidized Federal based on annual your loan over time
Stafford Loans; FFEL income; Your payments than you would under
PLUS Loans; FFEL change as your income the 10-year standard
Consolidation Loans. changes; Up to 10 plan; Each lender's
years. formula for
determining the
monthly payment amount
under this plan can
vary.
Pay As You Earn PRepayment Plan...... Direct Subsidized and Your maximum monthly You must be a new
Unsubsidized Loans; payments will be 10 borrower on or after
Direct PLUS loans made percent of October 1, 2007, and
to students; Direct discretionary income, must have received a
Consolidation Loans the difference between disbursement of a
that do not include your adjusted gross Direct Loan on or
(Direct or FFEL) PLUS income and 150 percent after October 1, 2011;
loans made to parents. of the poverty You must have a
guideline for your partial financial
family size and State hardship; Your monthly
of residence; Your payments will be lower
payments change as than payments under
your income changes; the 10-year standard
Up to 20 years. plan; You'll pay more
for your loan over
time than you would
under the 10-year
standard plan; If you
have not repaid your
loan in full after you
made the equivalent of
20 years of qualifying
monthly payments, any
outstanding balance on
your loan will be
forgiven; You may have
to pay income tax on
any amount that is
forgiven.
----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\32\ ``Repay your Direct Loans and Federal Family Education Loan
(FFEL) Program Loans.'' Federal Student Aid, U.S. Department of
Education. Retrieved from: http://studentaid.ed.gov/repay-loans/
understand/plans.
---------------------------------------------------------------------------
The Chairman. Thank you very much, Dr. Cooper.
Ms. Loonin.
STATEMENT OF DEANNE LOONIN, NATIONAL CONSUMER
LAW CENTER, BOSTON, MA
Ms. Loonin. Thank you, Chairman Harkin, Senator Alexander,
and other members of the panel. Thank you for inviting me to
testify here today.
I am here today on behalf of my low-income clients. They're
a diverse group, really representing or reflecting the broad
faces of student loan borrowers today, and it's important to
keep that in mind when we look at this issue, because the idea
of--or sort of the concept of an 18-year-old going to college,
finishing at age 21, is actually more of an anomaly now than
what happens in the current environment where non-traditional
students are actually the majority of students today.
But there is one common thread of all the clients I've
worked with over the years, and that's that they've all
sincerely wanted to go to college to better themselves and to
better the lives of their families. That may not have been the
outcome, but that was their sincere intent.
The great advantage of our system is the opportunity for
all to get a college education. But it should be about
investing in students most of all, not about government and
private profit.
Under the current system, schools may be profiting as
tuition continues to increase, private servicers and collectors
may be profiting due to borrower distress, and even the
government appears to be profiting. But it's on the back,
largely, of students who are asked to take on nearly all of the
risk. We can do better for borrowers, and we can do it within
the structure of the Direct Loan program.
The structure is not the problem. The problem is lax
oversight, lax management, and misaligned incentives. I believe
we need a multi-faceted approach and not assume that there's
just one solution to all of this. I want to mention a few, and
I have more details in my testimony.
The approach starts with school accountability, as Dr.
Cooper mentioned. The best way to prevent defaults is to help
students succeed. And then we also want to look at simplifying
the student loan system and focusing it more on borrowers. With
servicing, which we've already talked quite a bit about, the
focus now on private contractors and profit plays out in that
servicers too often steer borrowers to the easiest options.
My clients, much of the time, don't even know about IBR,
aren't told about IBR, don't know about the optimal options for
them. And I believe there are ways that we can streamline
servicing, perhaps with competition. Some competition is likely
healthy--but create a system that's about putting borrowers
first, not ensuring that private companies get every
opportunity to promote their brands.
I also discuss collection in greater detail in my
testimony. But in a nutshell, the government has given the
private collection industry a dispute resolution and counseling
role with borrowers, and instead, in my experience, working for
many years with clients, the collection agencies routinely
violate consumer protection laws and prioritize profits over
borrower rights. It doesn't work for borrowers, it doesn't work
for taxpayers, and I think it's time to end the experiment with
private collection agencies.
We've been giving examples of these problems for years to
government agencies, but we haven't had much response. In fact,
as has been mentioned, for the most part, the Department of
Education has kept renewing contracts even for those servicers
or collectors where there's been evidence of offenses. The
problems are now more public with the GAO and Inspector General
reports, and I believe that we can fix this.
The administration was able to mobilize and implement the
transition to full direct lending a few years ago. I think they
can put the same level of commitment to fixing the servicing
and collection system, and use all the resources available to
them, use the CFPB, which has very much improved, the complaint
system, oversight over servicers, and, of course, use
congressional oversight, too.
Ultimately, it's about giving students the best chance to
succeed and recognizing that, as with all investments, some
don't work out the first time around. We need to give borrowers
another chance, more than one chance at rehabilitation, more
than one chance at consolidation, the programs that we know how
to get out of default.
Instead, unlike businesses, under current policy, we hammer
student borrowers, frankly, until they die. We take earned
income tax credit, we take social security, we limit bankruptcy
rights. We've basically eviscerated the safety net.
We can do much better for borrowers. It's not just for
borrowers. It's for society so that clients like mine who want
to go back to school can go back to school, succeed, repay
their loans, and enter the workforce. I believe we can do
better.
[The prepared statement of Ms. Loonin follows:]
Prepared Statement of Deanne Loonin
summary
Promoting equal access to higher education depends in large part on
improving the Federal student loan system. Although Federal student aid
is not made up of loans alone, student loans are the centerpiece of
Federal aid and are unavoidable for most students and their families.
This is mainly because college costs have risen faster than family
incomes and available grant aid.
Although there have been some positive developments in recent
years, overall the system is focused too heavily on profits for the
government and private contractors rather than quality service and
protection of borrowers. This is unacceptable and unsustainable.
My testimony focuses on improving the student loan program through
a multi-faceted approach. There is no one solution to help more
students succeed in college, borrow as little as possible, and manage
debt. My testimony highlights the following key recommendations:
1. Target aid to the neediest students and reduce reliance on
loans.
2. Encourage success and prevent defaults by:
Holding schools accountable. (The best way to prevent
default is through student success),
Improving information and counseling,
Simplifying the Federal student loan system, and
Creating an automatic income-driven repayment (IDR)
option in late stage delinquency and studying other options.
3. Create a servicing and collection system based on borrower
service, not private profit, and make it transparent.
4. Hold the government and contractors accountable through rigorous
public and private enforcement.
5. Give borrowers the opportunity for a fresh start.
Draconian collection and default policies prevent individuals from
getting a fresh start. They also impede economic productivity by
preventing many students from returning to school, succeeding, entering
repayment on their loans, and entering the labor force.
6. Restore a student loan safety net.
Collection should be targeted to those with resources to pay and
there must be a safety net. This is critical for borrowers, but also
for taxpayers. There are significant costs to taxpayers associated with
pursuing the most vulnerable borrowers until they die. Under the
current system, lenders and collectors profit as the government pays
higher and higher collection fees.
7. Mandate research and innovation.
______
The National Consumer Law Center (NCLC) thanks the committee for
holding this hearing and inviting us to submit this testimony on behalf
of our low-income clients. The National Consumer Law Center is a
nonprofit organization specializing in consumer issues on behalf of
low-income people. We work with thousands of legal services, government
and private attorneys, as well as community groups and organizations
that represent low-income and older individuals on consumer issues.\1\
NCLC's Student Loan Borrower Assistance Project provides information
about student loan rights and responsibilities for borrowers and
advocates. We also seek to increase public understanding of student
lending issues and to identify policy solutions to promote access to
education, lessen student debt burdens and make loan repayment more
manageable.\2\
---------------------------------------------------------------------------
\1\ In addition, NCLC publishes and annually supplements practice
treatises which describe the law currently applicable to all types of
consumer transactions, including Student Loan Law (4th ed. 2010 and
Supp.).
\2\ See the Project's Web site at http://
www.studentloanborrowerassistance.org.
---------------------------------------------------------------------------
In my work as the Director of NCLC's Student Loan Borrower
Assistance Project, I provide training and technical assistance to
attorneys and advocates across the country representing low-income
student loan borrowers. I have written numerous reports on student loan
issues and am also the principal author of NCLC's Student Loan Law
practice treatise.
I provide direct representation to low-income borrowers through
Massachusetts-based legal services and workforce development
organizations. I also have daily contact with a wide range of borrowers
through our student loan Web site. Because of my extensive experience
representing student loan borrowers and working on student loan
matters, I have served as the legal aid representative at a number of
Department of Education negotiated rulemaking meetings.
promoting equal access to higher education and improving the federal
student loan program
The Federal student aid programs began during the 1960s as a way to
improve access to education for lower income individuals. In 1965, on
signing the Higher Education Act, President Johnson said, ``[The Higher
Education Act] means that a high school senior anywhere in this great
land of ours can apply to any college or any university in any of the
50 States and not be turned away because his family is poor.'' \3\
President Nixon echoed this message in 1970, stating that ``No
qualified student who wants to go to college should be barred by lack
of money.'' \4\
---------------------------------------------------------------------------
\3\ Quoted in Peter Sacks, Tearing Down the Gates: Confronting the
Class Divide in American Education ( 2007).
\4\ Id.
---------------------------------------------------------------------------
Measured by these goals, student aid policy has failed. College
completion rates in the United States have been flat since the 1970s
among all sectors of higher education. Lack of completion is a
particular problem among lower income individuals. The shocking reality
is that despite all of the money spent on financial aid, the difference
in college graduation rates between the top and bottom income groups
has widened by nearly 50 percent over two decades.\5\ U.S. Education
Secretary Duncan has admitted that college access disparities are
``actually worsening.'' \6\ As the New York Times reported, this
growing gap ``. . . threatens to dilute education's leveling
effects.''\7\
---------------------------------------------------------------------------
\5\ Tami Luhby, ``College Graduation Rates: Income Really
Matters.'' CNN Money (Nov. 28, 2011).
\6\ Quoted in Omari Scott Simmons, ``Lost in Translation: The
Implications of Social Capital for Higher Education Access'' 87 Notre
Dame Law Review 205 at 210 (Nov. 2011).
\7\ Sabrina Tavernise, ``Education Gap Grows Between Rich and Poor,
Studies Say'' New York Times (Feb. 9, 2012).
---------------------------------------------------------------------------
Closing the access gap depends in large part on improving the
Federal student loan system. Although Federal student aid is not made
up of loans alone, student loans are the centerpiece of Federal aid and
are unavoidable for most students and their families. This is mainly
because college costs have risen faster than family incomes and
available grant aid. To compound the problem, the lowest income
borrowers tend to borrow the most.
It is not just the levels of debt that cause problems, but the
levels of financial distress due to unmanageable student debt. There
are nearly 39 million borrowers carrying over $1 trillion in Federal
student loan debt.\8\ About $120 billion of Federal student loan debt
was delinquent in 2012--a 30.5 percent increase from fiscal year
2011.\9\
---------------------------------------------------------------------------
\8\ Statistics discussed in Rohit Chopra, Consumer Financial
Protection Bureau, ``A Closer Look at the Trillion'' (Aug. 5, 2013);
``Explainer: Changes to Federal Student Loan Interest Rates'' (June 21,
2013).
\9\ U.S. Department of the Treasury, ``U.S. Government Receivables
and Debt Collection Activities of Federal Agencies,'' Fiscal Year 2012
Report to the Congress (March 2013).
---------------------------------------------------------------------------
These problems are exacerbated by a draconian collection system
that provides little or no opportunity for a fresh start if a student
borrower does not succeed in college the first time around. The
challenges are even greater given the changing demographics of college
students today. Most students do not follow a straight line from high
school to a 4-year college to graduation. Only 15 percent of
undergraduate students live on campus. Three in ten works full-time and
one in four have their own children.\10\ Federal student aid policy
must reflect and accommodate the reality that ``non-traditional''
students are now the majority of college students.
---------------------------------------------------------------------------
\10\ HCM Strategists, ``The American Dream 2.0'' (2013).
---------------------------------------------------------------------------
The government has nearly boundless powers to collect student
loans, far beyond those of most unsecured creditors. The government can
garnish a borrower's wages without a judgment, seize his tax refund,
even an earned income tax credit, seize portions of Federal benefits
such as Social Security, and deny him eligibility for new education
grants or loans. Even in bankruptcy, most student loans must be paid.
Unlike any other type of debt, there is no statute of limitations. Even
those who can make some payments face serious damage to their credit
reports or ability to get credit for critical purchases such as cars
and homes.
This is unacceptable and unsustainable. Schools may be profiting as
tuition continues to rise and private servicers and collectors may be
profiting due to borrower misfortune, but we should not be growing our
student loan system on the backs of defaulted borrowers or measuring
success by private profit rather than student success.
My testimony focuses on improving the Federal student loan program
through a multi-faceted approach. There is no one solution to help more
students succeed in college, borrow as little as possible, and manage
debt. My testimony highlights the following key recommendations:
1. Target aid to the neediest students and reduce reliance on
loans.
2. Encourage success and prevent defaults by:
Holding schools accountable. (The best way to prevent
default is through student success),
Improving information and counseling,
Simplifying the Federal student loan system, and
Creating an automatic income-driven repayment (IDR)
option in late stage delinquency and studying other options.
3. Create a servicing and collection system based on borrower
service, not private profit, and make it transparent.
4. Hold the government and contractors accountable through rigorous
public and private enforcement.
5. Give borrowers the opportunity for a fresh start.
6. Restore a student loan safety net.
7. Mandate research and innovation.
There are many challenges highlighted in this testimony, but it is
also important to recognize the positive developments, particularly in
the government's successful transition to 100 percent Direct Lending.
By most accounts, the origination process works well. Memories are
short and too many have forgotten the costly abuses in the guaranteed
loan program that ended in 2010. It is most important to look forward
and focus on making the current programs work better for borrowers,
taxpayers and society.
i. target aid to the neediest students and reduce reliance on loans
This general goal should include incentives for schools to admit
low-income students and help them succeed. Increased support for
targeted grants, including Pell grants, is critical.
Although increased grant funds are necessary, we cannot solve the
access gap through money alone. Many of the hurdles low-income
individuals face go beyond financial issues. There are social trends at
work that may provide challenges that are just as significant. We urge
Congress to consider testing programs that address the additional
challenges so many low-income students face.\11\
---------------------------------------------------------------------------
\11\ See generally National Consumer Law Center, ``No Lost Causes:
Practical Ideas to Help Low Income Students Succeed in College'' (March
2014).
---------------------------------------------------------------------------
ii. encourage student success and prevent defaults
A. Hold Schools Accountable
One of the most effective ways to prevent defaults is to
incentivize colleges to improve student completion and success rates
and hold schools accountable for consistently inferior outcomes.
Borrowers are most likely to default if they do not complete college
and if they are unemployed or earning low wages after leaving or
graduating.\12\
---------------------------------------------------------------------------
\12\ See generally National Consumer Law Center ``The Student Loan
Default Trap: Why Borrowers Default and What Can Be Done'' (July 2012).
---------------------------------------------------------------------------
It is worth exploring requiring schools to pay directly for student
loan defaults. However, there are dangers for borrowers if schools pay
off loans and then attempt to collect directly from students. Borrowers
in these cases lose the various rights available under the Higher
Education Act for Federal student loans. Another option may be to
adjust the cohort default rate thresholds and calculations so that more
schools with default rate problems are sanctioned.
B. Improve Information and Counseling
Congress and regulators should look for opportunities to improve
the timing, content and effectiveness of counseling. However,
counseling and disclosures should not be substitutes for substantive
reform.
This is an important area for additional study as there are mixed
results on whether default aversion counseling actually prevents
defaults.\13\ In designing these studies, it is not enough to measure
whether borrowers increase knowledge through counseling and other
interventions. The focus should be on measuring borrower behavior over
time after receiving counseling or other default aversion services.
---------------------------------------------------------------------------
\13\ Id.
---------------------------------------------------------------------------
As part of the information and counseling efforts, Congress and
regulators should assess the effectiveness of the various ombudsman
programs and consider expanding them. The Department of Education's
ombudsman office, in our experience, can play a useful role in
fostering communication and in some cases mediating disputes between
the government and borrowers. We also urge creation of pilot programs
to fund non-profit, neutral counseling entities and legal assistance
programs.
C. Simplify the Federal Student Loan System
The Consumer Financial Protection Bureau's collection of complaints
about private student loans indicates high levels of confusion among
borrowers regarding their loans and the financial aid process. Many
borrowers did not know the rules for Federal aid eligibility and some
could not identify whether they had Federal or private loans.\14\ We
know first-hand how difficult it is to counsel distressed borrowers
about the differences between IBR, ICR, ISR, PAYE and a host of other
acronyms. Our clients and others like them all too often end up stuck
in a bureaucratic morass when seeking solutions for financial distress.
---------------------------------------------------------------------------
\14\ Rachel Fishman, ``What Borrowers Don't Understand About
Student Loans May Hurt Them'' Higher Ed Watch (June 18, 2012).
---------------------------------------------------------------------------
Simplifying the servicer system will improve repayment rates and
prevent defaults, as discussed in the next section. In addition we
recommend:
1. Establish a single portal for all borrower transactions. Even if
there are multiple servicers, all borrowers should receive
communications that are clearly from the government, not from a private
servicer or contractor who the borrower may or may not know and may not
even associate with student loans. We agree with the Direct Loan
Coalition that focusing borrower activity to a single site will improve
the simplicity and transparency of the Federal loan process.\15\
---------------------------------------------------------------------------
\15\ National Direct Student Loan Coalition, ``Reauthorization of
the Higher Education Act: Proposals for Legislative Change'' (September
2013).
