[Senate Hearing 113-445]
[From the U.S. Government Publishing Office]
S. Hrg. 113-445
STUDENT LOAN SERVICING: THE BORROWER'S EXPERIENCE
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HEARING
before the
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
ON
EXPLORING BORROWERS' INTERACTIONS WITH STUDENT LOAN SERVICERS BEFORE
AND DURING REPAYMENT AND WHETHER AND HOW THE ACTIONS OF STUDENT LOAN
SERVICERS MAY AFFECT BORROWERS' ABILITY TO MAKE TIMELY PAYMENTS
__________
JUNE 4, 2014
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon MARK KIRK, Illinois
KAY HAGAN, North Carolina JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
Charles Yi, Staff Director
Gregg Richard, Republican Staff Director
Dawn Ratliff, Chief Clerk
Taylor Reed, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Financial Institutions and Consumer Protection
SHERROD BROWN, Ohio, Chairman
PATRICK J. TOOMEY, Pennsylvania, Ranking Republican Member
JACK REED, Rhode Island RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York DAVID VITTER, Louisiana
ROBERT MENENDEZ, New Jersey MIKE JOHANNS, Nebraska
JON TESTER, Montana JERRY MORAN, Kansas
JEFF MERKLEY, Oregon DEAN HELLER, Nevada
KAY HAGAN, North Carolina BOB CORKER, Tennessee
ELIZABETH WARREN, Massachusetts
Graham Steele, Subcommittee Staff Director
(ii)
C O N T E N T S
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WEDNESDAY, JUNE 4, 2014
Page
Opening statement of Chairman Brown.............................. 1
WITNESSES
Nancy Hoover, Director of Financial Aid, Denison University...... 3
Prepared statement........................................... 22
William Hubbard, Vice President of External Affairs, Student
Veterans of America............................................ 5
Prepared statement........................................... 24
Robert Geremia, Social Studies Teacher, Wilson High School, on
behalf of the American Federation of Teachers (AFT) and
Washington Teachers' Union (WTU)............................... 7
Prepared statement........................................... 28
Lindsey M. Burke, Will Skillman Fellow in Education Policy, The
Heritage Foundation............................................ 8
Prepared statement........................................... 30
Additional Material Supplied for the Record
Prepared statement of the Consumer Bankers Association........... 34
Prepared statement of the Education Finance Council.............. 43
(iii)
STUDENT LOAN SERVICING: THE BORROWER'S EXPERIENCE
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WEDNESDAY, JUNE 4, 2014
U.S. Senate, Subcommittee on Financial Institutions
and Consumer Protection,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 10:03 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Sherrod Brown, Chairman of the
Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Senator Brown. The Subcommittee will come to order. Thank
you all for joining us. Ms. Hoover, the Ohioan on the panel,
thank you for coming back and being of assistance to us in a
number of ways.
About a decade ago, we began to see the warning signs of
problems in the housing market. A few years later, we watched
the combination of Wall Street greed and inattentive regulators
helping to destroy our economy. We are still picking up the
pieces.
This crisis and the topic of today's hearing, student loan
servicing, are very much interconnected. Over the course of the
last few years, we have seen that far too many homeowners
become victims of improper foreclosures when their mortgage
servicer could have assisted them to enroll in a loan
modification program but chose not to. And here we are again.
Outstanding student debt is $1.2 trillion--more than credit
card debt, more than auto loans. Student debt is second only to
mortgage debt, as we all so painfully have heard. Roughly 7
million borrowers are in default on a student loan. When these
borrowers lose, our economy loses.
In May 2013, the Consumer Financial Protection Bureau
released a report describing the impact of heavy student loan
burdens. A growing group of business leaders and regulators
have joined the CFPB to describe how student loans can
interrupt the slowly recovering economy.
Excessive student debt can defer or destroy the dreams of
prospective first-time homebuyers, small business formation and
entrepreneurship, and limit the options of young graduates who
might work as teachers or doctors in underserved areas.
Defaults will have long-term impacts on our economic
recovery. It is critical that we ensure that student loan
servicers do their jobs properly to protect individual
borrowers and our economy as a whole.
Last year, I wrote a letter to some of the largest banks
and student loan companies asking about their efforts to modify
loans for borrowers in trouble and measuring their success in
enrolling borrowers in affordable income-based plans. The
numbers were dismal. No bank has enrolled more than 5 percent
of borrowers who were in trouble. I am concerned that student
loan servicers care more about maximizing profits than giving
proper customer service.
Among the questions to consider: Is the complex and opaque
repayment system set up to make borrowers fail? Are servicers
ensuring that borrowers fully understand their full range of
repayment options, including those most advantageous to
borrowers experiencing financial hardship? Many of the loan
repayment options are better suited for contract lawyers than
recent graduates. If we do not give graduates the tools to
succeed, we cannot expect them to have a fair shot at building
a successful livelihood.
How can borrowers understand the repayment options best
suited to their specific needs when written in legalese that
only lawyers are trained to understand? That is clearly
unrealistic at best.
In the Dodd-Frank Act, I proposed a student loan ombudsman
within the CFPB, and, again, a shout-out to Senator Warren for
her terrific work at the beginning and since on that Bureau.
That office has issued reports describing pervasive and
troubling practices: servicers allocating borrowers' payments
in order to maximize late fees, servicemembers facing
challenges activating their military benefits on their student
loans, and all borrowers facing obstacles enrolling in loan
modification programs.
Based on referrals from this office, the Department of
Justice and the FDIC found that the Nation's largest servicer
had broken a series of laws, including the Servicemembers Civil
Relief Act. It has been ordered to pay fines and compensation
of more than $90 million.
In February, another major player in the private student
loan market revealed that it too was under investigation by the
CFPB for its student loan servicing practices. CFPB reports
have recommended that Congress examine some of the reforms to
the credit card and mortgage servicing markets, such as ones
related to payment processing and servicing transfers, in order
to improve the student loan servicing market.
To help address some of these problems which harm borrowers
and our economy, I have sponsored a number of reforms such as
the Student Loan Borrower Bill of Rights, which would provide
protections and require workable, alternative repayment options
for private loan borrowers who are at risk of default. It would
require lenders to notify borrowers about income-based
repayment plans for Federal loans and would protect borrowers
from penalties due to errors on the part of the servicer.
We know that private student loans generally have
significantly higher interest rates, offer limited payment
options, and offer no relief for the many graduates who do not
make the amount of money that they expected, who have been laid
off, or who are even unable to find work. My Refinancing
Education Funding to Invest for the Future Act addresses this
problem by authorizing Treasury to make the private student
loan market more efficient. It would allow borrowers to
refinance their costly private loans into more affordable
loans, at no cost to taxpayers.
I look forward to our witnesses' views on student loan
servicing practices and the opportunities to ensure
accountability and quality customer service.
Senator Warren, do you want to make an opening statement
now?
Senator Warren. No.
Senator Brown. OK. Thank you.
Let me introduce the four witnesses. We have votes at 11
o'clock. We will go as much past 11 as we can, but we obviously
will--I ask people to stay within their time limits if they
can.
Nancy Hoover, Director of Financial Aid at Denison. Nancy
Hoover is the Director of the program in Granville, Ohio. She
is past Chair of the National Direct Student Loan Coalition, a
grassroots organization that works to improve the Federal
direct loan program. Thirty years working in financial offices,
Ms. Hoover has dedicated her career to helping students afford
secondary education.
William Hubbard, sitting next to Ms. Hoover, served as Vice
President of external affairs for Student Veterans of America,
has considerable experience advocating on behalf of veterans.
He joined the Marine Corps at 17, currently is a drilling
reservist out of Joint Base Anacostia-Bolling. Welcome, Mr.
Hubbard.
Mr. Robert Geremia is an educator at Woodrow Wilson Senior
High School. He teaches AP U.S. history and District of
Columbia history. My understanding is he has some students with
him here today. Thank you for that. He has served as a student
mentor, grade level leader, track coach, union building co-
representative, and co-faculty adviser for the Gay Straight
Alliance, a member of the American Federation of Teachers and
the Washington Teachers' Union.
Lindsey Burke is the Will Skillman Fellow in Education
Policy at the Heritage Foundation. She has done extensive
research around the Federal Government's role in education.
Welcome, Ms. Burke.
Ms. Hoover, if you would begin. Thank you.
STATEMENT OF NANCY HOOVER, DIRECTOR OF FINANCIAL AID, DENISON
UNIVERSITY
Ms. Hoover. Chairman Brown, Ranking Member Toomey, and
Members of the Subcommittee, thank you for inviting me to
testify today at the hearing regarding the borrower's
experience with student loans servicing.
My name is Nancy Hoover, and I am the Director of Financial
Aid at Denison University in Granville, Ohio. Denison
University is a selective independent, undergraduate liberal
arts college with an enrollment of approximately 2,200
students. I have been the Director of Financial Aid at Denison
since 1994 and administered the implementation of the Direct
Loan program in Year 2 of the program.