---------------------------------------------------------------------------
This confusion has serious consequences. For example, the tax
statements (1099s) after a disability discharge come in envelopes from
the government contractor Nelnet. Those that we have seen do not
specify that there is an important tax document inside or that it has
anything to do with a student loan. Peg Julius from the Direct Loan
Coalition testified that ``Because the servicers are currently allowed
to co-brand all mailings (either paper or e-mail) with their company
name, students may not open the correspondence and thus, miss important
information. . . . This was not an issue when there was a single
Federal loan servicer and all correspondence was identified simply as
``Federal Direct Student Loans.'' \16\
---------------------------------------------------------------------------
\16\ Statement of Peg Julius on behalf of the National Direct
Student Loan Coalition (NDSLC) before the House Subcommittee on Higher
Education and Workforce Training, Hearing on ``Examining the
Mismanagement of the Student Loan Rehabilitation Process'' (March 12,
2014).
---------------------------------------------------------------------------
The improved disability discharge system provides some important
lessons in streamlining a government program. While not perfect, the
program operates much more efficiently due to a series of legislative
and regulatory improvements. The increased effectiveness is due in part
to a simplified system where all borrowers apply for discharges through
one servicer regardless of whether they have FFEL, Perkins or Direct
Loans.
2. Simply the income-driven repayment programs. There is too much
complexity in the numbers of income-driven repayment programs and other
options. Streamlining these programs, including creating one IDR plan,
will make it easier for servicers to provide quality assistance. We
agree with the Institute for College Access and Success' (TICAS)
proposal to consolidate the complex income-driven repayment plans into
one new and improved plan.\17\
---------------------------------------------------------------------------
\17\ See The Institute for College Access and Success, ``Aligning
the Means and the Ends'' (February 2013).
---------------------------------------------------------------------------
D. Create An Automatic IDR Option in Late Stage Delinquency
To help catch financially distressed borrowers before they fall
into default, we recommend automatically enrolling borrowers in late-
stage delinquency in IDR. Borrowers could opt out later if they choose.
The Institute for College Access and Success (TICAS), for example, has
recommended automatic enrollment in IDR at the 6-month delinquency
mark.\18\
---------------------------------------------------------------------------
\18\ Id. at 65-66.
---------------------------------------------------------------------------
We urge Congress to be wary of the seemingly simple solution of
placing all borrowers into a universal IDR program whether payments are
made via payroll deductions or other means. It is critical to maintain
choice for borrowers and recognize that IDR is not the best payment
plan for everyone. Some borrowers will pay more over the life of their
loans using IDR. IDR can also increase the amount of time borrowers
have outstanding debt, which might impede access to other forms of
credit. Further, even a low IDR payment is not affordable for everyone.
For example, high private student loan debts are not even counted in
the IDR formula. There should be other options such as hardship
suspensions or deferments for these borrowers.
Automatic payroll deduction is an option often discussed to improve
repayment. This option may seem simple and appealing, but this is not
necessary the case. Small employers in particular may not be equipped
to administer even a relatively simple repayment system and we have
often experienced problems with both large and small employers
mismanaging the wage garnishment process.
In addition, student loan debt is not the same as Social Security
payments which are currently collected through payroll deductions.
Borrowers often have legitimate defenses to student loan repayment.
They must have a way to be able to raise these defenses rather than
operate under a system that assumes that the debt is valid. For
example, we had a client recently who attended a for-profit school in
the Boston area for about 1 month. Despite promises of superior
instruction and job placement, the entire first month of
``instruction'' involved the students sitting in a classroom reading
job ads. The client left, but has a $10,000 outstanding loan. We intend
to assist her if possible in challenging repayment based on legal
claims against the school. This is not something that would arise in a
payroll deduction for Social Security or Medicare. Finally, an
automatic enrollment system must not penalize borrowers who are unable
to work and/or not required to file taxes.
Congress should proceed carefully and avoid latching on to a
seemingly simple, but not necessarily optimal solution. In addition,
without proper design, there are the potential unintended consequences
of losing leverage to incentivize schools to improve student outcomes.
In promoting the idea of automatic IDR, a consortium of advocacy groups
recently acknowledged that a system of this sort would not necessarily
solve the problem of college affordability or stem growing student debt
levels.\19\
---------------------------------------------------------------------------
\19\ ``Automatic for the Borrower: How Repayment Based on Income
Can Reduce Loan Defaults and Manage Risk'' (2014).
---------------------------------------------------------------------------
iii. create a servicing and collection system focused on borrowers,
not private profit and make it transparent
Servicers and collectors must provide holistic counseling so that
borrowers understand all available options. A well-designed system
focused on quality service will also help simplify the student loan
system and ultimately save money. The goal is to encourage superior
service through some competition without bombarding consumers with too
much information.
A. Improvements in Servicing
In order to create an improved servicing system, we need more
information about the current system, including information about
contract structure and performance evaluation. We fear that the
Department of Education is moving toward a model in which it justifies
withholding basic information about private servicers because of
supposed proprietary contract arrangements. This may work well for
Department employees seeking to avoid accountability, but it does not
work best for borrowers and taxpayers.
The goal of the system should be to provide quality service to
borrowers. The current system is not meeting this goal among other
reasons because there are too many servicers and too much variation in
service. Most important, the Department of Education is not providing
sufficient oversight to ensure that all borrowers receive quality
service. Regardless of whether there are multiple servicers or a single
servicer, borrowers should have standard, quality service and the
Department must award contracts based on metrics that focus on quality
service.
We urge the Department to consider different approaches. We believe
that the system that emerges should likely involve multiple servicers
competing for accounts. However, as discussed above, all borrowers
should receive quality standard service and should be able to deal with
the servicer through a single portal that clearly brands the student
loans as a government product and service. The performance metrics must
be relevant, rigorous and transparent. If there are multiple servicers,
borrowers should be allowed to switch if they are not satisfied.
Unfortunately, consistent quality service is not the current
borrower experience. Among other problems, we see servicers pushing
borrowers into the quickest options, such as forbearance, rather than
explaining and assisting borrowers to obtain more favorable long-term
solutions, such as income-based repayment. Forbearances can be costly
for borrowers because interest accrues during forbearance periods and
because they must be renewed more frequently than most other options.
For example, I recently met with a financially distressed client
who is barely managing to stay current on an old guaranteed
consolidation loan (FFEL loan). She had been living in a domestic
violence shelter for some time. She is temporarily living with a friend
while her son lives with other family members. She is trying to get
back on her feet and find work. It is difficult and she is only earning
about $5,000/year. Yet when she called her Federal loan servicer for
help, they put her in a short-term forbearance. For the last several
years, they have placed her in forbearances and deferments. She says
that no one even mentioned income-based repayment (IBR). She called the
servicer while I was in the room and sure enough, the representative
mentioned another forbearance. The representative only mentioned IBR
when I got on the phone and asked about it.
The servicers often complain that they are ``stuck'' and must push
easier solutions because of flaws in the government servicing contract
commission system. Essentially, servicers say that they are not paid
enough to take the time to administer the more complex programs. This
is unacceptable. When servicers enter into contracts with the
government, they know what the commission system will be. Even if there
are problems with compensation, those problems are not an excuse to
deny borrower rights or provide inferior service. The company is not
stuck. It can choose not to bid for a contract it deems unreasonable.
In contrast, borrowers are truly stuck if they face servicing problems.
They are not permitted to shop around and find better choices. The
Department is unequivocal about this trap on the Federal loan side. In
on-line FAQs, in response to the question, ``Do I select my loan
servicer?'' the Department's answer is No.\20\
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\20\ See http://studentaid.ed.gov/repay-loans/understand/servicers.
---------------------------------------------------------------------------
The servicing system has become so confusing that an entire
industry of for-profit ``debt relief '' companies has sprung up to
supposedly provide the services that the free government servicers are
failing to provide. Borrowers run the risk not only of paying
exorbitant fees to these companies, but also of losing important
rights. We released a report last year focusing on abuses in the for-
profit student loan ``debt relief '' industry.\21\ New York Governor
Cuomo's new Student Protection Unit recently announced that it had sent
subpoenas to 13 of these ``relief '' companies.\22\
---------------------------------------------------------------------------
\21\ See National Consumer Law Center, ``Searching for Relief:
Desperate Borrowers and the Growing Student Loan `Debt Relief '
Industry'' (June 2013).
\22\ See New York State Department of Financial Services,
``Governor Cuomo Announces New Student Protection Unit and Launches
Investigation into Student `Debt Relief ' Industry'' (January 22,
2014).
---------------------------------------------------------------------------
We have sent examples of poor service and legal violations to the
Department of Education for years and more recently to CFPB. The
Department has admitted to finding numerous problems with the
performance of servicers such as Sallie Mae. For example, the
Department responded to a request for information from Senator
Elizabeth Warren in December 2013 with a long list of ``issues''
identified by the Department in audits and reviews of Sallie Mae. These
issues with Sallie Mae's servicing of Federal loans include defects in
conversion to repayment, incomplete adjustments to borrower accounts
when transferred from a previous servicer, and incorrect calculation of
income for the income-based repayment program (IBR). The Department
also listed problems with the company's servicing of FFEL loans
uncovered in audits and review, including incorrect billings, due
diligence errors, and incorrect repayment terms. However, the
Department said that compliance issues have not risen to the level
where ``penalties were considered appropriate.''
As the Inspector General and GAO recently reported, the Department
has not followed up reports of problems with rigorous oversight. To
date, we have been able to work out individual client situations, often
in conjunction with ombudsman assistance, but have yet to see systemic
reform.
The CFPB's announcement in December 2013 that it will begin
supervising large student loan servicers is a promising sign for
borrowers.\23\ The CFPB can help fill the gaps caused by a long history
of lax Federal oversight. The CFPB and Department of Education must
work together to ensure that servicers are doing their jobs properly.
State Attorney General offices also have an important role in
protecting consumers in their States.
---------------------------------------------------------------------------
\23\ Consumer Financial Protection Bureau, ``CFPB to Oversee
Nonbank Student Loan Servicers'' (Dec. 3, 2013).
---------------------------------------------------------------------------
Additional Recommendations to Improve Servicing:
1. Ensure that all borrowers receive quality servicing with a
minimum of confusion. We agree with the Direct Loan coalition that
competition among a limited number of servicers can be healthy, but
that too many servicers increase complexity and taxpayer cost.
2. Address potential conflicts in the new program allowing
borrowers to choose a servicer when consolidating. We are very
concerned about the potential for abuse with this new consolidation
system. We outlined these concerns in a letter to the Department of
Education and CFPB dated March 6, 2014 and attached to this testimony.
We have not yet heard back. Among other actions, the Department could
prohibit third parties from making the choice on behalf of borrowers.
3. Give borrowers the opportunity to switch servicers. This will
help spur healthy competition.
4. Ensure smooth transitions if accounts must be transferred.
5. Provide public information about how servicers are evaluated,
including detailed information about the current performance metrics.
6. Ensure that borrowers have access to monthly statements, fair
billing and other basic consumer rights that exist in most other
consumer credit markets.
7. Penalize servicers that violate higher education and consumer
protection laws and fail to provide consistent quality service.
B. Improvements in Collection
The Department of Education refers every eligible debt to one of 22
collection agencies. The business is a huge growth opportunity for
collectors. According to one insider, ``The student loan market is a $1
trillion opportunity for the ARM [debt collection] industry that is not
going to decline anytime soon.'' \24\
---------------------------------------------------------------------------
\24\ Mark Russell, ``Student Loans: The ARM Industry's New Oil
Well?'' Inside ARM (Oct. 20, 2011).
---------------------------------------------------------------------------
We urge Congress to investigate this system, focusing on the cost
to taxpayers and borrowers. Outsourcing collection is not cheap.
Taxpayers paid about $1 billion in commissions to private student loan
debt collectors in 2011.\25\ Department projections show commissions
growing to over $2 billion by 2016.\26\
---------------------------------------------------------------------------
\25\ John Hechinger, ``Obama Relies on Debt Collectors Profiting
from Student Loan Woe,'' Bloomberg (March 26, 2012).
\26\ Presentation of Dwight Vigna, Education Department, 2013
Knowledge Symposium (Nov. 2013).
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Contractors are too often rewarded based on the amounts collected
without regard to borrower rights. In our experience, collection
agencies routinely violate consumer protection laws and prioritize
profits over borrower rights. The GAO report affirmed this unfortunate
trend, finding that the Department documented instances where
collection agency representatives provided false or misleading
information to borrowers. According to the GAO report, when the
Department found these violations, it simply provided feedback.\27\
This is unacceptable. At a minimum, the Department of Education should
have referred violations to other agencies that regulate debt
collectors, including the CFPB. The tender treatment of collection
agencies breaking the law is in sharp contrast to the way borrowers are
hounded forever when they run into financial distress.
---------------------------------------------------------------------------
\27\ U.S. Government Accountability Office, ``Federal Student
Loans: Better Oversight Could Improve Defaulted Loan Rehabilitation''
(March 2014).
---------------------------------------------------------------------------
The government must balance the need to collect student loans and
the need to assist borrowers. The current system heavily favors high
pressure collection and collector profits, to the detriment of
financially distressed borrowers seeking the help they so desperately
need.
The main problem is that dispute resolution is not the primary
mission of loan collection agencies. Debt collectors are not adequately
trained to understand and administer the complex borrower rights
available under the Higher Education Act, and the government does not
provide sufficient oversight of their activities. There are certainly
times when a borrower is uncooperative or has exhausted all options. In
those cases, the loan holder may have no choice but to focus on
collection efforts. Yet there are many borrowers who want to find a
solution, but are stymied because they cannot get past the rude,
harassing, and often abusive behavior of a collection agent.
As noted above, we have provided the Department of Education and
more recently the CFPB with consistent examples of problems over the
years with little or no response. The criticism has been more public
recently from the Inspector General and GAO. The recent GAO report, for
example, includes very important findings of Education's failure to
monitor its contractors and conduct oversight. In addition, the
Department's Inspector General issued a final alert memorandum in May
2013 informing the Department of concerns that Federal Student Aid
(FSA) paid estimated commissions and bonuses to private collection
agencies based on revised methodologies and without reviewing
supporting documentation. FSA was unable to calculate the actual
commissions earned due to problems with in-house systems and therefore
relied on self-reported estimates during fiscal year 2012.\28\
---------------------------------------------------------------------------
\28\ U.S. Department of Education, Office of Inspector General,
``Federal Student Aid Paid Private Collection Agencies Based on
Estimates,'' Control Number ED-OIG/L02N0002 (May 15, 2013).
---------------------------------------------------------------------------
The Department and other loan holders often dismiss examples of bad
behavior as ``anecdotal'' and point to low volumes of borrower
complaints. This excuse does not take into account that complaints are
relatively low in part because borrowers do not know how to complain.
There is no clear information for borrowers about how to lodge
complaints about collection agencies.\29\ In any case, there should be
no more hiding given the recent GAO and IG investigations confirming
the widespread problems in oversight and management of private
contractors. The GAO reported that with respect to rehabilitation, the
Department did not have data to track loan rehabilitation performance
or data on the extent to which borrowers that rehabilitate stay out of
default.\30\
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\29\ See Deanne Loonin & Jillian McLaughlin, ``Borrowers on Hold:
Student Loan Collection Agency Complaint Systems Need Massive
Improvement.'' National Consumer Law Center (May 2012), p. 15-17.
\30\ U.S. Government Accountability Office, ``Federal Student
Loans: Better Oversight Could Improve Defaulted Loan Rehabilitation''
at 20 (March 2014).
---------------------------------------------------------------------------
In addition to pushing for greater oversight, we urge Congress to
require the Department of Education to reveal how it measures
collection agency performance. We have attempted for some time to
obtain more information through FOIA requests, but have been
stonewalled for the most part. We are very concerned about the trend
away from providing the public and legislators with the information
needed to ensure that borrowers and taxpayers are protected.
An accessible complaint system and increased transparency will not
solve all student debt problems. However, improvement in these areas
can help restore the balance between borrower rights and extraordinary
government collection powers. The government has nearly unlimited power
to collect student loans. At a minimum, the government must be
accountable to the public about how it uses this power and how much it
costs all of us in the long run.
We urge Congress to monitor the Administration's response to the
recent GAO and Inspector General findings. It is past time to focus on
fixing not just loan rehabilitation, but the entire Federal loan
servicing and collection system. The Administration was able to
mobilize and implement the transition to full direct lending a few
years ago. Now the government must put this same level of commitment to
fixing the servicing and collection system.
We will know the collection system is working better if servicers
and collectors start complying with existing laws and learn to explain
these laws without bias to borrowers. The government must measure
success on this basis instead of focusing only on higher collection
levels.
Additional Recommendations to Improve Collection
1. Eliminate private collection agencies from the dispute
resolution role.
Until such time as the government identifies viable alternatives to
private collection agencies, we call on the Administration to issue a
moratorium on using private collection agencies for student loan
dispute resolution. Congress should also act to prohibit use of private
debt collectors and create a pilot program to study the effectiveness
of other debt collection techniques.
2. Provide public information about the cost of outsourcing to
private debt collectors and about performance. Collection agency
performance must be about more than dollars collected.
3. Monitor Department oversight of collection and require public
information about how performance is tracked and the results.
4. Require information about the process for handling complaints
against collection agencies and any disciplinary actions taken against
those agencies.
iv. hold private entities and the government accountable through
rigorous public and private enforcement
As the recent GAO and IG studies confirm, Federal and State
enforcement of HEA requirements has been generally lax. While
government enforcement is important, borrowers cannot rely on public
actions to get relief. Congress must act to ensure that borrowers have
private enforcement rights, not only to challenge predatory school
practices, but also servicer and collector abuses. This requires
amending the HEA to create an explicit private right of action.
Congress has created many new and improved options for borrowers.