Denison's endowment allows us to award annually financial
aid from our university's funds to 97 percent of our student
body. An average of 47 percent of our graduates borrow Federal
loans and 4 percent borrow private loans. The cumulative
Federal indebtedness for Denison's Class of 2014 was a little
over $21,000.
The William D. Ford Federal Direct Loan program turns 20
years old this year. The direct loan delivery process for loan
funds to students has continued to be efficient, reliable, and
easy for schools to administer, even after the 100-percent
transition of all schools to the Direct Loan (DL) Program.
When the Direct Loan Program was first implemented, all of
the loans were serviced by a single contractor. All
correspondence to borrowers was identified as the William D.
Ford Federal Direct Loan Program, and the logo for the
Department of Education made the servicing contractor for these
loans invisible to the students. The Department had to expand
the number of servicers to accommodate the increased volume of
loan servicing required for the purchase of federally backed
loans in 2008 and the transition of all schools to the Federal
Direct Lending Program.
The Department issued new DL servicing contracts to
agencies who had experience servicing loans to students in the
FFEL program and allowed, but did not require, these new
servicers to co-brand all their correspondence with the
Department's logo. Since the servicer's logo appears larger
than the Department's logo, borrowers are confused as to why
they are receiving written or electronic correspondence from an
unknown agency. Servicers report a large percentage of unopened
emails from the borrowers because they believe the
correspondence is junk mail or spam. The inherent flaw with the
current multiple servicer environment is that borrowers do not
understand who is servicing their loans and are at a greater
risk of defaulting.
Currently there are 15 contractors servicing federally held
loans. The current Federal loan servicing environment needs to
be simplified by a mandate that contractors be invisible agents
of the Federal Government with identical processes and policies
and the number of contractors be limited. Congress made
progress in this area with the Bipartisan Budget Act of 2013
which eliminates the special treatment for nonprofit student
loan servicers.
When the Department of Education has the opportunity to
renew the servicer contracts, it should consult with all of the
stakeholders in student loan servicing and open the contract
bidding process to other entities in financial sectors outside
the previous FFEL environment.
Borrowers need their point of contact for all repayment
activities to be a single Web portal and one phone number for
account access. The Department of Education has made
significant progress toward creating a single portal for
students who borrow Federal loans with the creation of
StudentLoans.gov, an efficient and robust portal at which
students can execute every required process for their Federal
loans except to initiate the repayment process.
StudentLoans.gov can be expanded so students can begin the
repayment process of their Federal loans at this site instead
of going to a specific servicer's Web site.
Senator Brown, I would like to thank you and other Members
of the Committee for your support of Bank on Students Emergency
Loan Refinancing Act and the Student Loan Borrower Bill of
Rights. These bills assist borrowers with loans at multiple
servicers to refinance all of their loans to have a single
servicer. And it also requires servicers to notify delinquent
borrowers about income-based options.
However, with all of the good options of repayment from
which the borrower can choose, it is extremely confusing for
students to understand the intricacies of all the current
repayment options. I encourage Congress to reduce the current
number of loan repayment plans to two--standard and income-
based--from which students can choose. Repayments should be
collected through the payroll withholding.
Many borrowers are unaware that the servicer has changed
until they encounter a problem. According to the report by the
Consumer Financial Protection Bureau, many borrowers have filed
complaints to correct errors related to the servicing
contracts. Student loan servicers need to provide notice to
borrowers about a change in their service like the mortgage
servicers are required to do.
Thank you again, Chairman Brown, for the opportunity to
provide a financial aid administrator's perspective on student
loan servicing, and I am happy to respond to any questions you
or the Members of the Subcommittee might have.
Senator Brown. Thank you, Ms. Hoover.
Mr. Hubbard.
STATEMENT OF WILLIAM HUBBARD, VICE PRESIDENT OF EXTERNAL
AFFAIRS, STUDENT VETERANS OF AMERICA
Mr. Hubbard. Chairman Brown, Ranking Member Toomey, and
Members of the Subcommittee, thank you for inviting Student
Veterans of America to submit our testimony on ``Student Loan
Servicing: The Borrower's Experience.'' As the premier advocate
for student veterans in higher education, it is our privilege
to share this on-the-ground perspective with you today.
As veterans graduate across the country, we believe that
the student debt burden will ultimately be one of the largest
inhibiting factors to their long-term success. This in part
stems from the lack of access to information at individual and
institutional levels. Veterans consistently cite the following
challenges: difficulty obtaining accurate information about
loans, convoluted pathways to gathering information and
implementing programs, and unnecessary roadblocks put in place
by servicers.
Despite avid efforts to increase protections against
abusive practices, getting servicemembers and veterans the
right information about the protections at the right time
remains a challenge. Servicemembers and veterans have access to
protections under the Servicemembers Civil Relief Act--SCRA--
and access to many different student loan repayment options.
Unfortunately, this web of support does not function
cohesively, and programs often function independent of each
other.
We have seen that many servicemembers enter the military
with pre-service student loan debt. This existing debt is also
a major source of the overall debt owned by servicemembers and
veterans. Existing debt is particularly harmful to a
servicemember or veteran when servicers do not comply with
protections afforded by SCRA.
There is also a common misconception that veterans who go
to school on the GI bill have a ``free ticket,'' but we know
that this is simply not true. As an earned benefit, not only is
the GI bill not free, it may not always cover the cost of a
full education. This is especially true for those attending
private institutions or for those considered out-of-State
residents.
To prevent situations that may violate a servicemember's or
veteran's rights, we believe that institutions need to have
access to a full range of financial data. This data is
necessary for institutions to be able to effectively counsel
their students about their financial futures. Individuals
should also have access to this data to achieve the highest
level of consumer awareness.
Currently there is no widely used system that would allow
any individual with education debt to see all of their loans in
a centralized place. METEOR, run by the National Student
Clearinghouse, could be such a tool. The METEOR program has the
unique function of providing all private lender data. It would
simply require the approval from the Department of Education to
access direct loan data.
To date, this has yet to happen. While we might not know
the full effect of student debt for this generation of
veterans, we are beginning to see the first and second order
effects today. Servicemembers and veterans with student debt
are significantly less likely to build their own business, save
for a home, or save for their retirement.
The effect of these issues will impact the economy for
years to come and will continue to distort economic behavior if
not taken seriously.
In light of the issues we have identified, SVA has
recommended various solutions. Of the solutions we have
submitted to the record, we would like to highlight one in
particular: program coordination.
Many programs exist to support the repayment of student
loans, though very few of these programs have coordinated
inter-program relationships. A major opportunity exists if
current programs were coordinated and streamlined to function
seamlessly. Putting the pieces of this puzzle together would be
an important step forward.
The investment that America has made in the GI bill and its
veterans becomes an even clearer asset to our economy when
those veterans are empowered with the right tools. By reducing
the debt burden on servicemembers and veterans, we can set them
up for long-term success.
We thank the Chairman, Ranking Member, and the Subcommittee
Members for your time, attention, and devotion to the cause of
veterans in higher education. As always, we welcome your
feedback and questions, and we look forward to continuing our
work with this Subcommittee, the Senate
Committee on Banking, Housing, and Urban Affairs, and the
Congress to ensure the success of all generations of veterans
through higher education.
Thank you.
Senator Brown. Thank you, Mr. Hubbard.
Mr. Geremia.
STATEMENT OF ROBERT GEREMIA, SOCIAL STUDIES TEACHER, WILSON
HIGH SCHOOL, ON BEHALF OF THE AMERICAN FEDERATION OF TEACHERS
(AFT) AND WASHINGTON TEACHERS' UNION (WTU)
Mr. Geremia. Mr. Chairman and the distinguished Members of
this Committee, my name is Robert Geremia, and I am a social
studies teacher at Woodrow Wilson High School here in
Washington, D.C. I come to you as a member of the American
Federation of Teachers and the Washington Teachers' Union. I
want to thank Chairman Brown for the opportunity to testify on
my experiences with student debt and loan repayment. I hope
that sharing my experiences in the financial aid process makes
it easier for students and their families to pay for higher
education.
Growing up in Rhode Island in a family of teachers, I
always felt like I could make the world a better place by
helping kids. I graduated from Rhode Island College with a
bachelor's degree, having double-majored in secondary education
and history. While I was fortunate that my parents were able to
cover my college tuition, I still had to pay for books and
other expenses during my undergraduate years, so I started my
teaching career, like so many of my colleagues, with some
credit card debt.
At the urging of my professors, I sought to teach in an
urban area, and that is how I ended up here in Washington, D.C.
I have to admit I was not fully prepared for the high cost of
living in Washington, D.C., on a starting teacher's salary.
After several years of teaching, I knew I needed to further
develop my skills, but I did not want to take time off from
teaching, and I knew that going to school for my master's
degree at night would take my energy from my students and their
work. I was accepted into one of the most respected teaching
programs in the country, Teachers College at Columbia
University. I was able to earn a master's degree in Social
Studies Education over three consecutive summers, and the
program, I believe to this day, was the right professional
choice for me.