The Department of Education also signs numerous contracts with
servicers and collectors to provide essential services. Theoretically,
these entities could lose their contracts if they do not comply with
the law. But even if this occurs, there are no provisions requiring
relief for borrowers harmed by these practices. For example, what
happens if the lender, guaranty agency or school refuses to discuss
loan rehabilitation even when a borrower clearly has a right to such a
plan? Currently the borrower can complain to the Department of
Education. Given documented problems with the Department's oversight,
this is less than a complete solution even for those borrowers who
persist and manage to speak to someone. Beyond complaining, it is
virtually impossible for a borrower to enforce her rights. Even in the
case of the now well-documented breakdown in the Department's
rehabilitation system, the GAO report shows in detail how most
borrowers were left in the cold. According to GAO testimony, less than
10 percent of the estimated 80,000 borrowers affected by the delays in
loan rehabilitation received assistance to make them whole.\31\
---------------------------------------------------------------------------
\31\ Statement of Melissa Emrey-Arras, U.S. Government
Accountability Office, Testimony before the Subcommittee on Higher
Education and Workforce Training, Committee on Education and the
Workforce, House of Representatives (March 12, 2014).
---------------------------------------------------------------------------
The lack of private enforcement shuts the door on borrowers seeking
to access programs that they are entitled to under the Higher Education
Act. This glaring problem also undermines the effectiveness of new
borrower-friendly programs because loan holders and servicers are not
held accountable when they fail to comply with the law.
Congress should also prohibit mandatory arbitration clauses in
school enrollment and lending contracts. Mandatory arbitration
provisions, buried in many kinds of consumer contracts, require
consumers to waive their right to use the court system, and instead
limit consumers to resolving their disputes with the lender or seller
through a binding arbitration process. This constraint puts the lender
or seller in a stronger position, because little discovery is
available, the business can pick the arbitration service provider (and
repeat players bring more business, leading to an incentive for the
arbiter to rule for the lenders), and decisions cannot be appealed.
v. give borrowers the opportunity for a fresh start
Current Federal aid practices and policies hammer students who do
not succeed the first time around. Draconian collection and default
policies prevent individuals from getting a fresh start. It also
impedes economic productivity by preventing many students from
returning to school, succeeding, entering repayment on their loans, and
entering the labor force.
I am always moved by how hard so many of my clients try even if
they do not always succeed. Each client has an individual story and
entire populations never fit into neat categories, but I can say that
most of my clients keep their dreams of higher education alive even
after repeated failures. This is why we need to provide them with the
opportunity to start fresh.
Providing a fresh start recognizes the reality that everyone makes
mistakes and that not everyone succeeds the first time around. The main
difference for low-income individuals is that one slip can be the end
of the educational journey. There is little or no margin for error or
cushion when they fall.
The first step to a fresh start is, as discussed above, to ensure
that borrowers are working with neutral entities, not aggressive
collection agencies, in accessing programs to assist them.
A. Study and Improve Existing ``Get Out of Default'' Programs
Rehabilitation and consolidation are the two main options currently
available to Federal student loan borrowers seeking to get out of
default. Overall, consolidation is much faster than rehabilitation,
mainly because a borrower in default does not have to make any
preliminary payments to qualify. Further, there is no resale
requirement. The faster process is especially important for borrowers
seeking to go back to school quickly. In addition, with consolidation,
borrowers do not have to make preliminary payments and so are not
forced to negotiate ``reasonable and affordable'' payments with a
collector. The main advantage of rehabilitation relates to credit
reporting. However, this benefit is often oversold.
There is a dearth of research on the effectiveness of either
consolidation or rehabilitation, particularly with respect to borrower
success rates.\32\ Department of Education staff confirmed in a phone
call with NCLC that they did not know of any studies comparing the
effectiveness of the two programs. This is particularly shocking since
the Department collection contracts incentivize rehabilitation. The GAO
also noted the Departments' failure to track the effectiveness of
rehabilitation.\33\
---------------------------------------------------------------------------
\32\ See generally ``The Student Loan Default Trap: Why Borrowers
Default and What Can Be Done'' (July 2012).
\33\ U.S. Government Accountability Office, ``Federal Student
Loans: Better Oversight Could Improve Defaulted Loan Rehabilitation''
(March 2014).
---------------------------------------------------------------------------
We urge Congress to study these programs to evaluate effectiveness
and in the meantime enact the recommendations below to ensure that the
programs truly afford borrowers a fresh start.
Key recommendations:
1. Eliminate the one-time limit on rehabilitation.
2. Eliminate the FFEL program resale requirement. Because of this
``requirement,'' borrowers who make the necessary payments can get
stuck with no possibility of completing the rehabilitation simply
because their guaranty agencies cannot find buyers. At a minimum,
agencies that cannot find buyers should be required to assign the loans
to the Department of Education.
3. Provide full credit reporting benefits. Lenders should be
required to erase all negative history in the borrower's credit report,
not just the default notation. This is a much more complete ``credit
clearing'' benefit.
B. Prevent Ballooning Loan Balances by Limiting Collection Fees
Collection charges should be limited to only those fees that are
bona fide and reasonable and actually incurred. As long as collection
agencies are still employed to collect student loan debts, Congress
should act to limit the profits they earn on the backs of borrowers.
C. Provide a Fresh Start for Those Harmed by Predatory Schools
Through our work consulting with legal services and other attorneys
across the country, as well as our direct representation work, we have
seen a continuous stream of student loan borrowers who are struggling
to pay 10, 20, and even 30-year old loans. The vast majority of these
borrowers, including single parents, veterans, non-English speakers,
first-generation students, and seniors, enrolled in for-profit schools
in order to earn higher wages and improve their lives and the lives of
their families. Too many of these schools, however, preyed on these
borrowers' dreams by falsely promising high quality educations that
would lead to high paying careers. By the time our clients reach us,
their hopes and dreams have been shattered. Unable to find the
employment promised, they face aggressive debt collection tactics for
student loan debts they cannot afford to repay. Many of them have no
way out.
A July 2013 New York Times article describes hundreds of borrowers
(and maybe more) in New York City facing financial devastation due to
loans incurred at a number of cosmetology schools that have been closed
for years.\34\ One of the borrowers summed up the trap she is in: ``It
would have been worth it,'' she said ``for a school that gave me a
future.''
---------------------------------------------------------------------------
\34\ Emily S. Rueb, ``Beauty School Students Left with Broken
Promises and Large Debts,'' The New York Times (July 28, 2013).
---------------------------------------------------------------------------
Although the Department of Education has recently worked at
creating regulations designed to curb future abuses, these regulations
do nothing to provide relief for the countless number of borrowers who
have been harmed by fraudulent schools. The three main types of
existing cancellations (or ``discharges'') that are intended to address
fraud--closed school, false certification, and unpaid refund
cancellations--are narrowly defined and provide relief to only a small
subset of harmed borrowers. These cancellations are not available to
borrowers harmed by other kinds of deceptive practices, including those
that are prohibited by Federal regulation. For example, a school may
routinely pay admissions officers by commission, fail to provide
educational materials or qualified teachers, or misrepresent a
student's likelihood of finding a job or earning a particular salary
after completion. All of these violations harm students, but none of
them are currently included as grounds for student loan discharges.
Congress and the Department of Education can fill in these gaps by
creating a fresh start relief program. For too long, the risk of
predatory school practices has fallen almost entirely on individual
borrowers, who were not in a position to discover fraud and police
schools before they enrolled.\35\
---------------------------------------------------------------------------
\35\ For more information about existing authority to create this
type of program and ideas for legislative change, see National Consumer
Law Center, ``Promoting Higher Education Access and Success: Higher
Education Act Reauthorization Recommendations'' (August 2013).
---------------------------------------------------------------------------
D. Use HEA Authority to Provide Relief for Private Loan Borrowers
Much of the statutory authority for private lending is outside of
the HEA. However, the government can use the HEA as an oversight tool
to protect private loan borrowers attending schools that receive title
IV funds. We recommend using this tool to require schools to certify
private loans. As part of the certification process, schools should be
prohibited from certifying loans that fail to provide basic consumer
protections such as death and disability discharges.
vi. restore a safety net for all all student loan borrowers
Collection should be targeted to those with resources to pay and
there must be a safety net. This is critical for borrowers, but also
for taxpayers. There are significant costs to taxpayers associated with
pursuing the most vulnerable borrowers until they die. Under the
current system, lenders and collectors profit as the government pays
higher and higher collection fees.
At the National Consumer Law Center, we see and hear the human toll
of the tattered student loan safety net every day from the low-income
borrowers we represent. Here is just one example.
I had a client (Mr. A) who passed away last year at age 84. He was
a veteran of the Korean War. After retiring from the insurance industry
in his 70s, he was living alone, subsisting only on limited Social
Security income.
Mr. A sought legal assistance because the government had started
taking a large chunk of his Social Security income and he could no
longer afford to buy the medications he needed for an array of serious
health problems. It took a while to unravel the source of the offset
because Mr. A insisted that he had never taken out any student loans to
pay for education. He was correct that he had never taken out loans to
finance his own education because he was able to use the G.I. bill.
Instead, the offset occurred because of parent PLUS loans from the
early 1990s. There was a large balance outstanding and Mr. A could not
pay. His children could not help him financially either.
I contacted the loan holder Sallie Mae to figure out a way to at
least reduce the Social Security offset. We submitted detailed proof of
Mr. A's income and expenses. It took hours to document these expenses.
Sallie Mae eventually agreed to reduce the offset to an amount that
allowed Mr. A to purchase most of the medications he needed to keep
going.
I discussed the possibility of a disability discharge with Mr. A,
but this proud man insisted despite all evidence to the contrary that
he could still work. Even after the suspension of the offset, Sallie
Mae kept placing the account with collection agencies. I asked the
Sallie Mae representatives to take the file back from the collection
agency. Among other problems, the constant phone calls and letters were
very upsetting to Mr. A. The Sallie Mae representative said they cannot
take files back from collection agencies, but they did agree to put our
name on the account as the contact.
Eventually after numerous stints at nursing facilities due to
declining health, Mr. A agreed to apply for a disability discharge and
was successful. However, he missed the paperwork requiring him to
document his inability to work for 3 years because he was not picking
up his mail while he was hospitalized. We were able to restore the
discharge, but then Mr. A received a tax statement claiming he owed
taxes on the discharged amount. This was one of the most upsetting
aspects of the case for Mr. A. We were in the process of proving his
insolvency when he died.
Despite this human toll, there is a common view that aggressive
collection is necessary to shore up the student loan system. An
attorney filing lawsuits on behalf of the government to collect student
loans stated,
``For every dollar collected from defaulted student loans,
it's money that can be used again for student loans or taken
off the deficit or used for other issues.'' \36\
---------------------------------------------------------------------------
\36\ Ron French, ``Michigan Goes Hard After Student Loan
Defaulters'' Bridge Magazine (May 15, 2012).
One of the government's largest collectors, ECMC, justified
aggressive collection practices by emphasizing that its efforts keep
Federal financial aid programs solvent.\37\
---------------------------------------------------------------------------
\37\ John Hechinger, ``Taxpayers fund $454,000 Pay For Collector
Chasing Student Loans'' Bloomberg (May 15, 2012).
---------------------------------------------------------------------------
These statements emphasize keeping the loan programs alive, but at
what cost? Should the Federal Government support a growing student loan
program on the backs of defaulted borrowers? If the goal of Federal
policy is to hound defaulted student loan borrowers until they die,
then Mr. A's case and others like them are policy successes. But we do
not believe that this should be the goal.
Key reforms to restore a safety net include:
1. Eliminate offset of earned income tax credits (one of the most
important programs that help working families keep working).
2. Eliminate Social Security offsets. Social Security helps give
aging and disabled Americans peace of mind. Offsetting this lifeline is
an extraordinary collection tool that should be eliminated.
In the meantime Congress should increase the exempted amount from a
flat $9,000/year to an amount that is sufficient for basic survival and
tied to an annual index. The $9,000 limit has not been raised since the
legislation was passed in the mid-1990s. It is even below the current
poverty level for a single person of $11,670.
3. Eliminate the 3-year reinstatement period for borrowers in the
Social Security Medical Improvement Not Expected category. The
Department of Education recently amended the HEA regulations to allow
borrowers to provide certain SSA determinations as presumptive proof of
disability discharge. However, the Department did not eliminate the
reinstatement period for these borrowers. This is in contrast to the
V.A. process in which certain veterans may receive discharges without a
3-year reinstatement period. Eliminating the reinstatement period for
these most disabled borrowers will also save money by reducing
unnecessary bureaucratic requirements and oversight.
4. Place a moratorium on offset of borrowers receiving SSDI so that
they can apply for disability discharges.
5. Restore Bankruptcy rights for all student loan borrowers.
6. Restore a statute of limitations for Federal student loans. The
elimination of the statute of limitations for government student loans
in the early 1990s placed borrowers in unenviable, rarified company
with murderers, traitors, and only a few violators of civil laws.
Despite the governmental and social interest in pursuing criminals,
statutes of limitations apply to nearly all Federal criminal actions.
Among other reasons, statutes of limitations are essential because of
the serious problems and abuses associated with adjudicating old
claims. The limitless pursuit of vulnerable student loan borrowers has
serious human and financial costs.
7. Eliminate adverse tax consequences for Borrowers Receiving
Administrative Discharges. Under current law, borrowers obtaining
discharges due to disability or death (e.g., for parents surviving
their children) or after IBR forgiveness face potential tax
consequences while most other borrowers obtaining discharges do not.
The current insolvency system is insufficient to protect many
vulnerable borrowers.
vii. mandate research and innovation
One way to improve efficiency is to conduct more empirical research
and pilot projects to find out what works. According to New America,
higher education generally suffers from a lack of rigorous
experimentation, both in terms of practice and policy.\38\
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\38\ Stephen Burd, Kevin Carey, Jason Delisle, Rachel Fishman, Alex
Holt, Amy Laitinen, and Clare McCann, New America Foundation,
``Rebalancing Resources and Incentives in Federal Student Aid'' (Jan.
2013).
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We urge the Department of Education to make long-term data
available to researchers AND to conduct internal studies using this
data. Requiring private lenders to report data on private student
loans, potentially through the NSLDS system, would open up another set
of data to study borrower behavior over time.
It is critical to isolate the main predictors of default by using
appropriate regression analyses. This regression research should focus
particularly on the extent to which lack of completion causes higher
default. Studies should also include interviews and surveys of
borrowers. Many of these studies will take time as borrowers are
tracked over longer periods.
In addition to research mandates, Congress should require the
Department of Education to release data about key Federal aid metrics
including extensive default rate information, effectiveness of post-
default programs, costs of collection, commissions to collectors and
servicers, and other critical information.
Giving borrowers a chance to get back in good standing may be less
costly in many cases than the relentless gauntlet of collection
tactics. We particularly need more information about the costs of the
Department's collection programs.
conclusion
The student loan programs work well for many students who are able
to complete their educations and earn sufficient income after
graduation to repay their debts within a reasonable period of time.
Unfortunately, this scenario is becoming less common as borrowers get
deeper into debt earlier in the process and do not know about available
options that could help them avoid problems down the road. Once these
problems begin, collection costs and fees accrue so rapidly and
aggressive collection efforts hit so hard that many borrowers never
recover.
While the student loan programs are here to stay, there are ways to
alleviate the burden for the most vulnerable and lower income
borrowers. Our higher education system and economic productivity depend
on how we resolve these issues.
Thank you for your consideration of these recommendations. Please
contact Deanne Loonin ([email protected]; 617-542-8010) with questions
or comments.
______
ATTACHMENT
National Consumer Law Center (NCLC),
March 10, 2014.
Rohit Chopra,
Assistant Director and Student Loan Ombudsman,
Consumer Financial Protection Bureau.
James Runcie,
Chief Operating Officer,
Office of Federal Student Aid,
U.S. Department of Education.
Dear Mr. Chopra and Mr. Runcie: We have been following the
Department of Education's plans to launch a new Direct Loan
consolidation system. We understand from the January 7, 2014
announcement that the Department has begun implementing the first phase
of this system and that the second is likely to occur this spring.\39\
According to the announcement, most borrowers without loans in default
should be applying for consolidation through the new studentloans.gov
portal.
---------------------------------------------------------------------------
\39\ We refer to this announcement: http://www.ifap.ed.gov/
eannouncements/010714NewDirect
ConsolidLoanProInfoPhaseOneTran.html.
---------------------------------------------------------------------------
We have been unable to navigate the system because it requires a
borrower PIN number. Based on the announcement and discussions with
Department staff, we understand that borrowers will, for the first
time, be required to choose a specific loan servicer as part of the
consolidation application. This ``chosen'' servicer will be responsible
for completing the consolidation application and acting as the
borrower's general loan servicer. Borrowers will be able to choose
between FedLoan Servicing (PHEAA), Great Lakes Educational Loan
Services, Nelnet and Sallie Mae.
Although we agree generally with enhanced borrower freedom to
choose servicers, we are very concerned about the potential for abuse
with this new consolidation system. This could occur in a number of
ways, including:
1. Collection agency referrals: Phase one does not include
borrowers with loans in default. However, the current plan is to
require these borrowers to use the new system once phase two is
implemented. These borrowers are almost always dealing with a
collection agency. Although borrowers should be able to bypass
collection agencies and consolidate on their own, our experience is
that the collection agencies pressure borrowers to allow the agencies
to process the consolidation applications. Under the new system, we
fear that these agencies will make servicer choices without consulting
the borrowers.
There is very serious potential for abuse. Kickback arrangements
are one possibility. Even more directly, one of the servicers on the
list, Sallie Mae, owns collection agencies.
2. For-Profit Debt Relief Companies. The National Consumer Law
Center released a report last year focusing on abuses in the for-profit
student loan ``debt relief '' industry.\40\ New York Governor Cuomo's
new Student Protection Unit recently announced that it had sent
subpoenas to 13 of these ``relief '' companies.\41\
---------------------------------------------------------------------------
\40\ See National Consumer Law Center, ``Searching for Relief:
Desperate Borrowers and the Growing Student Loan `Debt Relief '
Industry'' (June 2013), available at: http://www.nclc.org/issues/
searching-for-relief.html.
\41\ See http://www.dfs.ny.gov/about/press2014/pr1401221.htm.
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We found that the only ``service'' most of these companies perform,
if they perform any service at all, is processing government loan
consolidation applications on behalf of borrowers. This appears to be
yet another area of potential abuse if these companies seek
compensation to steer borrowers to particular servicers. Our
investigation found that these companies generally do not provide
reliable information to consumers. Therefore it would not be surprising
if they selected servicers on behalf of borrowers without informing the
borrowers about their right to choose servicers. Most of these
companies seek powers of attorney to act on behalf of borrowers.
3. School Referrals. A number of our clients with loans in default
have told us that for-profit school staff seeking to recruit them have
offered to get their loans out of default for free. Many then tried to
process loan consolidation applications on behalf of the borrowers. In
some cases, we believe that the schools may be working with ``debt
relief '' companies described above.
In addition, many schools, both for-profit and non-profit, counsel
students on handling loans after leaving school. In many cases, the
schools are working with borrowers seeking to consolidate loans. It is
unclear how these schools can counsel borrowers on comparing servicers
and making informed selections.
4. FFEL (Federal Family Education Loan or Guaranteed Loan)
Conflicts. Borrowers with FFEL loans often seek to consolidate into the
Direct Loan program. All four of the ``consolidation servicers'' has a
legacy FFEL portfolio. All but Sallie Mae were FFEL guaranty agencies,
although Sallie Mae owns a guaranty agency. We fear that these agencies
will steer borrowers into choosing them as the Direct Loan servicer,
perhaps even inaccurately informing borrowers that they are required to
keep the same servicer as they transition to Direct Loans.
We are also concerned about the lack of information available to
consumers to help them make servicer choices. The only information we
know of showing servicer performance is the quarterly servicer survey
information that is generally available only on the Department's
Information for Financial Aid Professionals (IFAP) Web site.\42\ While
imperfect, this information gives borrowers some sense of servicer
performance. However, it is hidden on a site that consumers rarely
visit or even know about. Further, we have noticed that the most recent
information has not been posted. We have not seen an update since
August 2013. There are media reports that the Department is making
adjustments to some of the data categories. However, we do not
understand why this would preclude the Department from continuing to
release updated information in the other categories.
---------------------------------------------------------------------------
\42\ See, e.g., http://www.ifap.ed.gov/eannouncements/
082213LSIQrtlyCustSatisSurveyBegin
Sept2013.html.
---------------------------------------------------------------------------
We are requesting that you send information about any and all
information that is publicly available for consumers to learn about
servicer performance. Please also indicate whether any information will
be available in the future. Please be specific about this information.
For example, can borrowers access the redacted transcripts from
borrower satisfaction surveys? What other information is available?
In addition, we request that you contact us as soon as possible to
explain any precautions the Department or other agencies have taken to
avoid potential abuses and to provide information so that consumers can
truly shop for servicers. This is particularly critical since once they
make a choice, as far as we know, the Department will not let borrowers
switch to a different servicer.
Sincerely,
Deanne Loonin,
National Consumer Center.
The Chairman. Thank you, Ms. Loonin.
Ms. Johnson, welcome back.
STATEMENT OF ROBERTA L. JOHNSON, DIRECTOR OF STUDENT FINANCIAL
AID, IOWA STATE UNIVERSITY, AMES, IA
Ms. Johnson. Thank you. Chairman Harkin, Ranking Member
Alexander, and members of the committee, thank you for inviting
me here today to testify.
As has already been mentioned, I've been at Iowa State
University for a number of years. I have had experience with
both the FFEL program as well as the Direct Loan program. Iowa
State University was a year-one school in 1994 in the Direct
Loan program, and I have the experience of the Direct Loan
program prior to 100 percent DL and post that period of time.
So I can talk to both sides of that issue.
To help you better understand the whole borrower
experience, I want to start with the application process, which
Senator Alexander showed. It's a 10-page process through the
FAFSA form, and it cannot be completed until January 1st of the
student's senior year in high school. For many students,
they're already emotionally invested in the institution.
Because many institutions, like ours, use a deadline for
making decisions about disbursement of campus-based and
institutional dollars of March 1st, students are often
estimating their information and getting that application in by
March the 1st. Then what ends up happening, of course, is that
they don't have their taxes filed until April 15th, and the
information is incorrect. Schools are going back and forth with
them several times to try to rectify this situation.
I would suggest that some of the recent studies on the
prior-prior year evaluation of tax--or using that tax
information would be something that bears consideration,
primarily because it would allow that information to go to
students in the fall semester of their senior year,
potentially, so that they would have opportunity to think about
saving, they would know their cost, and they could potentially
make other plans before they're so emotionally invested in your
institution if it turns out that that institution is simply
financially unfeasible for them.
Iowa State University is using the Financial Aid Shopping
Sheet as our official award notification to students. I was
very skeptical about using this initially, but the feedback
that we've received from our students and their families is
that they're very appreciative of this information, it's clear
to understand, and it did provide them with a definite picture
of what their costs would be prior to borrowing any loans.
However, the shopping sheet does not work well for graduate
and professional students because the metrics are all tied to
undergraduate performance indicators. So we need to think about
how we can change that. Also, there are a number of consumer
information required disclosures, College Navigator, the
Shopping Sheet, and the Score Card--we need to think about
making these consistent and utilizing the same measurement
points so that they're truly helping families to compare their
school choices rather than adding to their confusion.
Now, once a decision has been made to borrow, the students
are directed to the Department of Education's Web site,
studentloans
.gov, to complete the master promissory note, entrance
counseling. They will ultimately utilize the site for entrance
counseling, and they also go here to use the Financial
Awareness Counseling Tool, which Mr. Runcie discussed.
The Financial Awareness Counseling Tool is very robust. Our
institution is using it when working with students to develop
their own budgets, to help explain repayment plans, and to
assist them in realizing what their repayment amounts will be
once they complete the degree program.
The up front processing of loans, known as origination,
works very well via an electronic transmission of information
that goes to a contractor that the department has working for
them. And this year, we will be providing even additional
information beyond just loan period and grade level, as we need
to also provide program information so that when students have
received 150 percent of their program borrowing, they will no
longer be able to borrow through a subsidized Stafford loan.
But it's after the loan is disbursed that things are now
more challenging for the borrowers. When the Direct Loan
program was first implemented, there was a single servicer, and
all correspondence was branded as the Federal Direct Student
Loan Program. Now, the correspondence that comes to borrowers
is co-branded with the name of the servicer on it, and,
oftentimes, it's my experience that the name of the servicer
appears in larger print than the Department of Education's
information. So it is difficult for the borrower to know that
this is coming from the Direct Loan program.
I would suggest that also the studentloans.gov needs to be
the single point of contact for borrowers to be able to log
back in to access their student loans. Currently, a student has
to go to that individual servicer's Web site, sign up, get a
sign-in, login, and that is very confusing and, I think, leads
to a lot of challenges with repayment, because students have to
take some extra steps. If we can streamline this and put it
into one stop for students, I think it will help.
I think because loan contracts are up later this year, the
department has the opportunity to think about how contracts
need to be awarded. Do the loan servicers need to come from a
previous FFEL environment, or are there servicers that are
working in other financial sectors, such as credit card
agencies, that may do just as good if not a better job?
I think the plethora of student loan repayment plans can be
confusing, particularly all of the income-based plans for
students. We need to think about that.
And, finally, I would say in response to comments about the
cost of loans, I think there is some substantial revenue that's
being made, and we need to look at things like the origination
fee, as well as the capitalization of interest for our
borrowers, and see if there are some ways that we can
streamline those processes.
So, in conclusion, let me state that it works well, but
there are definitely areas that we can fine tune and find
efficiencies to assist our borrowers.
Thank you.
[The prepared statement of Ms. Johnson follows:]
Prepared Statement of Roberta L. Johnson
summary
Testimony on Strengthening the Federal Student Loan Programs for
Borrowers walks through the process of borrowing a student loan, both
from the perspective of the borrower as well as that of the school.
Starting with the financial aid application process, comments
include ways to minimize the burden to both borrowers and schools by
suggesting serious consideration be given to utilization of prior-prior
year financial information to minimize the amount of followup required
to confirm the family's estimated financial contribution. Comments are
also made on the benefits and challenges of utilizing the Financial Aid
Shopping Sheet, a mechanism by which schools indicate to borrowers how
much they can borrow.
Once a decision has been made to borrow, the lifecycle of the loan
begins. Commencing with completion of the master promissory note and
entrance loan counseling, continuing with in-school servicing and exit
counseling, and concluding with repayment, the testimony highlights
both the positive and negative aspects of the current environment with
suggestions as to how the challenges might be addressed.
Finally, comments are made regarding areas where legislation could
effect changes to impact the perception that the Federal Government is
making money off student loans through the elimination of the
origination fee and capitalization of interest.
______
Chairman Harkin, Ranking Member Alexander, and members of the
committee: thank you for inviting me to testify today at this hearing
regarding Federal student loans. My name is Roberta Johnson and I am
the director of Student Financial Aid at Iowa State University in Ames,
IA. Iowa State University is the public land-grant institution in Iowa,
enrolling 33,241 students. Last year, 84 percent of our total student
body received some type of financial aid and 53 percent of all students
received a student loan. Average indebtedness at graduation has hovered
near $30,000 for the last 5 years, although the percent of students
graduating with debt has dropped from 71.2 percent to 61.8 percent over
the same period.
My tenure in the financial aid office at Iowa State University
spans 31 years, including 29 years involved in some capacity with the
administration of the student loan programs on our campus. I was
involved in Iowa State University's transition to the Federal Direct
Loan Program as one of the original 104 schools that entered the
program in 1994 and have remained fully committed to this program in
the ensuing years, working both locally and nationally to strengthen
and streamline the program.
To help you better understand the experience of borrowers of
Federal student loans, I would like to start at the beginning of the
financial aid process. Regardless of the type of Federal loan, all
borrowers must complete the Free Application for Federal Student Aid
(FAFSA). Because the FAFSA cannot be completed until January 1 for the
year in which the student seeks enrollment, information regarding how
to finance educational costs is often the last piece of information a
student and their family receives prior to deciding whether to
matriculate. Many institutions, including Iowa State University, have a
priority financial aid filing deadline of March 1 to be considered for
aid from campus-based allocations and institutional sources. Because
the tax filing deadline occurs 6 weeks later, estimating errors are
common and require significant followup by both students/parents and
financial aid personnel. Recent studies on prior-prior year tax
information are promising. Not only would the possibility for
estimating errors be virtually eliminated, but students and their
families would have information regarding college costs and available
resources much earlier. This additional time would allow more time for
saving, additional incentive to apply for non-institutional
scholarships, and the opportunity to make decisions regarding
enrollment before the student is so emotionally invested in the
institution that they are willing to incur whatever debt is available
to matriculate.
In the short time between when a family files the FAFSA form and
the official financial aid award letter is sent, many families must
participate in a process known as verification. For most institutions,
approximately 30 percent of their FAFSA filing population will be
selected for additional review, requiring them to submit extra forms
and/or obtain copies of the Tax Return Transcript from the IRS. While
Iowa State University, along with 142 other institutions of higher
education, participates in the Quality Assurance Program which enables
us to determine our own selection criteria for verification, we are
still verifying a sizable number of FAFSA applications. Schools have
the option to delay release of the financial aid award letter until
verification is completed or send an award that may change due to the
fact it is based on estimated data. Our institution has chosen the
latter option since the time between receipt of the FAFSA and when a
family should hear something about financial aid is short. But it means
that we see some changes and have difficult conversations with students
when the initial financial aid award changes after they've already
committed to our institution. Use of prior-prior year would mitigate
these situations.
Due to the requirement that military students covered by the
Principles of Excellence Executive Order 13607 receive a Financial Aid
Shopping Sheet prior to enrollment, Iowa State University transitioned
to utilizing the Shopping Sheet as our official financial aid award
letter. Incoming students receive this document both via a hard-copy
sent via mail and a link directing them to an electronic version within
our secure student portal. Continuing students receive only the
electronic version. While originally skeptical that the Financial Aid
Shopping Sheet would provide families with the details necessary to
fully understand their financial aid award, we provided supplemental
information that met this need. Feedback from incoming families
indicated they found the information clear to understand and provided
them with a definite picture of what their costs would be prior to
borrowing any loans. However, the Shopping Sheet does not work well for
graduate and professional students as the metrics are all tied to
undergraduate performance indicators. The number of consumer-
information required disclosures, College Navigator, Shopping Sheet,
and Score Card need to be consistent, utilizing the same measurement
points so that they are truly helping families to compare school
choices rather than add to their confusion.
Once the decision has been made to borrow, students are directed to
a Department of Education Web site, www.studentloans.gov, to complete
the master promissory note, entrance loan counseling, and ultimately
will utilize this site for exit counseling. The Department worked with
their contractor to develop a Financial Awareness Counseling Tool to
provide additional information regarding student loans, repayment
options and obligations, and budgeting. The Financial Awareness
Counseling Tool is very robust and our office uses it when working with
students to develop their own budgets, to help explain the repayment
plans, and to assist them in realizing what their repayment amounts
will be once they complete their degree program.
The up-front processing of students loans, known as origination,
works very well via an electronic transmission of specific information
such as loan period, grade level, and accepted loan amount being part
of the transmission. Beginning this academic year, schools are also
required to submit additional information regarding the program in
which the student is enrolled so the Department can calculate when a
student has reached 150 percent of the published length of their
program and the expiration of subsidy for any future Stafford Loans.
The vast majority of students would probably have reached the
cumulative maximum in their subsidized Stafford Loan of $23,000 or have
been identified via a school's Satisfactory Academic Progress policies
without this requirement. While supportive of the desire to encourage
students to graduate as quickly as possible and be good stewards of
taxpayer resources, the requirement currently feels like additional
regulatory burden.
After the loan is disbursed, things get more challenging for
borrowers. When the Direct Loan program was first implemented, there
was a single servicer and all correspondence with the borrowers was
identified only as the William D. Ford Federal Direct Loan Program. The
servicer was invisible to the borrower for this Federal loan.
Understanding that the Department needed to have greater capacity in
the servicing arena when we moved to 100 percent Direct Lending,
initial utilization of servicers who had experience with student loans
through the FFEL program was probably the most expedient option.
However, servicers have been permitted to co-brand correspondence with
the Department, often times with the Servicer's logo appearing so much
larger that the Department's logo is almost unnoticeable. Borrowers are
confused why they are receiving correspondence, whether via letter or
e-mail, from an agency they've not heard from previously. In
conversations I have had with servicers, it has been reported that the
percentage of their e-mails that are opened is very low. This indicates
to me that borrowers believe the correspondence to be junk mail or
spam. These comments are concerning as it would indicate the potential
for delinquency and default is greater when borrowers don't heed their
correspondence.
From a school perspective, counseling borrowers whether in-school
or during repayment is also difficult. Rather than providing a single
telephone number or Web site for borrowers to make contact with their
servicer, we must now go to the National Student Loan Data System,
locate the servicer and contact information, and then share that with
the borrower. It would be far more expedient to utilize
www.studentloans.gov as the single portal through which the borrower
accesses loan information. Technology is sophisticated enough that
students should be able to log in on www.studentloans.gov and be routed
directly to the company servicing their loan(s) and/or dial a single
toll-free telephone number which will route them to their servicer
after supplying appropriate identifiers. Borrowers need not know who
their servicer is. Borrowers and schools should be confident that
payments, deferments, forbearances, etc. are all being handled
identically across servicers. Servicers should not advertise for
private loan products on the sign-in page for a Federal loan as is
currently the case with at least one Federal Student Loan servicer. And
servicers should cease offering training on topics that have nothing to
do with student loans to garner more favorable responses from financial
aid personnel when the Department conducts quarterly surveys. I contend
that the most important respondent in the surveys should be the
borrowers and their feedback would be even more meaningful if they were
not aware of which entity is providing the service. Other agencies in
the Federal Government, such as the IRS or the Social Security
Administration, contract with other agencies to service the work and
student loans should be no different.
Because the contract for loan servicers is up for renewal later
this year, the Department has the opportunity to rethink how contracts
are awarded. Does a loan servicer need to come from the previous FFEL
environment or can superior service be achieved by contracting with
entities from other financial sectors, such as credit card processors?
How should servicers be compensated and are contracts equitable and
``right priced''? Surpluses, if any, should be reclaimed to enhance the
Federal Pell Grant rather than being used at the discretion of the
servicer only for a subset of the borrowing population.
Another area of confusion is the plethora of repayment plans from
which borrowers can choose. While it is good that options exist,
understanding the intricacies of Income-Based Repayment, Pay as You
Earn, Income Contingent, and Income Sensitive plans besides the
Standard, Extended, and Graduated repayment plans is overwhelming.
Servicing contracts should be set up to help borrowers understand their
options and guiding them into a payment plan that best meets their
needs should be rewarded more than placing a borrower in forbearance to
minimize the telephone time required for the transaction. Better yet,
the opportunity to consider a repayment plan such as H.R. 1716, the
Earnings Contingent Education Loans (ExCEL) Act, introduced by
Representatives Petri and Polis, which ties repayments amounts to a
borrower's income is an idea worth serious review. While I would
advocate that assisting borrowers to repay their loans quickly is
always the most desirable option, collecting loans by linking
repayments to the borrower's income could completely eliminate defaults
and assist recent borrowers seeking employment in a still weakened
economy to tie their payments to their income without the additional
hassle of submitting significant paperwork annually.