However, in order to attend this highly regarded program, I
had to take out several loans despite my full-time salary. On
top of tuition and fees, I had to account for two apartments as
I could not contractually sublet my apartment in D.C. In
addition, I had to pay for travel to New York, books, and the
other typical living expenses. I would like to point out that
while the focus of college affordability is often on tuition,
it was really those other expenses that drove up my borrowing.
After three summers, I graduated with my master's degree and
approximately $37,000 of debt. While I received some grant
money during my program and subsidized loans of over $25,000
for 3 years, I had to take an additional $11,000 in
unsubsidized loans.
As I am working to pay off these loans, I have been puzzled
by several issues.
First, my loans have switched providers twice, and it has
never been quite clear to me why the transfers were made. As a
matter of fact, an additional amount has been debited from my
checking account for my monthly payment when the loans were
transferred the last time.
Second, when I recently set up an online account for my
loans, I found that the information about my loan, including
payoff options and payoff dates, was available. That
information was never provided to me on my paper statements.
I am proud of my 12-year career here in the District of
Columbia as a Highly Effective Teacher--I earned that rating
last year--yet my financial life has been put on hold because
of the loans I have taken to stay in the classroom. My loans
have a current interest rate of over 6 percent, and I will pay
over $10,000 in interest on top of the principal. It is hard to
see how I can save to buy a home with some of this debt burden,
though I definitely could secure a mortgage at an interest rate
of about 4 percent. And I have a car loan currently that is at
a 1.9 percent interest rate. Yet there is nothing I can do to
lower my student loan interest rate. With more and more
students being forced to take on debt, I believe we must make
it easier for them by having access to grants and lower
interest rate loans.
I made a decision to get an advanced degree to be able to
further my career and benefit the students I am committed to
serving. After about 2 years of payment, I learned that I am
likely eligible for two programs that could lower my monthly
payments and shorten the life of my loan. I believe many
college students would be more likely to pursue teaching, and
many of my colleagues would be more likely to pursue advanced
degrees if these programs were streamlined and better
understood. I suggest Congress find a way to reach out
proactively to teachers about these options.
Because the process was so convoluted for me, I worry about
what will happen to my students, many of whom are graduating as
I testify today, and begin this whole process. Many will be the
first generation in their families to attend college. Others
have worked hard and have been admitted to the Nation's top
colleges and universities, but will be unable to attend because
of costs. I am afraid some of my students do not understand the
ways high interest rates and basic living expenses will
multiply their debt, and when they graduate, I do not want them
to be faced with the same lack of transparency and confusion. I
hope that Congress can find a way to ease the burden on
students and families and make attending college and continuing
education more affordable. I fear if we do not, a generation,
like myself and my peers, will be too saddled with debt to
invest in housing, businesses, or to make career choices based
on anything other than earning potential.
Thank you, Mr. Chairman, distinguished Member. I look
forward to responding to questions.
Senator Warren. [Presiding.] Thank you, Mr. Geremia.
Ms. Burke.
STATEMENT OF LINDSEY M. BURKE, WILL SKILLMAN FELLOW IN
EDUCATION POLICY, THE HERITAGE FOUNDATION
Ms. Burke. Thank you, Mr. Chairman, distinguished Members
of the Committee. My name is Lindsey Burke. I am the Will
Skillman Fellow in Education Policy at the Heritage Foundation.
The views I express in this testimony are my own and should not
be construed as representing any official position of the
Heritage Foundation.
For many, earning a college degree is the way to climb the
ladder of economic mobility. Higher educational attainment is
associated with greater earnings. Median earnings for
individuals whose highest degree was a high school diploma
totaled $30,000 in 2011, compared to $45,000 for those earning
a bachelor's degree. College graduates, on average, earn
$650,000 more over the course of a 40-year career. While a
college degree is not the only route to upward mobility, for
many, it represents the most promising path for achieving their
full earnings potential.
The value of earning a college degree is demonstrable. The
cost of earning that degree, however, has become prohibitively
expensive for many as college costs have risen. Average tuition
at 4-year public institutions for out-of-State students reached
$22,200 this academic year, and at private universities average
tuition is over $30,000 annually. Many students leave with a
bachelor's degree in hand, but burdened with tens of thousands
of dollars in student loan debt. Worse still, many students
leave college without graduating, burdened with debt and
lacking the paper credential they had hoped would put them on a
path toward middle-class stability or better.
Well-intentioned Federal policies have failed to drive down
college costs. An easy flow of Federal student aid has enabled
students to take out sizable student loans, with little if any
credit check or consideration of their future earnings
potential. Some have even argued that such policies have
enabled universities to raise tuition, creating a vicious
lending and spending cycle.
Federal higher education subsidies have increased
substantially over the past decade and now represent 71 percent
of all student aid.
According to the College Board, during the 2012-13 academic
year, 43 percent of all student aid was in the form of Federal
student loans. The College Board notes that, over the past 10
years, the number of students borrowing through Federal student
loans increased by 69 percent, from 5.9 million students during
2002 to over 10 million today.
Approximately 60 percent of students who earned a
bachelor's degree during the 2011-12 academic year left school
more than $26,000 in debt. And as the Chairman mentioned, total
cumulative student loan debt now exceeds $1 trillion, which is
more than credit card debt cumulatively.
Increases in debt have been driven by increases in college
costs. In the last 30 years, inflation-adjusted tuition and
fees at private colleges increased by 153 percent; tuition and
fees at public universities increased in real terms by 231
percent. That is an increase that is greater than increases in
the cost of health care.
Increases in tuition and fees over the past 30 years
suggest that growth in Federal subsidies such as loans and
grants has done little to mitigate the college cost problem.
In order to make college more affordable, Federal policy
should do three things: stop the higher education spending
spree; employ fair-value accounting to understand the true cost
of Federal student loans; and decouple Federal financing from
accreditation.
If history is any guide, continuing to increase Federal
subsidies will fail to drive down college costs.
In 2014, the $33 billion Pell Grant program provided grants
to 9 million college students, making it the largest share of
the Federal education budget. Congress grew the Pell Grant
program in 2007 by expanding eligibility and funding, resulting
in a doubling of the number of Pell recipients since 2008. In
order to control higher education spending, Pell Grant funding
should be targeted to the low-income students the grants were
originally intended to help.
In addition, as long as the Federal Government finances
Federal student loans, it should use fair-value accounting
practices to get an accurate measure of what those programs are
costing taxpayers, to ensure the loans use a nonsubsidizing
interest rate.
In a report released last month, CBO calculated that the
four largest student loan programs--Subsidized Stafford Loans,
Unsubsidized Stafford Loans, PLUS Loans, and Parent PLUS
Loans--will cost taxpayers money, not result in a net gain (a
negative subsidy) for the Federal Government as is often
claimed. While the report states that the four loan programs
will yield a savings of about $135 billion from 2015 to 2024,
CBO calculates in the same report that using fair-value
accounting measures, the four loans would actually have a net
cost of $88 billion over the next 10 years, not including
administrative costs. In other words, the four largest student
loan programs represent an $88 billion taxpayer-financed
subsidy.
CBO explains the utility of using fair-value accounting to
fully understand the cost of Federal lending, stating that,
``The Government is exposed to market risk when the economy is
weak because borrowers default on their debt obligations more
frequently and recoveries from borrowers are lower.'' Fair-
value estimates take this market risk into account and, as a
result, are a more accurate reflection of the cost of Federal
student loans.
Congress should not expand the Federal student loan program
without requiring that fair-value accounting be used to
calculate the cost of these loans. Any loan program should use
a nonsubsidizing interest rate, e.g., the rate at which the
program breaks even; absent fair-value accounting, it is
impossible to tell the extent to which the student loan program
is providing a subsidy to borrowers. Specifically, the
Department of Education should be required to use fair-value
accounting estimates calculated by CBO and adjust loan rates
accordingly going forward, on an annual basis. This would help
determine whether the programs are costing money for taxpayers
and where to set interest rates to ensure the programs break
even.
Finally, if Federal policymakers want to drive down college
costs and increase access to higher education for those
historically underserved by the traditional 4-year system, the
single most important reform that can be made is to decouple
Federal financing from accreditation.
Continuing to simply increase Federal subsidies for higher
education will fail to solve the college cost problem.
Moreover, such subsidies shift the responsibility of paying for
college from the student, who directly benefits from attending
college, to the taxpayer. Transferring the burden of student
loan financing from university graduates--who will earn
significantly more over the course of a lifetime than someone
with a high school diploma--to the three-quarters of taxpayers
who do not hold bachelor's degrees is inequitable.
In order to drive down college costs and increase access to
higher education opportunities, policymakers should stop the
Federal spending spree, employ fair-value accounting practices,
and ultimately, work to decouple Federal financing from
accreditation.
Thank you.
Senator Brown. [Presiding.] Thank you, Ms. Burke. And my
apologies both to Mr. Geremia and to Ms. Burke. I have never
left a Committee I have chaired, but there was a call I just
had to take, and I apologize. And I know of your story after
Columbia, and I appreciate that. And, Ms. Burke, sorry to you,
too, at the beginning of your remarks.
Ms. Hoover, I will start with you, and I appreciate your
comments. Your testimony and others' on the panel point out
obviously that the financial futures of students depend on
fair, responsible servicing practices, but students are not
able to choose who will service their student loan. They are
selected by lenders often paid by the number of loans they
service rather than the quality of that servicing. Talk about
that structure. I know from your testimony you do not consider
that the right structure. Explore with us the better way to do
this, sort of an analysis of that structure, the way it is now,
and the better way to do that, if you would explain your
thoughts that way.
Ms. Hoover. Thank you, Senator Brown. Currently the
servicer contractors, the volume of loans assigned to the
servicer is based on metrics. There are three metrics that are
based on satisfaction: school satisfaction, customer
satisfaction--borrower satisfaction, and some satisfaction from
FSA and some other Federal agencies. And the other two metrics
are the percentage of loan defaults and percentage of the
dollars in default. So those are metrics that for each of the
servicers that are measured to get their volume of loans.
The loans are assigned to these servicers. The student does
not know to whom the servicer--their loan has been serviced.
The Department of Education has done a good job of trying not
to have mixed borrowers. They are trying to have all the loans
for a student with one servicer. However, there are some
students who have loans that are still FFEL loans that were not
sold to the Department. So there still are cases where students
have more than one servicer.
What I am suggesting is that these servicers are
contractors. They can still service the Federal loans, but they
need to be invisible to the students, because when a student
calls, a student needs to understand it is a Federal loan they
are repaying, they go to StudentLoans.gov to do everything,
their master promissory note, they do their counseling, they
know everything about their loans there. They should just
continue the trajectory of being able to start the repayment of
their Federal loan. And when they go there, if they have an
inquiry, there is technology today that would transfer that
call to the contractors. The contractors can still be the
servicers. It just needs to be invisible to the students,
because students are getting emails from the various servicers,
and they do not understand who these agencies are. They think
it is spam mail or junk, and they are ignoring it. That is my
suggestion.
Senator Brown. Mr. Geremia, how could your experience going
after getting your degree for your master's at Columbia, how
could yours have been better and different based on that
structure and the way that you were treated and your
interaction with the servicer?
Mr. Geremia. I believe the best way would be a little bit
more information about how much interest I would pay over time.
I was not quite sure about the process, even though I went
through interviews, exit interviews. I was not sure what the
total debt would look like at the time, and so I wish I
actually had a conversation with someone of my servicers. I
think yesterday might have been the first time that I actually
might have had a telephone call, a conversation. So definitely
more in-person conversations or phone interviews, yes.
Senator Brown. Mr. Hubbard, you represent a group of people
that have had some significant legal issues, if you will. If a
servicer is found to repeatedly violate their Federal contracts
or Federal laws, should there be consequences? And what should
they be to the servicer?
Mr. Hubbard. Thank you for the question, Chairman. This is
a critical question. Right now there are many bad actors out
there, some of which are very obvious; others are more under
the table. The recent Sallie Mae case was a good example, a
clear signal to the industry that these kind of issues will not
be accepted, they will not be tolerated. Sixty million dollars
being paid out is a sign that if you are going to take
advantage of the system, you are going to abuse servicemembers
and their loans, then it will not be tolerated.
I think absolutely compliance is a critical step in that
process and ensuring that servicemembers are treated with the
protections that they are afforded under SCRA.
Senator Brown. OK. Ms. Hoover, the CFPB Student Loan
Ombudsman 2013 Annual Report said:
Student loan servicers might consider providing notices prior
to and following a change in servicer so the consumer can
monitor the transition to ensure there are no servicing
interruptions. Many consumers were unaware of the servicing
change until problems arose.
Talk about your views on borrowers' experiences with
servicers prior to and following transfer and the costs to
borrowers from servicers' lack of or poor communications.
Ms. Hoover. I will have to say that the experiences that I
have had with my students have been limited in this respect
because for the number of years my students have been in the
Direct Loan Program and already had one contractor, I have not
had students telling me of significant issues with their
servicing of their loans, and that is, again, because of my
student body. But I do believe that the complaints that have
been registered with the Consumer Bureau are true. And as we
monitor, as our students begin to be more into this multiple
servicer environment, I shall certainly be listening to it very
carefully. But so far I have not heard that from my actual
students as graduates.
Senator Brown. Anybody else want to comment on that? Yes,
Mr. Hubbard.
Mr. Hubbard. I think this brings up a very important point,
and that is just a level of opaqueness in the system. When you
are a student and you have different loans, you might not even
known where those loans are. You do not even see them. If you
go to log onto some dashboard to figure out what those loans
are, how much you even owe, that can be a challenge to figure
out sometimes. Having an aggregated view of this loan data
would be absolutely implement.
Senator Brown. Senator Warren.
Senator Warren. Thank you, Mr. Chairman. Thank you for
holding this hearing. You know, we should be doing everything
we can to help student loan borrowers repay their loans, and
part of that is improving loan servicing.
But if we want to make sure people can repay their student
loan debts, shouldn't we start by doing what we can to reduce
the size of their debt loads? Right now the Federal Government
is collecting loans at 6 percent, at 8 percent, at 9 percent,
at 10 percent, and even higher. So what I would like to do is I
would like to just ask a question about whether or not you
could talk about the impact on people if we refinanced their
student loans down to lower rates. And I thought, Mr. Geremia,
you might start that.
Mr. Geremia. Thank you, Senator, and thank you, Mr.
Chairman. It would be a wonderful opportunity to have the
ability and opportunity to refinance my student loan. As I move
into my 30s and would like to begin a family and buy a home, I
would like to be able to have that opportunity.
Senator Warren. And you talked about it, Mr. Geremia. You
said you have a home mortgage, did you say? At what interest
rate?
Mr. Geremia. I do not have a home mortgage.
Senator Warren. Oh, I am sorry. I thought you said--you had
a car loan?
Mr. Geremia. I have a car loan at 1.9 percent interest
rate.
Senator Warren. At 1.9 percent.
Mr. Geremia. And many car loans are offered at 0 percent.
Senator Warren. You also want to be careful about those.
[Laughter.]
Senator Warren. Read closely.
Mr. Geremia. Yes, yes. So it would make sense to me that
maybe there are more options available to refinance at perhaps
a lower rate.
Senator Warren. Thank you.
Mr. Geremia. Thank you.
Senator Warren. Mr. Hubbard, could you speak just a little
bit about what the impact would be on people's lives if we
brought down the interest rate on student loans?
Mr. Hubbard. Absolutely. Thank you for the question,
Senator. This is huge problem right now. If you look at
individuals who go into the service with existing debt to begin
with and then they are in the service, they have deployments,
they have loss of protections. They are taken advantage of, and
they cannot even do anything about it. When you are in a combat
zone, are you really thinking about your student loans?
Probably not. That is a problem.
On the back end, as you are potentially going for your
education and you are, say, a reservist, you might not have the
GI bill, so you are taking out large loans.
You are taking out those loans with very little information
at your disposal, and you might have just been coming off
active duty where it was very difficult to have access to
anyone who even know anything about getting that right
information. So that makes it very complicated.
You are not able to buy a house when you come out of your
education. You are not able to invest in your retirement. That
impact is when the GI bill--the investment of the GI bill is
completely lost when you are mired in student debt. When you
see what an individual can do without student debt, when they
take advantage of the GI bill, it is impressive. It really is
impressive. You have got 25- to 30-year-olds buying houses for
the first time. They are very young. They are investing in the
future. And the impact of this is on the larger economy.
But I would actually like to point out something that is
not often looked at, and that is the issue of security.
National security is a big problem with existing debt for
veterans and servicemembers. If a servicemember loses a
clearance as a result of their high credit, their high student
debts, that is a direct impact to the national security of the
United States. So that is something that I think is worth
looking at.
One thing that is an issue that would be great, refinance
would be terrific for servicemembers. Unfortunately, the
protections offered by SCRA are lost when a student--a veteran
goes to refinance their loans, and that is something that has
not been addressed.
Senator Warren. I think that is a very powerful point, and
I appreciate it, because what we are talking about here is
how--the impact of student loan debt on individuals and also,
as you rightly point out, the impact on the larger economy. We
have got studies now showing that it is causing people not to
be able to buy homes. They are not able to start small
businesses. They are not able to start their economic futures
and build something strong. This is why more than 30 Senators
have introduced the Bank on Students Emergency Loan Refinancing
bill. We want to lower interest rates so that more people have
a fair shot at getting started in life.
I want to pick up on the point you made, though, Mr.
Hubbard. You know, in March, the Consumer Financial Protection
Bureau put out a report analyzing complaints from veterans
about financial products, and the report suggests that private
student loan debt collectors may be making misleading or
intimidating statements to coerce veterans into paying their
debts, including threatening to contact a servicemember's chain
of command or repercussions under the Military Code of Justice
for failure to pay. And in March, the GAO released a report
raising issues regarding the oversight of contractors who
collect on Federal student loan debt.