There is no doubt Federal budget scoring rules are complicated and
I am no expert on them, but it seems that potentially substantial
revenue is raised for the Federal Government in its student loan
programs. Loans are clearly an investment in the future and a good
investment by government, but I think the return should be in improved
human capital, better earnings, increased participation in civic life
and general well-being. I would encourage the committee to support
these long-term benefits and reduce the immediate revenue that may
accrue from the loan programs and raise the expense of borrowing for
students. An example of what should be reviewed is the existence of an
origination fee. It is difficult to explain to the student or parent
why the Federal Government must keep a portion of their loan funds. And
with the advent of sequestration, the origination fee adjustments
became even more difficult for schools. A second area that should be
reviewed is interest capitalization whenever there is a change in a
borrower's status. Legislatively, student loan interest capitalization
doesn't seem to be prescribed so why does this practice exist?
Eliminating capitalization (not interest accrual) seems to be an area
that could minimize burgeoning indebtedness.
In conclusion, let me state that the Direct Student Loan program
works extremely well but like any program that has existed 20 years,
some areas need fine tuning to enhance efficacy for all--borrowers,
schools, and taxpayers. Thank you for the opportunity to provide
insights as one who has been in the trenches for years and I look
forward to the changes you will enact to improve the program for years
to come.
The Chairman. Thank you very much, Ms. Johnson.
Ms. Dill, welcome and please proceed.
STATEMENT OF MARIAN M. DILL, DIRECTOR OF STUDENT FINANCIAL AID,
LEE UNIVERSITY, CLEVELAND, TN
Ms. Dill. Thank you. Chairman Harkin, Ranking Member
Alexander, and members of the committee, thank you for inviting
me to testify today.
I currently serve students at Lee University, a Christ-
centered institution located in east Tennessee, with an
enrollment of almost 5,000 students. In 2013, 55 percent of our
students participated in the Federal Direct Loan programs, and
the average per borrower indebtedness for graduates was just
over $29,000.
Today, I want to give you some practical insights from my
experience, and I will divide my comments into two parts,
first, focusing on student success strategies, and, second,
focusing on simplification and reduction of non-essential
administrative burdens.
First, student success strategies. Currently, the Federal
Government, the regulations, prohibit schools from requiring
additional loan counseling for students who appear to be over-
borrowing or who, by statistical indicators, appear most at
risk for defaulting. Statistical indicators may include
marginal academic performance or borrowing beyond direct cost.
Also, schools are not permitted to limit part-time students
from borrowing at full-time rates.
Based upon the research and discussion with my fellow aid
administrators, I submit the following recommendations.
No. 1, institutions should be allowed to require additional
counseling for students meeting those various identified risk
factors before any loan disbursement, not just the first.
Currently, schools can offer additional counseling, but we
can't require it. Additional counseling would reinforce key
borrower responsibility.
Educating the borrowers while they're still in school is
key to successful repayment. Institutions need the authority to
require such training in order to promote student success and
to reduce default rates.
No. 2, institutions should be allowed to limit borrowing
based upon broad categories of students, for example, those
students who are enrolled part-time and still able to borrow
the annual loan amounts. In doing so, they can exhaust their
aggregate limits prior to completing even half of their
academic programs.
As an aid administrator, this is alarming. Yet we have no
authority over borrowing, thus no practical tools to stop this
from occurring. This over-borrowing pattern can have severe
consequences for the student, the institution, and the Federal
program.
No. 3, parent-plus loans should be held to a more
restrictive underwriting standard. Currently, plus approvals
are based solely upon credit worthiness and are blind to the
ability to repay. In moving to direct lending, I observed a
drastic increase in plus loan approvals.
I recall one conversation with a single mom living solely
on various forms of public assistance. She was approved. She
didn't have bad credit. She had no credit and was thus
approved. And she said to me, ``What are they thinking? I
cannot pay this back.''
No. 4, income-based repayment should be considered the
automatic repayment plan for borrowers. This would provide a
simplified process and ensure that no borrower's repayment
amount would ever exceed their ability to repay and, therefore,
reduce the probability of default.
Next, I believe there are some practical administrative
shifts that would both strengthen the loan program and reduce
the unnecessary administrative burden.
No. 1, Congress should mandate the creation of a single web
portal where institutions and students can go and easily access
information about all Federal, private, and institutional
loans. The nonprofit organization, National Student
Clearinghouse, currently provides a free service, Meteor
Network, which has the capacity to meet this objective. The
department's directive is needed to achieve reporting of all
student loan information.
No. 2, the department should overhaul existing entrance and
exit counseling to provide clear, concise information which
meets the legislative requirements. This generation is
dependent on social media and is accustomed to sound bites and
You Tube videos. The Financial Awareness Counseling Tool, FACT,
is well designed and student friendly, but it doesn't satisfy
the legislative requirement. This resource needs to be enhanced
to meet those standards.
No. 3, the primary responsibility of default management
should shift back to the Federal servicers or the former
guarantee agencies. This responsibility shifted to the schools
in the transition from FFEL to DL, direct lending. Schools are
now faced with the need to hire additional staff to oversee the
process, hire costly third-party servicers, or risk the
penalties of rising cohort default rates. We do not have the
system resources to conduct skip tracing, robo-calling, or
other means formerly employed by the FFEL lending community.
Finally, I hope that my testimony provides insight into how
our current student loan policies could be enhanced to better
serve our students. Thank you for your time, and I'm happy to
answer your questions.
[The prepared statement of Ms. Dill follows:]
Prepared Statement of Marian M. Dill
Summary
student success strategies regarding borrowing
Research
Research shows student borrowers are not in the most
appropriate repayment plans.
Research shows that degree completion and making the first
payment on a student loan is critical.
Recommendations
Allow institutions the authority to require additional
counseling and financial literacy while students are still in school.
Allow institutions the flexibility to limit borrowing,
based on broad categories of students (enrollment status, degree, or
program level), without compromising the authority to let students
borrow up to the Federal annual and aggregate limits, on a case-by-case
basis.
Hold Federal Parent PLUS Loan borrowers to a more
restrictive underwriting standard based more on ability to repay.
Consider making the Income-Based Repayment (IBR) plan the
default payment plan for student loan borrowers.
simplification and reduction of administrative burden
Recommendations
Mandate creation of a single web portal where institutions
and students can easily access information about Federal, private and
institutional loans.
Overhaul the existing on-line entrance and exit counseling
making it easier for student navigation and clearer understanding.
Update the Financial Awareness Counseling Tool (FACT) to
meet legislative requirements to be used for an enhanced counseling
option.
Shift the primary responsibility of default management to
the Federal servicers or former guarantee agencies.
conclusion
Complexity of the current system is not working for
students and families. It also creates an unnecessary administrative
burden on institutions.
The above recommendations are practical administrative
shifts that would strengthen the student loan program and reduce
administrative burden.
______
Chairman Harkin, Ranking Member Alexander, and members of the
committee: Thank you for inviting me to testify today. I am Marian
Malone Dill and am currently serving as director of Financial Aid at
Lee University in Cleveland, TN. I am a first generation college
graduate and was a recipient of title IV aid as both an undergraduate
and graduate student. During my 20 years of aid administration, I have
served at 2-year and 4-year institutions in the public and private
sectors. I believe in the power of financial aid to assist students in
attending college in order to propel them to a better life personally
as well as for the prosperity of this great nation. America's brightest
and most talented should not be inhibited by their socioeconomic
status. Federal student aid exists to help students reach their fullest
potential and empower them to lead America and continue our prominence
as the greatest country on earth. Education is critical to keeping
America competitive in the world market.
To assist the committee in understanding the student population
that I currently serve, please allow me to introduce Lee University.
Lee is a comprehensive, Christ-centered university located in the
Appalachian region of east Tennessee. Lee has become a higher education
pioneer by incorporating service learning and cross-cultural studies as
a regular part of every student's educational experience. In 2013, Lee
University enrolled almost 5,000 students. Of Lee's undergraduate
student population:
Twenty-five percent were first generation college
students.
Thirty-five percent received a Federal Pell Grant.
Fifty-five percent participated in the Federal Direct Loan
Programs.
Sixty-one percent of the graduating class borrowed Federal
student loans with an average per borrower indebtedness of just over
$29,000.
Today I want to give you some of the practical insights from my
experience as a financial aid administrator working directly with
students and parents on Federal student loan issues. These insights
will demonstrate why our current student loan policies--and how the
complexity of regulations in particular--aren't working well for
students, families and financial aid administrators. I will divide my
comments into two parts, first focusing on student success strategies
regarding borrowing and second focusing on simplification of Federal
student loan programs and reduction of nonessential administrative
burdens.
student success strategies
In recent research to determine the profile of Lee students who
find themselves most economically harmed by student loan debt, the
following information was found:
Seventy percent of Lee borrowers were in the standard
repayment plan, and only 13 percent were in the Income Based Repayment
(IBR) plan.
The 2010 national 3-year Cohort Default Rate (CDR) is 14.7
percent. Lee University's CDR for the same period is 12.9 percent as
calculated by the U.S. Department of Education. Of the Lee students who
defaulted,
Eighty percent did not complete their degree, and
Ninety-four percent of those students did not make
the first payment.
Under current Federal regulations, schools are prohibited from
requiring additional loan counseling for students who appear to be
over-borrowing or who by statistical indicators appear most at risk of
defaulting. Statistical indicators may include marginal academic
performance, borrowing beyond direct cost or borrowing beyond potential
future earnings based on program of study. Also, schools are not
permitted to limit part-time students from borrowing at full-time rates
or to slow over-borrowing by students enrolled in academic programs
that produce a disproportionate share of loan defaults.
Based on the research and discussion with my fellow aid
administrators, I submit the following recommendations:
1. Institutions should be allowed to require additional counseling
(if deemed appropriate) for students meeting various identifiable risk
factors and before any loan disbursement, not just the first one.
Currently, schools can offer additional counseling and financial
literacy programs, but cannot require it in order for the loan to be
disbursed. Financial literacy goes beyond the required loan counseling.
Its purpose is to educate students on basic budgeting principles and
living within their financial means. Additional counseling would
reinforce key responsibilities on the part of the borrower and assist
in keeping students updated and informed. Institutions should also be
allowed to require financial literacy in addition to entrance
counseling. I believe educating the borrower while they are still in
school, is key to successful repayment. Institutions need the authority
to require such training in order to promote student success and reduce
default rates.
2. Institutions should be allowed to limit borrowing based on broad
categories of students while retaining the authority to allow students
to borrow up to the Federal annual and aggregate limits on a case-by-
case basis. Currently financial aid administrators are prohibited by
regulation from requiring extra counseling or financial literacy as a
prerequisite to the disbursement of Federal student loans. For example,
students who are enrolled part-time are still able to borrow the full
loan annual amount. This past year, I discovered a student who had only
earned 58 credit hours and had virtually exhausted her loan
eligibility. How is she going to graduate? She hasn't even reached the
junior status. How is she going to successfully repay the almost
$57,000 in student loan debt? As an aid administrator, this situation
is very alarming, yet because we have no authority over borrowing, we
have no practical tools to stop this student from going into further
debt. This over-borrowing pattern can have severe consequences for the
student, the institution and the Federal program.
3. Parent PLUS loan borrowers should be held to a more restrictive
underwriting standard. Currently PLUS approvals are based solely upon
credit worthiness and are blind to debt to income ratios or ability to
repay. In the shift from FFELP to Direct Lending, I observed a drastic
increase in PLUS loan approvals. Some parents were actually astonished
when they received an approval. I recall one phone conversation with a
parent from Baltimore. She was a single mom living solely on various
forms of public assistance and was approved for a PLUS loan. She didn't
have bad credit. Rather she had no credit and was thus approved. She
said to me, ``What are they thinking? I can't pay this back.'' However,
in the absence of bad credit the parent was approved.
4. Income-Based Repayment (IBR) should be considered as the
automatic repayment plan for borrowers. This would provide a
dramatically simplified process for the borrowers and ensure that no
borrower's repayment amount would ever exceed their ability to repay
and therefore reduce the probability of default. The various iterations
of repayment plans can be daunting for borrowers and a move to
automatic IBR could help streamline the options. At Lee, we recently
held a short seminar for faculty and staff, to assist them in
determining what repayment plan would be most appropriate for their
individual situation. One participant reported they had been out to the
studentloans.gov Web site and had been researching for over an hour
trying to find the right answer. There was just too much information
along with unfamiliar terms to easily come to clear understanding.
simplification and reduction of administrative burden
Of course, there are other areas of consideration to strengthen the
student loan programs. I believe there are some practical
administrative shifts that would both strengthen the program and reduce
some unnecessary administrative burden. This is the second area I would
like to submit for your consideration today.
1. Congress should mandate the creation of a single web portal
where institutions and students can go and easily access information
about Federal, private and institutional loans. The nonprofit
organization National Student Clearinghouse (NSC)--currently provides a
free service, Meteor Network, to both students and schools via a single
portal access for both Federal and private loans. NSC serves as the
unified point of connection between 3,300 institutions representing 93
percent of the national postsecondary enrollment. The Clearinghouse
Meteor has the capacity to meet the objective. The U.S. Department of
Education should facilitate the development and delivery of a single
web portal which would contain all student loan information (Federal,
private and institutional).
Currently institutions and borrowers must go to multiple sources to
determine their entire loan portfolio. This creates an unnecessary
burden for institutions and borrowers. In addition, it increases the
probability that an outlier loan will be missed in the repayment or
consolidation process. The lack of a simple single source for obtaining
all student loan information increases the probability of default.
2. The Department of Education should overhaul existing entrance
and exit counseling to provide clear, concise, customer friendly
information which meets legislative requirements. Borrowers need ample
information to make an informed decision not volumes of consumer
information rhetoric. Currently students quickly become lost in the
overwhelming amount of information on www.studentloans.gov, which leads
to further confusion. This generation is dependent on social media and
is accustomed to sound bites and YouTube video for obtaining
information. The counseling tools need to provide student friendly
verbiage.
Also, the Financial Awareness Counseling Tool (FACT) does not
satisfy legislative requirements. FACT is a well-designed and student
friendly interactive resource, but does not meet the regulatory
requirements for counseling. This resource needs to be enhanced to
satisfy legislative requirements for loan counseling. FACT should
provide enhanced counseling options that can be used by institutions to
promote success for students meeting various statically at-risk trigger
points. These trigger points include poor academic performance,
academic programs with high default rates or students borrowing above
fixed cost.
3. The primary responsibility of default management should shift to
the Federal servicers or the former guarantee agencies. In the shift
from FFELP to Direct Lending the burden of default management shifted
from the lenders and guarantee agencies to the schools. Schools are now
faced with the need to hire additional staff to oversee the process,
hire costly third party servicers or risk the penalties of rising
cohort default rates.
Over the last year, the Lee University staff has spent a
considerable amount of time researching this one topic. The task is
daunting. We do not have the system resources to conduct skip tracing,
robo-calling or other means formerly employed by the FFELP lending
community.
The task of evaluating a student's situation alone is very time
consuming for the financial aid administrator. Weeding through the
various types of loans a student may have from various schools and
multiple servicers adds to the confusion and hinders repayment efforts.
For example, the research for one delinquent borrower might take up to
45 minutes. Then staff reported taking as much as 1 hour to assist just
one delinquent borrower on a three-way call with the Federal servicer
to ensure the borrower received all the appropriate repayment options
in order to prevent default.
Students sometimes believe they are successfully repaying their
loans or have consolidated all their loans to later find out one was
omitted from the process and is now in default. Without expensive
software, adequate staff and time to assist students in preventing or
resolving defaults, schools are left to outsource default management to
third-party servicers.
In summary, I hope that my statement and testimony provides insight
into why our current student loan policies--and how the complexity of
these regulations in particular--are not working well for students and
families. I have offered four recommendations regarding student success
strategies regarding borrowing that will allow institutions to educate
students and families on borrowing, to control loan indebtedness and to
assist students and parents regarding loan repayment.
I have also offered three areas of consideration to strengthen the
student loan program. These recommendations are practical
administrative shifts that would both strengthen the student loan
program and reduce administrative burden.
Thank you for your time. I am happy to answer your questions and
reserve the right to revise and extend my remarks.
References
Lee University Student-Body Statistics (2014). Office of Institutional
Research, Cleveland, Tennessee: Lee University.
NASFAA (2013). Report of the NASFAA Task Force on Student Loan
Indebtedness. Washington, DC: NASFAA. Retrieved from http://
www.nasfaa.org/indebtedness-report.aspx.
NASFAA (2014). Report of A Loan Program Simplification That Could
Drastically Lower Default Rats and Help Struggling Borrowers.
Washington, DC: NASFAA. Retrieved from http://www.nasfaa.org/Main/
orig/2014/A_Loan_Program
_Simplification_That_Could_Drastically_Lower_Default_Rates_And_Help
_Struggling_Borrowers.aspx.
National Student Clearinghouse (2011). National Student Clearinghouse
Launches Redesigned Web Site for Recently Acquired Meteor Network.
Retrieved from http://www.studentclearinghouse.org/about/
media_center/press_releases/files/release_2011-07-28.pdf.
U.S. Department of Education (2013). Default Rates Continue to rise for
Federal Student Loans. Retrieved from https://www.ed.gov/news/
press-releases/default-rates-continue-rise-Federal-student-loans.
The Chairman. Thank you all very much. You all touched on
all the elements of what we're trying to grapple with here on
students loans, just every aspect of it. We'll start our 5-
minute rounds of questions.
We have two divergents here. Dr. Cooper, you discussed a
need to streamline current repayment options. You recommended
also that maintaining the standard repayment plan and offering
a single income-based plan would allow borrowers to benefit if
they experience extended financial hardship. You go on to note,
``The single income-based plan should aim to target protections
to borrowers in most need.''