Mr. Hubbard, are you concerned that the Federal student
loan debt collectors are also using military servicemembers'
service to pressure them to repay?
Mr. Hubbard. It is a great question, Senator. I am not only
concerned; I am absolutely outraged. This is something that is
unacceptable. The Sallie Mae case was a clear signal that this
is not something that will be accepted in our society. When an
individual goes into service, that is not an opportunity for a
servicer to take advantage and abuse those servicemembers
because they do not have the right information. If you have an
individual who does not have access to clear information and
then somebody calls them offering what they believe is
information, taking advantage of them, that is just--that is
simply unacceptable.
Senator Warren. Well, thank you very much. I remain deeply
concerned that that debt collectors for the Federal student
loan program are breaking the rules and misleading borrowers.
If a borrower fails to pay a loan, the Federal Government
should be able to collect. But contractors must be following
the law and should not take advantage of people. I think this
is an issue that deserves very serious attention.
Senator Brown. Thank you, Senator Warren.
Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman, and
I thank you and Senator Warren for your extraordinary
leadership on this issue, which is critical to not just
individual progress but to our economy overall.
I want to recognize everybody, particularly Robert Geremia.
You are from Rhode Island, aren't you, Bob?
Mr. Geremia. Yes, sir, originally.
Senator Reed. Where in Rhode Island? Excuse us, ladies and
gentlemen.
[Laughter.]
Mr. Geremia. Yes, South Kingstown, Rhode Island.
Senator Reed. Are you related to Kenny Geremia?
Mr. Geremia. No.
Senator Reed. OK. Only in Rhode Island can you have this
conversation. I played peewee football with Ken Geremia from
Cranston, Rhode Island. He is your uncle, he is your cousin,
correct?
Mr. Geremia. Yes, a distant cousin, sir.
[Laughter.]
Senator Reed. See, I knew it.
Senator Brown. Whether he is or not.
Senator Reed. No, no. He is.
You, after graduating from Rhode Island College, which is a
great school, went on to Columbia and are teaching at Wilson
High School now in Washington. But I have a question. Federal
law requires that the individual borrower be informed of his or
her rights for repayment options before they enter the program
and as they graduate. Do you think you got effective advice,
information, or counseling so that you understood the full
range of repayment options, public service loan forgiveness?
Can you comment?
Mr. Geremia. Thank you, Senator. Yes, I did receive
counseling. I do not believe, especially with my graduate
loans, that was particularly effective. It involved sort of an
exercise going through the motions, clicking on boxes. There
really is not that ``Do you have a question?'' kind of--that
one-on-one interaction.
At Rhode Island College during my undergraduate years, I
felt like I had that opportunity. Things were a little bit more
clear, spelled out. Of course, there were your parents. Our
parents were helping out.
As we advance in our careers and our lives and sort of
looking to fine-tune teaching skills, yes, I read through it.
It was not clear; it was not effective, especially for someone
like myself who is trying to pay rent, trying to teach 100
students, grade their essays, finish a master's thesis.
Senator Reed. You know, Rhode Island College, I was there
for the graduation. The tuition is still roughly $8,000 a year,
and, in fact, we have a Federal limit on what you can borrow at
the undergraduate level. There is no limit in graduate school.
So the counseling for graduate school has to be more focused,
more intense, and more effective, because there you are really
talking about big sums of money. There is no limit on that. But
I appreciate that very much.
Mr. Hubbard, thank you for your service, thank you for your
testimony. Under the Servicemembers Civil Relief Act, there are
lots of--they used to call it the Soldiers and Sailors Civil
Relief Act, but it is now the Servicemembers. There are many
rights that servicemembers have, but they have to be aware of
those rights. How did the Department of Defense do about
informing servicemembers, particularly those who are about to
leave the service, about their rights as veterans or their
rights as servicemembers?
Mr. Hubbard. Well, there are a couple of pieces to that
puzzle, and I think this is a great question, so thank you for
that, Senator.
The Department of Defense is certainly responsible to some
degree for making sure that their people are taken care of. On
the other end of things, if a servicer is giving them false
information, simply lying to them, who is to say that the chain
of command--you know, some captain--is an expert on education
loans. They are probably not. There are definitely individuals
within the Department of Defense that are, but can they reach
every single individual? I doubt it.
Unfortunately, servicers are reaching every single
individual, and they are giving them false information. For
that member of the military to be able to reach out and find
their own information with, say, through an aggregated
dashboard or something similar, that would hopefully allow them
to alert some red flags. Those red flags would bring that
person to go out and seek that information from that DOD
education expert, and then hopefully that would circumvent the
process of those servicers simply lying to those
servicemembers.
Senator Reed. Again, this is a rough historical analogy,
but in the old days, you used to be able to put places off
limits because they treated soldiers and sailors and marines
and airmen badly. And I think we have to--and would urge
Secretary Hagel to think about this. Maybe there has to be a
consistent effort of identifying servicers who are consistently
not just, you know, negligent but doing worse, and maybe that
is where, you know, that dashboard or at least in the company
or the battalion or the squadron you can have ``Do not go
there.'' So I think that is important.
Ms. Hoover, can I ask a question? It goes right back to the
services. We, I think, become sometimes over reliant on major
entities to do the servicing, and that has an inherent risk of
failure. Do you have any sort of advice about how we can
provide better services to students? Just a general question.
Ms. Hoover. How we can do better with the servicers?
Senator Reed. Right.
Ms. Hoover. Thank you, Senator. As I indicated in my
testimony, I still believe there needs to be one place of
contact for all borrowers and that the contractors be invisible
to the students. I think if the student--if the servicers were
mandated to be contractors with identical processes and
policies, a lot of this confusion could be eliminated. And that
is where I keep coming back to one place, keep it simple, and,
therefore, some of the--when the contracts are renewed for
servicing, maybe they could be offered to entities outside of
FFEL, because credit cards and mortgage servicers have some
excellent technology and do not have the default rates that we
have that are inherent today.
Senator Reed. Thank you very much.
Thank you very much, Mr. Chairman.
Senator Brown. Thank you, Senator Reed. And we will try to
do a second round, if we can, before the votes.
A question for all of you. Federal student loans are seen
as safer than private loans because they offer repayment
options, but we often hear that Federal loans lack
comprehensive and consistent servicing standards. So I would
like each of you, just a yes-or-no question on this: Do
regulators, the CFPB and the Department of Education, do
regulators need to establish standards so that borrowers have
more protections? Ms. Hoover?
Ms. Hoover. Yes.
Senator Brown. Mr. Hubbard?
Mr. Hubbard. Yes.
Senator Brown. Mr. Geremia?
Mr. Geremia. Yes.
Senator Brown. Ms. Burke?
Ms. Burke. No.
Senator Brown. All right. Thank you.
Let me talk for a moment about credit ratings. Student loan
borrowers are typically young--not always but typically young--
typically limited credit history. They enter this marketplace.
If the servicer does not serve them quite right, they end up--
if the servicer makes mistakes, report loans that are in a
payment plan, is delayed, borrowers can be penalized for
irresponsibly managing their debt, if you will. Mr. Geremia,
how do servicers affect credit cards--credit scores, excuse me.
How do servicers affect credit scores and inability to access
credit later in their lives?
Mr. Geremia. Well, I would imagine that if there were
issues repaying, there was a default payment, that would affect
credit scores down the line and, therefore, would inhibit
ability to make home purchases, car purchase even, even apply
for jobs or Government jobs. Thank you.
Senator Brown. Mr. Hubbard, you talked about a soldier in
combat. You talked about veterans, soldiers, sailors, and air-
men and -women coming home and facing various kinds of student
loan problems and just how it is much more difficult to launch
their economic lives, as Senator Warren said. Talk to me about
what a credit score means to current and former military
personnel who may have to pass credit checks in order--in terms
of security clearance and getting their economic lives in order
both, if you would.
Mr. Hubbard. Thank you for the question, Senator. There are
two sides to this coin. There is the security issue, and there
is the economic issue.
On the security side, if an individual has a bad credit
score, they are not going to get a good clearance. They are not
going to get a clearance. That might be critical to their
future in the military or even their personal future on the
private side. Alternatively----
Senator Brown. Have you seen examples of that?
Mr. Hubbard. Yes, absolutely.
Senator Brown. OK.
Mr. Hubbard. And then, alternatively, the economic issue is
huge. The investment that America has made in servicemembers is
ultimately crippled when these individuals cannot invest in
themselves and then further on in the economy. When they cannot
buy a home, that money is lost. It is lost to servicers, and it
is taken out of the economy and not reinvested.
Senator Brown. And you see in terms of Government
investment, you see a soldier who, for whatever reason, now has
a lower credit score. Sometimes the reason is beyond her or his
control. You see that soldier eligible for a promotion,
eligible--perhaps the military is looking to provide, to give
them a security clearance for this new position, this new rank,
and they are denied because of the credit score, and the
Government investment then goes to waste in that sense.
Mr. Hubbard. It does. It goes to waste. And this comes to a
question of common sense. We have good individuals who are
strong soldiers, sailors, airmen, marines, they do well, but
they have a bad credit score, what it looks like is they are
not responsible. When if you take it back and look at the
context, a servicer might have taken advantage of this
individual, flat out lied to them, and allowed this person to
take out more loans than they were capable of or just
completely inflated the rate on them. They go deploy, they have
got $50,000 in loans; they come back, it is $75,000. That is a
big problem.
Senator Brown. And there is no real--for the soldier
looking to get security clearance for a new position, there is
no real appeal on this, I assume, to the military of, well, my
credit score is lower because of X, Y, and Z that I had nothing
to do with.
Mr. Hubbard. Well, there are appeals, but it does not take
away the doubt. And the doubt is something that, once seated,
is very difficult to scrub.
Senator Brown. Thank you, Mr. Hubbard.
Senator Warren.
Senator Warren. Thank you. So we have talked a lot today
about how Federal investigators have uncovered serious problems
with student loans, servicers, and collectors. Just recently
the GAO raised questions about Federal debt collectors that are
breaking the rules, and Federal regulators have cited Sallie
Mae for violating Federal laws by overcharging servicemembers
on their student loans.
Now, when loan servicers break the rules, they push
borrowers to do things that are good for the bottom line of the
servicer, but not good for the borrower. And ultimately if
students are not able to repay, then it is the taxpayers who
will pick up the bill here.
Part of the problem, as you have pointed out, is the rules
are complex, and it makes it hard for borrowers to know what
they should expect from their servicers.
But I want to ask the question from a little different
angle, and that is, when a borrower thinks that something is
wrong, thinks that maybe they have not been told the truth or
that someone has broken the law, where do they turn? Where do
they go now? Ms. Hoover, how about if I start with you?
Ms. Hoover. Most of the time, the students now are going
back to their financial aid office because they are so confused
about where else to go. But the tragedy is that sometimes
students do not do anything.
Senator Warren. Well, fair enough.
Ms. Hoover. But in a small school like mine, we do due
diligence, and we continue corresponding with our students who
are delinquent so they do come back to us. But, again, I am a
small school, and that is not realistic for large schools.
Senator Warren. And the further people get out of school, I
am sure the less likely it is they are going back to their own
financial aid offices to be able to get any help. So basically
what you are telling me is they do not have much of any place
to turn, or at least do not know much of any place to turn.
Ms. Hoover. Until we had the Consumer Bureau Protection
Agency, but, again, the students are not aware of that, and it
is, again, just the lack of not understanding of where to go.
Senator Warren. Mr. Hubbard, how about for vets?
Mr. Hubbard. Well, I would like to point out one scenario,
if I can, Senator. There was a servicemember cited by the CFPB
after they solicited comment on this very particular topic, and
this individual went to lower--under SCRA, went to lower their
loans to 6 percent. The servicer looked at their loans.
Everything that was below 6 percent was raised. That 6 percent
did not get lowered. This individual made a call and in the end
had all of their loans raised as a result. That is a prime
example of what happens.
This particular issue was found out by the CFPB, which is
the primary route for individuals to make that complaint. Since
the Consumer Bureau has come out and been soliciting this
information, these stories have come out in droves. And stories
like that, they make me sick.
Senator Warren. Yes, as they very well should. You know,
borrowers should not bear the responsibility for keeping
servicers in line. Federal contracts should include
accountability and oversight protections that require servicers
to perform to a high standard. But at the very least, if
borrowers have questions or they believe they have been
mistreated, it should be clear where they can turn for some
kind of relief.
I want to ask about one other issue, if I can, and that is,
you may know that Sallie Mae has been touting its status as the
Federal student loan servicer with the lowest default rates.
And in February, I wrote a letter to Sallie Mae asking for data
about the company's default prevention strategies. I asked for
these data because not all strategies to reduce defaults are
going to provide a path to successful repayment, and some may
even leave borrowers deeper in debt.
Now, Sallie Mae responded to my letter, but cited only a
few limited pieces of information about its direct loan
portfolio. It did not provide the data needed to evaluate their
default prevention program. And as a result, I have asked the
Department of Education to provide default prevention data for
Sallie Mae and other Federal loan servicers. So far, no answer.
So I want to try this from another direction. Mr. Hubbard,
do you believe that borrowers are getting sound advice from
servicers like Sallie Mae about what to do when they get behind
on their payments?
Mr. Hubbard. Thank you for the question, Senator. Off the
bat, the single metric of the lowest default rate is pure
nonsense. Just because you have a low default rate does not
mean that individuals are not mired in high amounts of debt. If
I make a low payment every day for the rest of my life, I will
not default, but I will be paying forever. I will never get a
house. I will never have the money to start a family. I will
never have the money to start a business. I will never be able
to put back into the economy what the American economy has
given to me. That is a huge problem.
In addition to that, just because an individual goes out of
their way to find out information does not mean on the back end
it is not being treated properly. We found issue after issue
with Sallie Mae in particular with tons of complaints coming
into the CFPB. They were the number one complaint servicer of
any servicer by a long shot. Just because they have a low
default rate, well, congratulations, but you still have a ton
of debt for student veterans who are dealing with that debt,
and it is impacting them in their daily lives.
Senator Warren. Well put, Mr. Hubbard. You know, about a
quarter of Sallie Mae's loan portfolio is in deferment or
forbearance. And these borrowers are trying to get their heads
above water by deferring their payments, but as you point out,
the interest continues to accumulate. This is going to add to
their debt burden and ultimately may drown them. We need real
data to tell us which strategies work as a life preserver and
which work as an anchor for borrowers. Also, better data can
help drive stronger accountability for Sallie Mae and other
loan providers.
I hope we continue to push for that.
Mr. Chairman, thank you, and thank you all for being here
today and sharing your stories. Thank you.
Senator Brown. Thank you, Senator Warren. And to the
witnesses, thank you all for joining us. There is a vote call.
Ms. Hoover, thank you, Mr. Hubbard, Mr. Geremia, and Ms. Burke,
thank you for your testimony.
There may be written questions from Members who were here
or not here and please answer them within a week, if you can.
Thank you.
[Whereupon, at 11:03 a.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREPARED STATEMENT OF NANCY HOOVER
Director of Financial Aid, Denison University
June 4, 2014
Chairman Brown, Ranking Member Toomey, and Members of the
Subcommittee, thank you for inviting me to testify today at this
hearing regarding the borrower's experience with student loan
servicing.
My name is Nancy Hoover and I am the Director of Financial Aid at
Denison University in Granville, Ohio. Denison University is a
selective independent, residential, undergraduate liberal arts college
with an enrollment of approximately 2200 students. I have been the
Director of Financial Aid at Denison since 1994 and administered the
implementation of the Direct Loan program in Year 2 of the program. I
have served as a National Chair of the National Direct Student Loan
Coalition, a grass roots organization comprised of schools dedicated to
the continuous improvement and strengthening the Federal loan programs
for our students.
Denison's endowment allows us to award annually financial aid from
Denison University funds to 97 percent of our student body. The
generous financial aid that Denison awards to our students results in
an average of 47 percent of our graduates borrowing Federal loans and 4
percent borrowing private loans during their 4 years of attendance. The
cumulative Federal indebtedness for Denison's Class of 2014 is $21,470.
The William D. Ford Federal Direct Loan program turns 20-years old
this year. The first direct loan was disbursed on July 1, 1994. The
delivery of loan funds to students, known as the loan origination
process, is done via an electronic exchanges of key eligibility
information between the schools' systems and the Department of
Education's Common Origination and Disbursement (COD) System. The
Direct Loan delivery process for loan funds to students has been
efficient, reliable, and easy for schools to administer. The Department
of Education is to be commended for ensuring the superior quality of
the loan delivery process was not compromised as it transitioned all
schools to the DL program.
When the Direct Loan program was first implemented, all loans were
serviced by a single contractor and any correspondence to borrowers was
identified as the William D. Ford Federal Direct Loan Program and the
logo for the Department of Education made the servicing contractor for
these Federal loans invisible to the students. The Department of
Education had to expand the number of servicers to accommodate the
increased volume of loan servicing required for the federally backed
student loans purchased in 2008 and the 100 percent transition of all
schools to the Federal Direct Lending program. The Department issued
new DL servicing contracts to agencies who had experience servicing
loans to students in the FFEL program and allowed, but did not require,
these new servicers to co-brand all their correspondence with the
Department's logo. Since the Servicer's logo appears larger than the
Department's logo, borrowers are confused as to why they are receiving
written or electronic correspondence from an unknown agency. Servicers
report that they experience a large percentage of unopened mails from
borrowers because they believe the correspondence is junk mail or spam.
When borrowers ignore the correspondence from the servicers of their
Federal loans they will ultimately default on their loans. The inherent
flaw with the current multiple servicer environment is that borrowers
do not understand who is servicing their loans.