I think Ms. Dill is saying that the income-based system
ought to be basically everybody. Am I wrong in that?
Ms. Dill. I'm suggesting that the income-based be the
automatic plan that students are assigned to, but that the
students still be allowed to opt in to the standard repayment
plan.
The Chairman. You said that we should maintain the
standard.
Ms. Cooper. We do.
The Chairman. Why would you disagree with this?
Ms. Cooper. The issue about making the income-based
repayment plan automatic or universal--sometimes those terms
are used interchangeably--I think is an interesting concept,
and it's a concept that we at IHEP actually recently studied in
depth with five other organizations. From the conclusion of our
work with those other organizations, we as an organization came
out of it believing that while we should study it and it might
be viable, there are just too many things about it right now
that don't make it ready yet.
For example, some of the problems are that some students
may end up actually borrowing more over time. That's not
something that we want. We don't want them to borrow--not
borrow more--repay more. We don't want that. They actually--
some will pay longer than they would pay under the standard
repayment plan. We don't want that, either.
And the third thing is without the proper institutional
reforms in place, we might be incentivizing bad actors to
really take advantage of the most vulnerable students. So while
I definitely believe that there is some promise in this maybe
down the road, until we work out and refine these kinks that
can ultimately hurt students more, I'm not ready to say full
scale that we should make it automatic just yet.
The Chairman. Ms. Dill, I don't know if you want to respond
to that. I understand from your testimony that 70 percent of
the students at Lee are in the standard repayment plan.
Ms. Dill. Yes, sir.
The Chairman. It seems like you don't have any kind of an
exorbitant default rate. Your default rate seems to be right in
place with everybody else.
Ms. Dill. That's correct, sir.
The Chairman. So it appears that most of those borrowers
are repaying their loans. So if that's the case, why would we--
that's the current default system right now.
Ms. Dill. Yes, sir.
The Chairman. Why would we want to change it? I'm just
trying to figure this out. I don't have a dog in this fight one
way or the other. I'm just trying to figure it out.
Ms. Dill. Sure. My goal is student success, not just in the
classroom, but once they graduate from the classroom. And by
allowing the income-based repayment to be the initial, the
automatic repayment plan, it ensures that no student would have
a loan repayment that would exceed their ability to repay,
therefore, reducing the default rate. It simplifies the
process, it makes it more user friendly for the borrower, and
it ensures their ability to repay.
The Chairman. This is something I think we're going to have
to take more of a look at. I like income-based repayment, but
should it be the default, or should it be just one in an
arsenal of different things?
The problem I have with that is sometimes people will take
the easiest course out, which means they lower their payments.
Even though they could pay more, they stretch it out. And what
do they do over that period of time? They wind up paying more
in interest charges rather than on the principal. That's the
only kind of problem I personally see with it.
Ms. Loonin, I want to talk to you about--could you respond
a little bit on the issue of--and you mentioned it in your
testimony--on collection agencies and how they operate? And I
think you were very provocative. You even said something about
doing away with them or something.
Ms. Loonin. Yes.
The Chairman. How can you do that?
Ms. Loonin. I don't know if I meant do away with them
completely in the world. I was just speaking, obviously, on
student loan issues. It isn't the case that all government
agencies use third-party private collectors to collect debts.
The IRS, for example, tried it for a while and changed their
minds and went back to using other internal collection.
So what I'm saying is that from my experience, having dealt
directly with the collection agencies myself on behalf of the
clients for years, it's not a typical collection model. It's
not just about collection. It's about the Higher Education Act,
and I don't think it works.
The Chairman. And I've had experience in that area, too,
and I've seen where a collection agency writes one letter, and
they get to keep 18 percent to 20 percent for doing almost
nothing. I know that's the trial lawyer little thing we got
into earlier today. But it seems to me that is an outlandish
kind of thing, and plus the hounding that goes on from these
collection agencies. I think we need to look at that. My time
has run out.
Senator Alexander.
Senator Alexander. Thanks, Mr. Chairman. I won't bring it
up again.
[Laughter.]
Just an observation--and this was a debate we had in 2013
when we, by 81 to 18, passed the law which put a new market-
based interest rate formula on the student loan program. Our
goal there was for neither taxpayers nor students to profit off
of each other. So we asked the Congressional Budget Office to
tell us how we could get as close to zero as we could. And
those of us who voted for that felt we did not change what was
already happening, according to the Congressional Budget
Office.
It's true that if you take the way the law says, you
cannot--whether students are profiting or students are paying--
that over 10 years, it is $185 billion based upon what we were
already doing. On the other hand, if you do what the
Congressional Budget Office says we should do, which is called
fair market accounting, which is the way we did TARP, the
Troubled Relief Asset Program, then the students would pay $85
billion more. In other words, the students are profiting off
the taxpayers.
That's a debate we're likely to have this year between two
different ways of accounting. But our goal there was not to
have one profit over the other when we imposed that new rate on
loans that cut in half the undergraduate rate to about 3.86
percent.
I thank you for your testimony today and your specific
suggestions.
Ms. Johnson, your comments about early notification of the
amount of money you can borrow or loan, we heard before, and
we're taking that into account dealing with the FAFSA and
trying to simplify it. All of you suggested ways to simplify
the--you could count eight different options, if you count
forbearance and other things, available to a student in terms
of repaying a loan.
So I'd like to specifically ask you--and we asked our
earlier witnesses about the application form--if you could--
although some of you have done it in your testimony, if you
would like to give us very specific suggestions in a letter
about how you would rewrite this 5-page--these 5 pages, which
is very small type, that would be very helpful to me and I
suspect to others here. This is not an ideological inquiry.
This is just a simplification inquiry.
And I think, Dr. Cooper, you used the words, layering new
over old. We don't want to layer new over old. We've
reauthorized the Higher Education Act eight times, and that
happens when we do that.
So if you were starting from scratch and saying--you
mentioned the single standard repayment plan, the single
income-based repayment plan--what would you include on this 5-
page form if you were starting from scratch, each of you? That
would be very, very helpful to me and I suspect to others.
Senator Alexander. Finally, I would like to ask you, Dr.
Cooper, or anyone else--you mentioned skin in the game. One of
the problems with over-borrowing--that's not really the subject
of this hearing but several of you have commented about it. Ms.
Dill commented on things we could do, like you shouldn't be
able to borrow as if you were a full-time student if you're a
part-time student. That's one suggestion.
Second, we could change the law or the regulations that
prohibit institutions from counseling students in some cases or
limiting the amount of money that could be borrowed. Or a third
idea is the skin in the game idea, that an institution or some
institutions, at some point, if they lend more money to a
student, would have some responsibility for repaying that.
What do you mean by skin in the game? And have you got
recommendations about that?
Ms. Cooper. In terms of addressing the issue of skin in the
game, we believe that when it comes to higher education and the
cost of it and how to pay for it, it's a shared responsibility.
It's one that goes with the States, the institutions, and the
government, as well as students. So we believe that everyone
should be involved in that particular endeavor. When it comes
to the issue of over-
borrowing, specifically, I think----
Senator Alexander. But how would you do skin in the game?
Give me an example. What would you say to the University of
Tennessee? How would the University of Tennessee put skin in
the game on borrowing?
Ms. Cooper. One of the proposals that we recommend is a
risk-sharing model. There are some risk-sharing models that are
already out there. For example, guarantee agencies have used
them. TICAS has proposed some. We participated in the
consortium that I just talked about, where we----
Senator Alexander. Can you give me an example? I'm very
interested in it.
Ms. Cooper. Yes. What we could do is we could have the
institutions pay into a fund a proportion that is--they could
pay a proportion that's equivalent to their cohort default
rates, for example, so if their cohort default rate is about 20
percent, then they can themselves put 20 percent into that
fund, and that----
Senator Alexander. That's 20 percent of the amount they----
Ms. Cooper. Of students who are in default or who are in
repayment. And it's really a way of trying to better protect
students from institutions that have a history of causing this
issue of over-
borrowing, and not just over-borrowing for the sake of over-
borrowing, but over-borrowing and then students not getting a
high-quality degree at the end where they can get a job to
repay it back.
Senator Alexander. Thank you. My time is up. If any of you
would like to respond in writing, I would appreciate that.
Mr. Chairman, I think one of the things we should examine
is how do we get the institution more involved, either to have
some say in how much money they loan or some responsibility for
paying it back.
The Chairman. I agree with that, and I have some thoughts
on that. But I'm going to recognize Senator Murray since
Senator Murray didn't have a chance in the last round.
Senator Murray.
Statement of Senator Murray
Senator Murray. Thank you very much, Mr. Chairman. This is
such an important hearing that you're having, and I really
appreciate all of the thoughts and the panelists' discussion on
this.
It's so telling when we have so many people in our country
today who are spending all of their extra income paying back a
student loan, and they're not buying clothes, houses, cars, you
know, contributing to our economy in other ways. And it is
really prohibiting young people from even thinking about their
future beyond college. So I think this is extremely important,
and I really appreciate all of our panelists for being here.
One of my priorities during the negotiations last winter on
the Bipartisan Budget Act was to maintain our investments in
student aid and not ask our students to contribute even more
toward deficit reduction. And, fortunately, as you know,
Congressman Ryan and I were able to work together and provide
some relief to struggling borrowers. The way we did it was by
reducing the collection fees that guarantee agencies charged on
defaulted loans.
Ms. Loonin, I'm really glad you're here, and I wanted you
to talk a little bit more about how these guarantee agencies
collect fees on student loans. And do you have any estimates on
how many struggling students will save because of the changes
that we all did put in place because of that budget agreement?
Ms. Loonin. Yes. Thank you. It was a very sensible idea,
among many, to save some money. I believe the Congressional
Budget Office estimated that that particular reduction in the
amount of guarantee agency collection fees, as well as both the
amount that's charged to the borrower and the amount that goes
to the government, would save somewhere around $2.5 billion.
Specifically, on the point of reducing the 18.5 percent
that is, frankly, automatically--the guarantee agencies
automatically put that onto the loan balance, so it's
capitalized. So a borrower coming out of rehabilitation
actually has a very much higher balance, which makes it even
harder for them to repay the loan. And as was mentioned
earlier, it's not tied at all to what amount of time or work
the collection agency has actually put into that account.
I actually have a client right now, for example--I can't
get the collection agency to call me back to do a
rehabilitation. I've been working on it for the last couple of
weeks. Even the ombudsman's office actually has been involved.
Eventually, I'm going to do most of the work that, I think,
will get this rehabilitation done. This borrower really wants
to work. She's had a stroke and she's doing her best. But that
collection agency will automatically put 18.5 percent onto
about a $40,000 balance.
Senator Murray. Describe so we all understand how these
guarantee agencies actually collect these fees on student
loans.
Ms. Loonin. Most of them use third-party collection
agencies, just like the Department of Education does as well.
And then the fees are actually charged to the borrower as
payments are made, so it's on a commission system, essentially,
whether a borrower makes a voluntary payment or, as in this
case, post-rehabilitation.
Senator Murray. Or how much work the guarantee agency
actually does.
Ms. Loonin. Again, it's third-party debt collectors, and
it's not tied to how much work is actually done per borrower.
Senator Murray. Thank you very much.
Mr. Chairman, the other issue that I am extremely
interested in is this issue of financial literacy, and it's
something I've talked and worked a lot about and have authored
legislation to help ramp up some financial and economic
education efforts for students, beginning a lot younger than
when they get to college. But I think the more you know, the
more you can make reasonable decisions, and we just do a very
bad job in this country of doing financial literacy.
But several of the panelists here have talked about
strengthening loan counseling, and I want some of you to
comment on how much loan counseling is done right now. Is it
done by colleges, or do the servicing agents do it? How do most
students get the information about the interest rate that
they're paying or how long they're going to have to pay it off
or what all this means to them?
Anybody?
Ms. Johnson.
Ms. Johnson. Sure. At our institution, this happens through
a variety of mechanisms. Primarily, we started this because our
average indebtedness has hovered near $30,000 for about the
last 5 years. And as a large public institution, I'm
continually questioned about why, as a public institution, our
debt is as high as it is, and there are a variety of reasons.
But we implemented some counseling. The first primary mechanism
for counseling is the entrance loan counseling that borrowers
can do prior to completing the promissory note.
Senator Murray. Can do or----
Ms. Johnson. They are required to do it.
Senator Murray. They are required to do it?
Ms. Johnson. They are required to do it. So if they haven't
done entrance counseling, we don't----
Senator Murray. Is this a university requirement?
Ms. Johnson. No, this is a Federal requirement. So they can
do the master promissory note and then do entrance counseling
all as one process on studentloans.gov. We put a hold on any
disbursement of funds until that entrance counseling has
occurred. The challenge with the entrance counseling is that,
like many other things that are internet-based, it's text
heavy, and you can scroll through, scroll through, click,
click, click, and it doesn't take you very long to do all the
clicks and get through that process.
Senator Murray. Without really reading it.
Ms. Johnson. Without really reading it. Anecdotally, we've
also heard that there are parents that are doing this on behalf
of their children. That makes us shudder, because the borrower
is not getting that information.
We are utilizing a Financial Awareness Counseling Tool on
our campus for our private loan borrowers. We are mandating
that they come in and visit with us in person before they
borrow through a private loan program and using that tool to
assist them to make sure they understand things like interest
rates. We've been very successful in reducing or even averting
some of that private loan borrowing that has occurred.
One of the pieces that we're most pleased with is that 5
years ago, 71 percent of our undergraduate students were
graduating with debt. We've dropped that to about 61 percent.
So over a 5-year period of time, 10 percent fewer of our
students are leaving our institution with debt. Now, those that
are borrowing are still borrowing the same amount of debt, but
there are fewer of them that are borrowing. So we're making
some progress, we think.
Exit counseling is also mandatory for borrowers. So prior
to their departure from our institution, they must go through
the exit counseling. But you don't have a lot of teeth in that,
because if a student does not do their exit counseling, you
don't withhold their diploma or put a hold on their transcript
for getting a job. So we tell them it's a requirement, but they
may not do it.
Senator Murray. I think this is a really important area.
And, again, Mr. Chairman, thank you to you and Senator
Alexander for focusing on this.
The Chairman. I think if there's one thing that definitely
cuts across party lines here and that we all agree on is that
there has to be better loan counseling. Senator Alexander has
talked about even going into high schools and getting it at
that level, which I agree with. I think the central thesis is
that we need to have better loan counseling. There may be some
differences on the edges, but I think that's sort of a common
theme, I think, that runs through all of this.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
Ms. Loonin, you recently wrote a report on Sallie Mae,
which is doing both servicing under the Direct Student Loan
program and, of course, still has outstanding old federally
guaranteed loans. Sallie Mae touts its status as the loan
servicer with the lowest default rates.
I recently sent a letter to Sallie Mae, asking for more
information about its default prevention strategies, because I
think it's
important to understand the default aversion programs that
borrowers are using, whether it's a deferment, a forbearance,
an income-based repayment, or something else. And I asked for
data on all of its Federal loans, including both the federally
guaranteed and the Direct Loan program.
Sallie Mae recently responded to my letter, but it did not
respond to the extensive data request. Instead, Sallie Mae
cited three pieces of data, all related only to the Direct Loan
program, its default rate, its forbearance rate, and its
income-based repayment rate.
Ms. Loonin, I wanted to ask if these data are sufficient to
give us an accurate picture of Sallie Mae's default prevention
strategies?
Ms. Loonin. Thank you. It's great that your work has been
in holding Sallie Mae more accountable, and I really am sorry
that they're not here today. But it's excellent that they
revealed some information, because we do want to have more
data. But that's very incomplete.
First of all, by not including the FFEL information, it
does not give a complete picture. And, surely, Sallie Mae has
control over its FFEL--no worries about any kind of
instructions from the Department of Education not to release
that information. So that would be extremely useful information
that would be--and you'd get more historical data, too, because
the program has gone on for longer.
Also, within default prevention, it's helpful to see what
their statistics are. But default prevention is about much more
than just this cliff of who actually falls into default. We
like to parse that out and see by times of delinquency, for
example, and look at similar--observe the HAMP program, which I
know you're familiar with, or one of the mortgage programs; how
many people inquired about income-based repayment or other
things; what was the acceptance rate; and what's the retention
rate. That would give you a much deeper picture of whether
people are just out of default one moment in time, but over
time.
Senator Warren. Good. Thank you very much. I'm very
disappointed that Sallie Mae did not come today. I think it's
important that we take a closer look at how all of our
servicers are performing. But we need accurate data to be able
to do that. So thank you.
I want to ask a second question, and that's about the
student loan program. Just loans from 2007 to 2012 are now on
target to make $66 billion in profits for the U.S. Government--
just that small cohort. And let's keep in mind that these are
the best data that we have available. These are Government
data. These are not data anybody else made up. The GAO, the
CBO, the Fed are all looking in the same direction on what's
happening to students that are loading up on student loan debt.
Right now, the best estimate we have is that the interest
rate that we're going to charge next year to our students is
double, nearly double, the rate that undergraduates would have
to pay in order to have the program break even, and as much as
triple for graduate students and for plus loans. I think it is
obscene for the Federal Government to be making profits like
this, measured in the billions of dollars, off the backs of our
students.
So the question I want to ask is with $1.2 trillion in
outstanding student loan debts and a third of borrowers more
than 90 days delinquent on their student loan debt--this is
crushing our young people. I'd like you to talk about what the
implications of this are for young people who are trying to
start their lives.
Dr. Cooper, could you talk about that, please?
Ms. Cooper. Absolutely. I think that we definitely need to
keep these things in mind, because as we extend even some of
our repayment options to 20 or 25 years out, we have to
recognize that that then delays students' ability to make some
life choices, like buying a home, saving for retirement, things
that we've all heard about, I'm sure, in various articles and
reports. So we need to be mindful.