Currently there are 15 contractors servicing federally held loans.
These servicers are provided a broad latitude in determining the best
way to service their assigned loans to yield high performing portfolios
and high levels of customer service. The current Federal loan servicing
environment needs to be simplified by a mandate of contractor anonymity
and limiting their numbers. Congress made progress in this area with
the Bipartisan Budget Act of 2013 which eliminates the special
treatment for nonprofit student loan servicers. A limited number of
contractors can provide healthy competition while too many contractors
can increase complexity and administrative cost.
The Federal contractors who service the loans need to be invisible
agents of the Federal Government with identical processes and policies.
When the Department of Education has the opportunity to renew the
servicer contracts, it should rethink how contracts are awarded. It
should consult with all of the stakeholders in student loan servicing
to find best practices to eliminate the confusion and frustration that
exists today for borrowers. The Department should open the contract
bidding process to other entities in financial sectors outside the
previous FFEL environment such as credit card or mortgage servicers.
Borrowers in repayment need their point of contact for all
repayment activities to be a single Web portal and one phone number for
account access which utilizes available technology to route the
borrower to the contractor. The Department of Education has made
significant progress toward creating a single portal for students who
borrow Federal loans with the creation of StudentLoans.gov, a very
efficient and robust portal at which students can:
sign their Master Promissory Note
complete their Entrance and Exit loan counseling,
complete the Financial Literacy counseling at any time in
the college career to monitor their loan indebtedness and
calculate the monthly payments based on the type of repayment
option selected
complete the entire process for the Direct Consolidation
Loan based on data pulled from the National Student Loan Data
System (NSLDS); this includes signing the promissory note and
selecting the repayment plan
complete the process to request an income based repayment
of Federal loans through Income-Based (IBR), Pay as You Earn,
or Income-Contingent (ICR) repayment plans
StudentLoans.gov can be expanded to allow students to begin the
repayment process of their Federal loans that are listed in the
National Student Loan Database (NSLDS) at this site without going to a
servicer's Web site to begin their repayment process. Students are
repaying their Federal loans to the Department of Treasury, not the
agency that is servicing their loans. Borrowers in repayment can make
inquiries at StudentLoans.gov and can be transferred to the appropriate
servicing contractor who would remain invisible to the borrower. This
approach can reduce the cost of Federal servicing since only one
borrower ``front end'' servicing operation has to be created and
maintained.
Senator Brown, I would like to thank you and other Members of the
Committee for being a cosponsor for the following two Senate bills that
are focusing on student loan debt and the repayment of these loans: S.
2292--Bank on Students Emergency Loan Refinancing Act Students in
repayment of Federal loans that were originated when interest rates
were higher, would certainly benefit from having the ability to
refinance these loans to rates that are being offered to new Federal
loan borrowers established by the Bipartisan Student Loan Certainty Act
of 2013. ``In addition, about 6 million borrowers have one Direct Loan
and at least one FFEL loan, which requires them to submit two separate
monthly payments, a complexity that puts them at greater risk of
default.''\1\ The ability to refinance these loans could be another
opportunity for students, who still have multiple loan servicers, to
consolidate their loans for a lower payment and a single servicer and
to reduce the risk of defaulting on their loans.
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\1\ The White House, Office of the Press Secretary (2011). FACT
SHEET: ``Help Americans Manage Student Loan Debt'' Retrieved from
http://www.whitehouse.gov/the-press-office/2011/10/25/fact-sheet-help-
americans-manage-student-loan-debt.
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The current Federal student loan caps often force students to pay
college costs with private loans that have none of the benefits and
protections provided in the Federal student loan program. The provision
in S. 2292 to allow borrowers with private loans an option to refinance
into the Federal program would provide these students access to the
better terms and conditions for their loans and the advantage of having
one servicer for all of their educational loans.
S. 1803--Student Loan Borrower Bill of Rights
The additional disclosures to student borrowers that are being
proposed in this bill for servicers of private loans are needed to help
borrowers from defaulting on these loans and adversely impacting their
credit rating for a long time. I concur with the provision in the bill
that requires servicers to notify borrowers who are delinquent in
repayments with information about income-based repayment options.
However, with all of the good options of repayment from which a
borrower can choose, it is extremely confusing for students to
understand the intricacies of Income-Based Repayment, Pay as You Earn,
Income Contingent, and Income Sensitive plans in addition to the
Standard, Extended, and Graduated plans.
To streamline student loan repayment, reduce confusion for the
students, and eliminate defaults, I encourage Congress to reduce the
current number of loan repayment plans to two options--standard and
income based. The loan repayments in the income-based plan would be
based on Adjusted Gross Income with the payment not to exceed a small
percentage of the borrower's income and would be collected through
payroll withholding to the IRS and passed through to the Department of
Education. The concept of this income-based repayment option is based
on the student loan repayment model in the United Kingdom which sees
almost no default from borrowers who continue to live in the U.K. after
college.
The bill also addresses problems related to servicing transfers for
borrowers. Many borrowers were unaware that their servicer had changed
until they encountered a problem. According to a report by the Consumer
Financial Protection Bureau, many borrowers have filed complaints to
correct errors related to servicing transfers.\2\ Student loan
servicers need to provide notice to borrowers about a change in the
servicer like mortgage servicers are required to do.
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\2\ Consumer Financial Protection Bureau, ``Annual Report of the
CFPB Student Loan Ombudsman'', p. 14, October 16, 2013.
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In conclusion, I want to reiterate that the Federal Direct Student
Loan program works extremely well and provides all students with a
reliable and efficient source of loan funds. Any program that has
existed for 20 years can always have areas that can be enhanced to
provide excellent service for borrowers, schools and taxpayers.
Thank you again Chairman Brown for the opportunity to provide a
financial aid administrator's perspective on some areas of student loan
servicing that could be enhanced to eliminate the confusion and
complexity that current borrowers in repayment are experiencing and to
decrease significantly the number of defaulted loans in this country.
I look forward to any of the changes you will enact to improve the
program for years to come and I am happy to respond to any questions
you or the Members of the Subcommittee might have.
______
PREPARED STATEMENT OF WILLIAM HUBBARD
Vice President of External Affairs, Student Veterans of America
June 4, 2014
Chairman Brown, Ranking Member Toomey and Members of the
Subcommittee:
Thank you for inviting Student Veterans of America (SVA) to submit
our testimony on ``Student Loan Servicing: The Borrower's Experience.''
As the premier advocate for student veterans in higher education, it is
our privilege to share our on-the-ground perspective with you today.
In 2008, veterans in colleges and universities across the Nation
came together to form SVA. Using a network of peer-to-peer
relationships and determined to achieve beyond expectations, these
veterans relied on their military training and skills to succeed in
higher education--sometimes while simultaneously serving in our
military.
SVA's top priorities include improving access to higher education
and scaling effective services that empower veterans to graduate on
time, with little-to-no student debt, well-prepared for fulfilling
futures. We look forward to this important conversation and hope to
share the perspective of veterans in higher education with this
Subcommittee.
Current Issues
The First Step: Greater Access to Information
As veterans graduate across the country, we believe that their
student debt burden will be one of the largest inhibiting factors to
their long-term success. This issue is partly the result of the lack of
access to information at individual and institutional levels. Veterans
consistently cite the following challenges: difficulty obtaining
accurate information about loans, convoluted pathways to gathering
information or implementing programs, and unnecessary roadblocks put in
place by servicers. These three issues manifest in various ways as
servicemembers and veterans seek to pay off their education debt.
Ensuring that servicemembers and veterans are able to base their
borrowing decisions on sound information is of the utmost importance to
SVA. In the Consumer Financial Protection Bureau's (CFPB) mid-year
report released this April, comments were collected from more than
1,300 individuals with student debt. Of the top 5 complaints
representing 93 percent of the responses, all were related to
misinformation. These include: communication tactics, continued
attempts to collect debt not owed, disclosure verification of debt,
false statements or representation, and improper contact or sharing of
information.\1\
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\1\ Consumer Finance Protection Bureau, 2014, ``Mid-year update on
student loan complaints'', http://files.consumerfinance.gov/f/
201404_cfpb_midyear-report_private-student-loans-2014.pdf, pg. 6.
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Despite avid efforts to increase protections against abusive
practices, getting servicemembers and veterans the right information
about those protections at the right time remains a challenge.
Servicemembers and veterans have access to protections under the
Servicemember Civil Relief Act (SCRA) and access to many different
student loan repayment options. Unfortunately, this web of support does
not function cohesively and programs often function independent of each
other.
The Unspoken Burden of Existing Debt
Of particular concern, we have seen that many servicemembers enter
the military with pre-service student loan debt. This existing debt is
also a major source of the overall debt owned by servicemembers and
veterans. Though some still believe that only officers are college-
educated, the simple fact is that today's professional military is the
most highly educated all-volunteer force that this country has ever
seen. Existing debt is particularly harmful to a servicemember or
veteran when servicers do not comply with protections afforded by the
SCRA.