We want our students to be effective and active parts of
our economy. We don't want them saddled with debt for the first
20 years out of college.
Senator Warren. Thank you very much. I see that my time is
up.
Would it be all right if we had a couple more responses on
that, Mr. Chairman? Just responses. I won't ask another
question.
The Chairman. Go ahead.
Senator Warren. Anyone else?
Ms. Loonin. Sure. Thank you. And I want to say that what I
see with my clients--many of whom, as I mentioned, did not
succeed the first time around--is that the debt is really
crushing their opportunity to try again. They really are trying
again. I think if we looked at the cost that way in the long
term, it would cost us less to have them actually succeed.
Ms. Johnson. I would answer from the perspective of having
a number of new young staff in my office, as well as the
students that we serve, and, yes, they're delaying those life
choices. They are utilizing the income-based repayment plans
just to assist them. But home ownership and all of the things
that we think contribute to a successful economy and that we
want to have happen to drive our economy toward more health are
being deferred or delayed because of the debt.
Ms. Dill. I would say that it is a burden, and I concur
with what the other individuals have said. I appreciate what
this committee is doing to help our students be successful, not
only in school, but in the repayment process.
Senator Warren. I appreciate all of you coming here today.
I appreciate the work you're doing day in and day out.
Thank you, Mr. Chairman and Ranking Member Alexander, for
having this hearing today. There is no problem that is more
urgent in our economy and in our country. We don't build a
future if we crush our young people with debt and don't let
them have a fighting chance to get a start.
Thank you.
The Chairman. Thank you, Senator Warren.
None of you in your testimony touched on something that we
also need to look at. That is the lack of any limits on
graduate student loans. Prior to 2005, kids going to graduate
school could borrow Stafford loans up to a certain limit. In
2005, a new program was started, the Grad-Plus Loan program. So
today, a student going into graduate school can borrow up to
the maximum of their Stafford loan, and then they can go to
this new program created in 2005 that has no limits.
I'm just amazed at this. I'm wondering if--I've seen that a
lot of these loans to grad students has really accelerated
since 2005--huge. I'm going to get more data on that--what's
happened there.
I have two questions. No. 1, should we be looking at,
again, establishing limits on Grad-Plus loans? And, No. 2, how
much does the fact that these graduate loans, going up to
$100,000, $200,000, raise the average national loan
indebtedness that we see of all students? I've said before that
I think the average is $29,000. How much of that is boosted up
because of the Grad-Plus loans that are out there? So those two
questions--do we put limits on it?
Ms. Johnson.
Ms. Johnson. First of all, the statistic about the average
indebtedness--when schools are required to report their
indebtedness on common data set, et cetera, the question is
always asked: What is the average indebtedness of your
undergraduate students?
The Chairman. Oh, I see.
Ms. Johnson. I have never been asked to report on the
average indebtedness of my graduate students.
The Chairman. Do you have that data?
Ms. Johnson. No.
The Chairman. How come?
Ms. Johnson. We've been trying to do a study on our campus,
because we did get a grant to study this. It's difficult,
because you have to sort out--many students come to you later,
after having done their undergraduate study. They've already
consolidated some of their loans, which are then in a big
balance, and trying to figure out what's graduate and what's
undergraduate is a difficult prospect. But, no, we've never
been asked to do that.
The Chairman. Are you telling me that we don't really
know----
Ms. Johnson. I don't know.
The Chairman [continuing]. the indebtedness of these Grad-
Plus loans? Is that a fact?
Ms. Cooper. Senator Harkin, what I can say to that is that
I don't know the indebtedness, but I do know that graduate
student borrowing has increased between 2008 and 2012, which
does suggest that we may want to take a closer look at Grad-
Plus loan policy.
The Chairman. But the Grad-Plus loans come through the
Department of Education Direct Loan program, right?
Ms. Cooper. That's correct.
Ms. Johnson. Yes.
The Chairman. We really don't have a handle on how much is
going out there and how much students are borrowing? I find
that very disturbing, because I have--some of it is anecdotal--
about $200,000 debts and things like that. Kids go to graduate
school, and they have these huge debts, and they may not get
jobs after that that really can cover that. Maybe they're going
into teaching, and they can't pay that back. Am I missing
something here?
Ms. Cooper. It would also be worthwhile to look at how much
of that is grad school debt versus how much of that is
undergraduate debt. Sometimes in the reported totals, we're not
able to disaggregate what belongs to the undergraduate level
versus what's at the graduate level. But, as I said before, it
has been for the Grad-Plus loan program that we have seen
increases in the number of borrowers in that program.
The Chairman. Just a moment. I wish Mr. Runcie or anyone
else was here from the Department of Education. I intend to ask
them and find out for this committee what kind of data they
have on these Grad-Plus loans, how much is outstanding, how
many are being defaulted on, and separate that out from the
regular Stafford loans. This is amazing.
The last thing I would say is I have a bill in, which is S.
546, the Smarter Borrowing Act, to strengthen loan counseling,
to create more requirements for schools. I have a lot of co-
sponsors on it. I would ask you to take a look at it and tell
me what needs to be done to it. What else do we need to do to
change it and modify it?
[The information referred to may be found in additional
material.]
The Chairman. One more question I have--Ms. Dill, you said
something that, again, startles me. You said under current
Federal regulations, schools are prohibited from requiring
additional loan counseling for students who appear to be over-
borrowing or who, by statistical indicators, appear most at
risk of defaulting. Is this so?
Ms. Dill. Yes, sir. Thank you, Mr. Harkin. Absolutely. The
Federal regulations require entrance counseling as a
prerequisite to disbursement, the initial disbursement.
The Chairman. Yes.
Ms. Dill. But after that, institutions are not allowed to
require additional counseling for disbursement. We can offer
it, but we're not allowed to require it. And without the
ability to require it, there's no teeth in it.
The Chairman. Does anybody have any--I saw you nodding your
head.
Ms. Johnson. I would agree with her assessment. There was
one school, I believe, in Florida that was attempting to do
this, and then the department told them to cease, because it
was not written in the statute. So they didn't have a legal----
The Chairman. Is there a reason for this? Is there any kind
of logical reason that schools are prohibited from doing this?
Anybody?
[No verbal response.]
Again, I think that's definitely something we have to look
at. I was not aware of that.
Thank you very much, Ms. Dill. I'm sorry.
Senator Alexander.
Senator Alexander. I appreciate Senator Harkin's line of
inquiry. I was handed this information from an article this
year from Inside Higher Education that said the median overall
indebtedness for a borrower who earned a graduate degree
increased in inflation adjusted dollars from $40,000 in 2004 to
$57,000 in 2012.
Ms. Dill, you said that the average indebtedness--Lee is a
university with--you don't have graduate programs, right?
Ms. Dill. We do have graduate programs.
Senator Alexander. You do have, but most of your students
are undergraduates.
Ms. Dill. That's correct, sir.
Senator Alexander. And your average indebtedness is
$29,000?
Ms. Dill. That reported data element is, as Ms. Johnson
referred to, the undergraduate.
Senator Alexander. That's undergraduate.
Ms. Dill. Yes.
Senator Alexander. Ms. Johnson, yours is $30,000 for
undergraduates.
Ms. Johnson. Correct.
Senator Alexander. Is that because that's about the maximum
a student can borrow in an undergraduate 4 years or 5 years?
What I'm trying to get to--are students simply--because the
interest rate is 3.86 percent today, are they borrowing all
they can, all they're allowed to? Is that not right? Why are
your numbers about the same?
Ms. Dill. That is an interesting question. The aggregate
loan limit for a dependent undergrad student is $31,000. The
aggregate limit for an independent student is $57,000.
Senator Alexander. So they could borrow more.
Ms. Johnson. Correct.
Senator Alexander. Is it your judgment that if you were
allowed to--if students were required with each disbursement to
have some sort of financial counseling, that that would be good
for the student? Or would that just be another Federal
regulation that causes college administrators to do a lot of
unnecessary work?
Ms. Dill. What I am advocating is that it would be allowed
that we could require the additional counseling.
Senator Alexander. But not required.
Ms. Dill. But not required, because you do have the
statistical indicators of the students that are most probably
capable and will repay, and you don't want to create an
unnecessary administrative burden. But I am asking and
advocating for the authority.
Senator Alexander. Ms. Johnson.
Ms. Johnson. What we have done at our institution is that
prior to disbursement, we require a student to at least say,
``Yes, I still want this disbursement'' or ``No, I don't.'' And
there is a link to a repayment, which says, ``Oh, by the way,
if you take this disbursement, here's how much it's going to
cost you now.''
Senator Alexander. You just slide around it.
Ms. Johnson. Yes.
Senator Alexander. But you do do it with private loans.
Ms. Johnson. Yes, we do.
Senator Alexander. You'd like to have it as a tool. Is that
correct?
Ms. Johnson. Correct. I would agree. I would not make it
mandatory, but allow it to--or permit it.
Senator Alexander. And that would require changing a
department regulation. Is that correct?
Ms. Johnson. Correct, yes.
Ms. Dill. Yes.
Senator Alexander. The only other thing--I'd like to end up
where I started out. I can't remember anyone who said to me
it's easy to pay for college, and for me, it wasn't so easy--
scholarships and jobs and all that. But I think it's important,
as we have this discussion, to remember that according to the
New York Federal Reserve at the end of 2012, 40 percent of
borrowers had loans of less than $10,000 or less, 70 percent
had loans of less than $25,000, and less than 4 percent had
Federal student loan debt above $100,000, and the college board
said the college degree is worth a million dollars over your
lifetime.
While all these problems we've raised, we need to address,
I don't want to exaggerate them so much that students are
afraid--that students miss the point that if you want to go to
community college, it's free, basically, on average, as far as
tuition and fees are concerned, and it's a few thousand dollars
at a public university, as far as tuition and fees are
concerned, and that loans are available, and the opportunity is
there.
My hope is that because of this, we can simplify the
application form and simplify the various options people have
for loan repayment--and we'll probably have a debate about
expanding those opportunities--and as a result, many more
students will find it easier to go to college and easier to
find out in advance, as you've suggested, what their loan and
grant will add up to before they apply to Iowa State or to Lee
or somewhere else, and that they'll have an easier way to find
out what their loan repayments are. So I thank the chairman for
such an excellent hearing and appreciate being involved.
The Chairman. Thank you very much.
Senator Warren. We have time. I know the vote has been
called, but we've got time.
Senator Warren. Thank you, Mr. Chairman. I appreciate you
holding this hearing. It's very important, and thank you all
for coming.
The Chairman. This has been great. We had really good
testimony here today. I, again, would ask all of you to please
look at that bill I mentioned and tell me what we need to do to
modify or change it, that type of thing. I would really
appreciate that.
I want to thank all of our witnesses for sharing their
expertise today and all my colleagues. I request the record
remain open until April 10th for members to submit statements
and additional questions for the record.
Ms. Johnson, I can't let this moment pass without thanking
you for wearing the red and gold of the Cyclones, and I'll take
advantage of the fact that Mr. Murphy is not here to say
tomorrow night, ``Go, Cyclones.''
[Laughter.]
Senator Alexander. Just a minute here.
[Laughter.]
At 7:15, Tennessee plays Michigan.
The Chairman. Oh, tonight? I thought it was tomorrow night.
Well, we're about the same----
Senator Alexander. We'll all be cheering.
The Chairman. Right.
Thank you very much.
[Additional material follows.]
Additional Comments from Marion M. Dill
Chairman Harkin, Ranking Member Alexander, and members of the
committee: Thank you for the opportunity to submit followup comments
regarding practical strategies to improve the student loan process.
First, I would like to commend the work of the Senate HELP Committee on
their efforts with student loan reform. The hearing held on March 27
regarding Strengthening the Federal Student Loan Program for Borrowers
was the first time I have ever testified before a Senate Committee. I
left with the impression that Senators from both parties are seeking to
gain a greater understanding of the grassroots effects of the current
legislation and to find ways to improve the process for students.
Student success is the priority! I appreciate your determination to
gain greater understanding and insights and for taking the time to
listen. As I stated in my testimony, there are a number of enhancements
I believe could contribute to the advancement and improvement for
student borrowers.
My followup comments and recommendations will be divided into
specific topics for ease of readability. Some of the recommendations
are framed from the perspective of questions that I believe should be
answered. Finding the answers to the questions should lead to greater
insight and understanding for improving student access, student success
and the integrity of the Federal Direct Loan Program.
Response to Senator Harkin's Request Regarding S. 546--Smarter
Borrowing Act
Enhancing loan entrance counseling is important and beneficial to
the borrower. This would both improve the integrity of the program and
hopefully reduce the national cohort default rate.
Recommendation 1: Provide clear authority to schools to require
additional counseling as a contingency for disbursement. It seems the
proposed bill stops short of providing this authority. Schools are held
accountable for the cohort default rates, but are not given the
authority and tools to either limit borrowing or to require additional
counseling. The Office of Postsecondary Education provided additional
guidance in GEN-11-07. Pam Moran is the Senior Policy Analyst with the
main focus of FFELP and Direct Lending Programs and could provide
additional insight to this regulation.
During the Tennessee Association of Student Financial Aid
Administrators (TASFAA) conference held this week, the Federal Trainer
reminded the aid community that we are prohibited from adding
additional eligibility requirements. Institutions are not allowed to
require additional restrictions. Since there is nothing in the statute
to allow for additional counseling, schools are prohibited from
requiring any additional (beyond the entrance) counseling as a
requirement for disbursement.
Statutory Citation
Sec. 685.304 Counseling borrowers
(a) Entrance counseling. (1) Except as provided in paragraph (a)(8)
of this section, a school must ensure that entrance counseling is
conducted with each Direct Subsidized Loan or Direct Unsubsidized Loan
student borrower prior to making the first disbursement of the proceeds
of a loan to a student borrower unless the student borrower has
received a prior Direct Subsidized Loan, Direct Unsubsidized Loan,
Subsidized or Unsubsidized Federal Stafford Loan, or Federal SLS Loan.
Recommendation 2: Tie any mandated additional counseling to a set
cohort default rate rather than the national average. This is
consistent with current regulation. The national average is a moving
target and could quickly become confusing in the administration of the
regulation. Precedence has already been set regarding the use of a set
threshold of 15 percent.
Statutory Citation and Guidance
34 CFR 682.604
34 CFR 685.303
Cohort Default Rate Guide--Benefits for schools with low official
cohort default rates--Page 2.4--2
A school with a cohort default rate of less than 15.0 percent for
each of the three most recent fiscal years for which data are
available, including eligible home institutions and foreign
institutions.
Response to Senator Alexander's Request--Regarding Simplification
of the Application Process
Recommendation 1: Implement the use of income data from the second
prior year, commonly referred to as prior-prior year as the basis for
the EFC calculations across the board. Listed below are some expected
benefits and off-sets:
Should increase the use of the IRS data retrieval, thus
making the process easier for students and parents.
Should allow earlier application processing (as early as
fall of the senior year).
Earlier notification should assist families in making
better informed decisions earlier in the admissions application
process.
Should decrease the amount of verification which should
reduce administrative burden.
As per NASFAA research--A Tale of Two Income Years: the
use of prior-prior year income should not drastically change the
eligibility for dependent students. For a view of the full report go
to: http://www.nasfaa.org/ppy-report.aspx.
Realistically will increase the number of professional
judgment requests due to 2 years for possible change to income. This
would increase the administrative burden; however that should be off-
set by the reduced number of verifications.
Recommendation 2: As recommended in NASFAA's Preliminary
Reauthorization Task Force Report, research the feasibility of
utilizing the 1040 as the application for Federal student aid. For a
view the full report go to: http://www.nasfaa.org/reauth/.
Determining the best repayment plan for the borrower (Standard vs.
IBR Repayment Plans)
Recommendation 1: I recommend the following questions be answered.
Are the servicers reaching out to the borrowers that indicated
something other than the standard repayment plan during the exit
interview provided on studentloans.gov? If not, I hope you will ask why
not!
Currently the exit interview provided on Studentloans.gov explains
the various repayment options. It provides a detailed overview of how
much will be repaid over the life of the loan using each repayment
option and asks the borrower which repayment option they would like to
use.
According to Wood Mason, Program and Management Analyst for the
U.S. Department of Education, this information is being forwarded to
the Federal servicers. How is it being used? Is it being used at all?
Additional research is needed here. Are the servicers using this
information to assign repayment plans? Thus the questions, are the
servicers reaching out to the borrowers that indicated something other
than the standard repayment plan? If not, I hope you will ask why not!
Below is a screenshot from the www.studentloans.gov exit
counseling.
Recommendation 2: I recommend the following question be answered.
Who is helping delinquent student borrowers with exploring deferment,
forbearance, and repayment options? Another possibility would be to
require servicers to communicate the various repayments options to any
borrower that is beyond 60 days delinquent. If servicers were
systematically required to explore repayment options with delinquent
borrowers, then more students might utilize the various options to
avoid default and continue to make on-time monthly payments. Thus,
helping the student and improving the integrity of the program.
Response to Senator Alexander's Request--Why is the undergraduate
per borrower indebtedness for Iowa State University, a public
institution, and Lee University, a private institution, almost the
same--approximately $29,000?
This might speak to affordability of some private institutions that
have similar cost structures to State institutions. There are schools
that are providing excellent educational opportunities at an affordable
cost and with self-initiated accountability. Lee University has worked
extremely hard to keep our cost low in order to allow the greatest
access to students from all socio-economic backgrounds. In 2014-15
Lee's tuition & fees for all full-time undergraduate students is
$14,280 and Iowa State Out-of-State tuition & fees for a full-time
undergraduate student is $20,617. According to The College Board, as
seen in the following chart, public 4-year institutions have incurred a
greater average annual increase during the last two decades.
Currently, Lee's cost is similar and sometimes less than the amount
charged for out-of-State tuition at many State institutions. There are
institutions that do a great job in providing a quality education at an
affordable rate. It is my hope that legislators will consider the
integrity of these institutions when developing legislation regarding
accountability. Indeed, there are bad apples out there and Congress
needs to address those cases of abuse. Abuse can be addressed without
making blanket regulations that create unnecessary administrative
burden for all institutions.
The Tennessee Independent Colleges and Universities Associations
(TICUA), published the following: TICUA Fact--April 9, 2014.
Another contributing factor might be the institution's lack of
authority to reduce loan amounts for specific populations, academic
programs, credential levels, or other broad categories.
As per GEN-11-07, institutions only have authority to reduce the
loan amounts on a case-by-case basis Section 479A(c) of the Higher
Education Act, as amended (HEA), and the Direct Loan Program
regulations at 34 CFR 685.301(a)(8). This creates a considerable
administrative burden and many schools do not have sufficient staffing
to accomplish such a burdensome task, therefore resulting in awarding
maximum annual amounts.
GEN-11-07 goes on to state,
``Schools do not have the authority to limit Direct Loan
borrowing by students or parents on an across-the-board or
categorical basis. For example, schools may not limit all
student and parent Direct Loan borrowing to the amounts needed
to cover only institutional costs, if the borrowers would
otherwise be eligible to receive additional loan funds.''
Statutory Citation
Loan Limits
HEA Sec. 428(b)(1)
[20 U.S.C. 1078(b)(1)]
Professional Judgment
HEA Sec. 479A(c)
[20 U.S.C. 1087tt(c)]
Recommendation: Allow institutions to set lower loan limits for
specific populations, academic programs, credential levels or other
categories established by the school. Some examples might include:
students enrolled in associate degree programs borrowing
more than 50 percent of the aggregate limit.
part-time students borrowing full-time loan amounts.
Response to Accountability of Institutions--Any legislation must
consider the populations being served by the institution rather than
just looking at a base scorecard
Considerations--How can Congress help schools who are doing the
right thing by making college affordable and by enrolling low-income
students? Accountability must consider the schools that are doing the
noble thing of helping all students attain a higher education degree
rather than just those that are most academically and financially
prepared for college. Lee University is an institution of excellence,
doing the right thing by keeping cost low and allowing students who are
less academically prepared to attend. Doing the noble thing does not
help the institutions' statistical indicators on the current score
card. Nonetheless serving a broader base of students is still the right
thing and creates accessibility. Critical data elements that must be
considered are:
i. Admissions requirements
ii. Percentage of Pell Eligible students
Congress should mandate the creation of a single web portal where
institutions and students can go and easily access information about
Federal, private and institutional loans.
The lack of a single web portal has significant impact on students
today. Loans are missed during the consolidation process. Students
think they are making satisfactory payments, to later learn that one
loan was omitted and is now in default. The capability is presently
available through the ``Meteor Network'' managed and operated by the
National Student Clearinghouse (NSC).
According to Eugene G. Cattie, managing director, Financial Aid
Services National Student Clearinghouse, this can be remedied without
legislation or anything more than a letter of approval from the
Department of Education/Federal Student Aid (DOE/FSA). The Meteor
Network is a free portal access to borrowers of their loans in real
time. NSC has owned the rights to this system for 3 years and has
upgraded and enhanced its capabilities to include the Federal Direct
Loan Program (FDLP). Although this free system is able to access the
Federal Family Education Loan Program (FFELP) and a majority of the
private loans through the TIVAs, it has been prevented access to the
FDLP loans by the DOE/FSA. Mr. Cattie reports that, NSC has repeatedly
made the request for the last 3 years. All questions related to
security, privacy and administration of Meteor have been addressed
through several meetings with DOE/FSA yet they have not responded to
NSC's request.
It is interesting to note, that a simple letter authorizing NSC to
access the FDLP loans would allow immediate access to students and
schools to utilize this system in real time review. Mr. Cattie further
indicates this system was offered to DOE/FSA for free to use. Why is
this beneficial resource which would be provided at no cost to the
national budget, being withheld from student borrowers?
default management
The primary responsibility of default management should shift to
the Federal servicers or the former guarantee agencies. Even for
schools with low cohort default rates, there is a disproportionate
workload associated with default management. For example: at Lee the
2010 3-year cohort default rate is 12.9. Even so, we could easily
increase staff hours associated with DL by 50 percent to effectively
implement a default management plan. Let me clarify--if it takes 40
hours per week to manage the DL portfolio for 100 percent of borrowers
at Lee, it would take an additional 20 hours per week to implement the
default management plan for less than 15 percent of those borrowers.
The labor is disproportionate to the volume of students.
It is true that Lee's current cohort default rate is below the 14.7
percent national average. This ``low'' rate might cause some to ask,
``Why should we be concerned?'' Even these ``low'' rates translate to
significant amounts at the national level. Our goal should be
successful repayment for every borrower. This is important to the
student, the institution and the Federal program. The at-risk borrowers
even at schools with low cohort default rates need reasonable access to
the income-sensitive repayment options.
Create a U.S. Department of Education Hotline for Loan Borrowers.
Consider tapping into the $66 billion of yearly profits created
from the DL program and provide a resource for students to have ALL
their Federal loan questions and options answered by highly trained
staff (similar to the hotline already provided for the application
process at 1-800-4FED-AID) This is a ``middle ground'' for shifting the
primary responsibility for Default Management back to the servicers and
guarantors.
In a recent survey to NASFAA members (Katy Hopkins, NASFAA
Communications Staff, 3/6/2014), 34.19 percent of the aid professionals
reported the biggest challenge to be ``understanding Loan Repayment
Options and conveying the `right' message to students.''
In short, colleges across the country are struggling to have
working call centers and ``high touch'' services by highly trained
staff. In the absence of this, community colleges in particular may be
required to ``outsource'' these types of services for borrowers in
school or who become delinquent in order to avoid the consequences of
rising Cohort Default Rates.
Let's work together to wisely utilize some of the $66 billion of
yearly profits generated from Direct Loans to serve students better,
provide meaningful services and to improve the integrity of the
program.
Hold the Direct Loan Servicers to the same standardized Due
Diligence standards as the former FFELP lenders.
Listed below is the Common Manual which prescribes the FFELP
collection due diligence requirements in Chapter 12.4.A (it's a huge
document and takes a few minutes to upload). The Common Manual is the
FFELP ``bible'' that translates regulation into procedure and is used
uniformly by all guarantee agencies. http://www.commonmanual.org/doc/
ECMarchive/ECM2013.pdf. Why aren't Direct Loan Servicers held to the
same standard? Why doesn't legislation provide the same protection to
borrowers under DL? Examples of requirements:
Make at least four diligent efforts (each consisting of
one successful contact or at least two attempts) to contact the
borrower by telephone.
Statutory Citation: Sec. 682.411(d)(1); Sec. 682, Appendix D,
Q&A #1; DCL 96-L-186/96-G-287, Q&A #53
Send the borrower at least four written notices or
collection letters informing the borrower of the delinquency and urging
the borrower to make payments. The required notices or collection
letters sent during this period must include, at a minimum, information
regarding deferment, forbearance, income-sensitive repayment, income-
based repayment, loan consolidation, and other available options to
avoid default.
Statutory Citation: Sec. 682.411(d)(1) and (2)
The lender must engage in collection efforts that ensure
that no gap in collection activity of greater than 45 days occurs
through the 270th day of delinquency. These efforts must urge the
borrower to make the required payments on the loan. At a minimum, these
efforts must provide the borrower with options to avoid default and
advise the borrower of the consequences of defaulting on a loan.
Statutory Citation: Sec. 682.411(e); DCL FP-04-08]
In summary, I hope that my statement and testimony provides insight
to the current functioning of the Federal student loan program and some
possible enhancements that would benefit students and improve the
integrity of the program.
Thank you for your time.
References
Common Manual Guarantors (2013) Common Manual: Unified Student Loan
Policy 2013 Annual Update. Retrieved from http://
www.commonmanual.org/doc/ECMarchive/ECM2013.pdf.
Federal Student Aid An Office of the U.S. Department of Education
(2013) Cohort Default Rate Guide--Operations Performance Division.
Washington, DC: FSA. Retrieved from http://www.ifap.ed.gov/
DefaultManagement/guide/attachments/CDRMasterFile.pdf.
NASFAA (2013) Article Prior-Prior Year Study Shows Stability in
Financial Aid Packages for Low-Income Students. Washington, DC:
NASFAA. Retrieved from http://www.nasfaa.org/media/releases/
NASFAA_Report_Simple_Change_in
_Tax_Year_Data_Collected_Would_Streamline_Aid_Process_For_Needy
_Students.aspx.
NASFAA (2013) Report A Tale of Two Income Years: Comparing Prior-Prior
Year and Prior-Year Through Pell Grant Awards. Washington, DC:
NASFAA. Retrieved from http://www.nasfaa.org/ppy-report.aspx.
NASFAA (2014) Article And The Biggest Financial Aid Challenge Is . . .
Washington, DC: NASFAA. Retrieved from http://www.nasfaa.org/Main/
orig/2014/
And_The_Biggest_Financial_Aid_Challenge_Is%e2%80%a6.aspx.
Office of Postsecondary Education (2011) Dear Colleague Letter: GEN-11-
07 Guidance on Participation in the William D. Ford Federal Direct
Loan (Direct Loan) Program. Washington, DC: OPE. Retrieved from
http://ifap.ed.gov/dpcletters/GEN1107.html.
The College Board (2014) Article Average Rates of Growth of Published
Charges by Decade. New York, NY: College Board. Retrieved from
http://trends.collegeboard
.org/college-pricing/figures-tables/average-rates-growth-tuition-
and-fees-over-time.
Responses by James W. Runcie to Questions of Senator Hagan
and Senator Warren
senator hagan
Question 1. 1. How is someone who was just called to serve our
country supposed to determine if consolidating their loans for the
Public Service Loan Forgiveness program is a better bet than taking the
6 percent interest rate cap? Or if deferring payment on their student
loans would be better than opting into an income based repayment
program? Can you tell me what steps the Department of Education is
taking to make it easier for servicemembers to understand their
benefits?
Answer 1. The Department is committed to ensuring that our
servicemembers fully understand and have access to all of the student
loan-related benefits for which they are eligible. We have taken a
number of steps to ensure that clear, comprehensive guidance on these
benefits is broadly available. Last year, the Department worked with
our contracted servicers on a servicemembers' brochure that provides
explanations of all benefits. The brochure is available on all servicer
sites, as well as on our main Web site here: https://studentaid.ed.gov/
sites/default/files/military-student-loan-benefits.pdf.
In addition, the Department worked with our Federal student loan
servicers to develop servicemember-focused Web sites, interactive voice
response (IVR) functionality, and robust scripts and processes to
identify military personnel during counseling /conversations/servicer
contact. Our servicers provide tailored guidance to borrowers
identified as servicemembers on many topics, including:
Public Service Loan Forgiveness (PSLF) benefits;
Steps and processes to apply for benefits under the
Servicemembers Civil Relief Act (SCRA);
The advantages and disadvantages of various repayment
options, including income-driven plans, deferment or forbearance.
Finally, we now require our Federal loan servicers to check the
names of all their borrowers against the Department of Defense's
Defense Manpower Data Center (DMDC) database to identify borrowers who
qualify for the SCRA interest rate limitation, and then apply the limit
to a borrower's eligible loans if the borrower would benefit from the
change without requiring a specific request from the borrower and
without additional paperwork from the borrower.
Question 2. Given that the Nation's largest loan servicer--Sallie
Mae--is facing an enforcement action due to its violating the rights of
servicemembers. Can you describe for me steps the Department can take
to hold Sallie Mae and other loan services accountable going forward?
Answer 2. The Department is committed to providing a high quality
customer experience to our borrowers. We investigate all allegations of
wrongdoing, and appropriately resolve any issues. If we determine that
any of the Department's loan servicers have violated any laws,
regulations, policies, or other contractual terms and conditions, the
Department will assess the findings and determine the most appropriate
course of action. Remedies could include monetary relief, termination
of the contract in whole or in part, or other appropriate corrective
actions.
As you are aware, on May 13, 2014 the Department of Justice and
Sallie Mae (now Navient) agreed to a consent order to address Sallie
Mae's compliance with the SCRA on the private and Federal student loans
it owns or services. Building on our work with the Department of
Justice, the Department has initiated its own review of all of our loan
servicers, starting with Sallie Mae, to determine their compliance with
all provisions of the SCRA for our federally serviced loans, and
determine if further actions should be taken.
Question 3. What is the Department doing, in both the FFEL program
and the Direct Loan program, to ensure compliance for servicemembers?
Answer 3. Federal Student Aid (FSA) is reviewing all of its
servicers? operations and procedures on providing servicemembers their
benefits under SCRA. Our internal review of the servicing of the Direct
Loan program will inform how and when we review Federal Family
Education Loan (FFEL) lenders and servicers.
In addition, we now require our Federal loan servicers to check the
names of all their borrowers against the DMDC data base to identify
borrowers who qualify for the SCRA interest rate limitation, and then
apply the limit to a borrower's eligible loans if the borrower would
benefit from the change without requiring a specific request from the
borrower and without additional paperwork from the borrower. Prior to
this recent process change, a borrower seeking benefits under SCRA was
required to make a written request and provide a copy of their military
orders reflecting active duty status.
We will issue guidance to the FFEL community through a Dear
Colleague letter on how to implement the SCRA and access the Department
of Defense's data base soon.
senator warren
The Federal Reserve Bank of New York reports that more than 30
percent of borrowers whose loans are in repayment are 90 days or more
delinquent on their debts. This is an alarming number. The Department
of Education does not seem to make similar data public.
What measures do you believe the Department of Education, Congress,
and the public should focus on to judge how well student borrowers are
faring in the Federal loan program? Do you think delinquency rates are
an important measure? Please explain what student loan data the
Department of Education makes public, and why.
In February, I sent a letter to Sallie Mae requesting more detail
regarding its recent claims about its success at keeping borrowers out
of default. I requested this information because I think it is
important to understand which default aversion programs borrowers are
using--Whether it's a deferment, forbearance, income-based plan, or
something else. As you know, not all strategies to reduce defaults put
students on a path to successful repayment, and some may even add to a
borrower's debt load.
In my letter, I asked for data on all of Sallie Mae's Federal
loans, including both federally guaranteed and Direct Loans. Sallie Mae
responded to my letter by citing only three pieces of data, all related
to its Direct Loan portfolio only; its default rate, its forbearance
rate, and its income-based repayment rate. In explaining their limited
response to my request, Sallie Mae argued that the company is
restricted from releasing certain information under its contract as a
Federal student loan servicer. The information they did provide,
however, is presumably covered by those same restrictions, suggesting
that the Department of Education is willing to release data, at least
in certain instances.
Please provide the following information about Sallie Mae's
performance relating to servicing Federal loans, distinguishing Sallie
Mae's servicing performance on its portfolio of privately held FFEL
loans, Federal Direct Loans, and federally owned FFEL loans. Please
also provide relevant data for each of the servicers under the Direct
Loan program.
1. The share of borrowers who successfully moved directly from a
deferment or forbearance into an income-based repayment plan in the
last year.
For the number of borrowers who moved from a deferment or
forbearance into an income-based repayment plan, the Department
considered loans in an Income-Based Repayment (IBR) plan up to
September 4, 2014. The logic used to determine if a loan was
successfully transitioned to an IBR schedule looked for an IBR plan
start date before or within 10 days of the deferment or forbearance end
date. The denominator used to calculate the percentages consists of
loans that exited a deferment or forbearance in the last year. Please
note that some borrowers may have successfully transitioned into other
repayment plans.
2. The portion of borrowers not currently in school who have used
multiple forbearances or deferments (excluding in-school deferments).
For borrowers who have used multiple forbearances or deferments,
the data include only borrowers who were not in an ``in-school'' or
``grace'' status as of the date of the query.
3. The portion of loans that became delinquent in the last fiscal
year, the percentage (by dollar value and number of borrowers) that are
currently in various statuses.
Responses for all servicers are based on Direct Loans. The
responses related to the Not-for-Profit Servicers are provided on a
separate page. For comparison purposes, it is important to note that
there are significant differences in the way borrowers were allocated
to TIVAS versus the NFPs. In general, the NFPs received accounts that
had been in active repayment for several years. The TIVAS have received
loans in all statuses. In addition the TIVAS have been receiving new
borrowers entering repayment for the first time since 2010. The NFPs
have not received first-time repayment borrowers. Also, ``income-driven
repayment plan'' includes borrowers in Income-Based Repayment, Pay As
You Earn, and other income-driven repayment options.
4. Of loans that became delinquent in the last fiscal year, the
percentage (by dollar value and number of borrowers) that are currently
in various statuses.
For the portion of loans that have become delinquent in the last
fiscal year, the data include all loans greater than 30 and fewer than
361 days delinquent. The data reflect the servicer at the time the loan
became delinquent. The denominator used to calculate the percentages
consists of loans that became delinquent at any point during the fiscal
year. Also, ``income-driven repayment plan'' includes borrowers in
Income-Based Repayment, Pay As You Earn, and other income-driven
repayment options.
5. The number of defaulted loans assigned to Pioneer Credit
Recovery that were originally serviced by Sallie Mae, as well as the
amount paid in commissions for these loans.
Included is the requested data for defaulted loans assigned from
Sallie Mae's Federal portfolio to all private collection agencies
(PCAs) under contract with the Department of Education. These
assignments are made based on a methodology determined by each agency's
performance as determined by metrics specified in the PCA contracts.
Department loan servicers have no role or influence in determining
which PCAs receive defaulted loans from their portfolio.
[Whereupon, at 12:02 p.m., the hearing was adjourned.]
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