As the loan servicing system stands now, there are many other
scenarios that present additional obstacles for servicemembers and
veterans. For example, a servicemember who took out student loans to
attend school prior to enlisting has many repayment options available.
However, when they call their loan servicer to discuss such options,
the typical response is that the servicemember can defer payments until
they return from deployment. While that might sound helpful, the
servicemember probably wasn't informed that they will continue to
accrue interest. The sparkling deal they were just ``sold'' results in
their $50k loan becoming a $75k burden. In effect, this deferral is
akin to purchasing a car without knowing the true cost.
Additional Factors for Borrowers
There is a common misconception that veterans who go to school on
the GI Bill have a ``free ticket'', but we know that this is simply not
true. As an earned benefit, not only is the GI Bill not free, it may
not always cover the full cost of an education. This is especially true
for those attending private institutions or considered out of state
residents. Furthermore, as quintessential nontraditional students, take
longer to complete their degree. In such scenarios, veterans likely
take on additional loans to complete their programs or risk stopping
short of graduation.
Student loans are a reality for both servicemembers and veterans.
Former Secretary of Defense Leon Panetta noted that 41 percent of
servicemembers were dealing with education loan debt and that in some
cases, this was leading to loss of security clearances.\2\
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\2\ Stars and Stripes, 2012, ``New partnership aims to protect
troops against student loan problems'', http://www.stripes.com/news/
new-partnership-aims-to-protect-troops-against-student-loan-problems-
1.193550.
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Last year, the Assistant Director & Student Loan Ombudsman for CFPB
testified before this Committee on several examples of misconduct by
loan servicers. He cited cases where servicemembers were expected to
jump through excessive or impossible hoops to invoke their protections.
In one case, a servicemember called their loan servicer to try to claim
the 6 percent interest rate cap under the SCRA, but instead of lowering
the high interest rate loans to 6 percent, the loan servicer raised the
low interest loans on all their other loans.\3\
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\3\ Chopra, Rohit, 2013, ``Testimony of Rohit Chopra Before the
Senate Committee on Banking, Housing, and Urban Affairs'', http://
www.consumerfinance.gov/newsroom/the-cfpb-before-the-senate-committee-
on-banking-housing-and-urban-affairs/.
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In other cases, servicemembers will seek to consolidate and/or
refinance their student loans, only to find that they then lose the
protections under the SCRA. At the root of this issue, servicemembers
do not have access to clear and actionable information about their
student loans from their loan servicers.\4\
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\4\ Bloomberg BusinessWeek, 2012, ``Military Student-Loan Borrowers
to Get More U.S. Advice'', http://www.businessweek.com/news/2012-10-18/
military-student-loan-borrowers-to-get-more-u-dot-s-dot-advice.
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Additionally, National Guard and Reservists do not always receive
the same GI Bill ratings as their active duty counterparts, which can
lead to high amounts of borrowing. The most recent Department of
Defense (DoD) demographic reports show that well over one-third of our
military servicemembers serve in the Guard or Reserve.\5\ Of these
components, it is very clear that the GI Bill does not cover all
education expenses.
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\5\ Approximately 848,000 of 1.39 million members of the armed
forces in 2012 were cited as reservists; Department of Defense, 2012,
Demographics Profile of the Military Community, http://
www.militaryonesource.mil/12038/MOS/Reports/
2012_Demographics_Report.pdf, pg. vi.
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While many veterans may not have a clear understanding of how their
education benefits will impact their overall cost of attendance, others
face abusive and misleading practices across sectors of education which
results in undue and unnecessary debt burdens.
We remain concerned that some technical and career colleges claim
that their programs will lead to credentials and certifications, when
in reality these promises are hollow. Due to a lack of proper
accreditation, some students in these schools realize that they wasted
years of valuable benefits and have nothing to show for it. We applaud
the bipartisan efforts of the dozens of State Attorneys General working
to curb this practice among the worst offenders, and would like to work
with this Committee and the Congress to improve the laws preventing
this despicable practice.
The Case Study of Sallie Mae
In one of the most egregious cases, Sallie Mae was exposed for a
laundry list of abusive practices. The company violated the protections
of the SCRA in numerous ways, and the FDIC noted that, ``Sallie Mae
violated Federal law prohibiting unfair and deceptive practices in
regards to student loan borrowers.''\6\ Among the many infractions,
they were cited for, ``misrepresenting and inadequately disclosing in
its billing statements how borrowers could avoid late fees,'' and
``failing to provide complete SCRA relief to servicemembers after
having been put on notice of these borrowers' active duty status.''\7\
These actions are inexcusable and the settlement was a clear signal
that they will not be tolerated. While Sallie Mae's startling
infractions have been brought to light, it is clear that similar
tactics continue to be implemented throughout the industry.
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\6\ FDIC, 2014, ``FDIC Announces Settlement with Sallie Mae for
Unfair and Deceptive Practices and Violations of the Servicemembers
Civil Relief Act,'' http://www.fdic.gov/news/news/press/2014/
pr14033.html.
\7\ Ibid.
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To illustrate the challenges faced by servicemembers and veterans,
it is worth digging deeper into Sallie Mae's $60 million settlement
with the Department of Justice--the result of mistreating a reported
60,000 servicemembers.\8\ In the CFPB's Consumer Complaint Database (as
of June 2nd), Sallie Mae was the top offender, with 3,664 formal
complaints being filed, representing nearly 50 percent of the total
complaints. The next closest was AES/PHEAA with a total of 795
complaints. Given the volume of complaints reported about the company's
practices, it should have come as no surprise that they were taking
advantage of the military and veteran community systematically.
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\8\ Department of Justice, 2014, ``Justice Department Reaches $60
Million Settlement with Sallie Mae to Resolve Allegations of Charging
Military Servicemembers Excessive Rates on Student Loans,'' http://
www.justice.gov/opa/pr/2014/May/14-ag-502.html.
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Ultimately, it was a member of the military community who filed a
complaint about these harmful practices that brought the offenses to
light. The critical factor here was that a servicemember understood his
rights. Though the case of Sallie Mae highlighted explicit misconduct,
there are also situations involving practices that are less obvious.
The Need for Loan Data Aggregation
To catch situations that may violate a servicemember or veterans'
rights, we believe that institutions need access to a full range of
financial data. This step is necessary for institutions to be able to
effectively counsel their students about their financial future.
Individuals should also have access to this data to achieve the highest
level of consumer awareness.
Currently, there is no widely used system that would allow any
individual with education debt to see all of their loans in a
centralized place. However, METEOR, run by the National Student
Clearinghouse (NSC), could be such a tool. METEOR provides student
borrowers with real-time access to all higher education loan data for
free through a single portal without compromising the security of the
data. METEOR is an open source platform that also has the capacity to
include VA benefits and all loans, private and Federal, in one screen
presentation.
METEOR's capability to provide instant access to real-time loan
balances can improve a veteran's ability to manage their loans, which
are often sold multiple times to various servicers. This product opens
the door for veterans and active duty personnel to manage and follow
their debt no matter where they are. This function also allows schools
to proactively provide loan counseling to students before the burden of
debt becomes insurmountable. This system is currently ready to launch,
but requires the release of Direct Loan data from the Department of
Education (ED). The METEOR program has the unique function of providing
all private lender data and would simply require approval from ED to
access the Direct Loan data, which has yet to happen.
The issues identified in this testimony continue to be widespread
and lend to the growing mass of $1.2 trillion in education debt for
U.S. students. Without addressing the need for greater transparency and
accuracy of information, there will be no reasonable solution to curb
this challenge.
Detrimental Impacts
While we might not know the full affect of student debt on this
generation of veterans, we are beginning to see the first and second
order of affects now. Servicemembers and veterans with student debt are
significantly less likely to build their own business, buy a home, or
save for their retirement. The second and third order effects of these
issues will impact the economy for years to come and continue to
distort economic behavior if not controlled.
In a recent article in the Chronicle of higher education, it was
noted that, ``Respondents with any kind of debt reported lower well-
being financially, psychologically, physically, and in terms of life
satisfaction. Within categories of employment--full-time, part-time,
and unemployed--respondents with debt reported lower well-being than
did their unindebted peers.''\9\ \10\ This new research determined that
those with any level of debt experience significant decreases in their
well-being.
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\9\ Chronicle of Higher Education, 2014, ``2 Years On, Two-Thirds
of This Graduating Class Aren't Financially Self-Sufficient'', http://
chronicle.com/article/2-Years-On-Two-Thirds-of-This/146813/
?key=GmgmIgVtZCIWYn82YzoRaG5WP3Y/Yh96NndGYiojbllQEw%3D%3D.
\10\ University of Arizona, 2014, ``Life After College: Drivers for
Young Adult Success,'' http://aplus.arizona.edu/wave-3-report.pdf.
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Future Solutions
In light of the issues we have identified, SVA supports the
following policy solutions:
1. Automatic Service Status Confirmation: Some servicers require
individual servicemembers to certify their military status on
an annual basis or more frequently, despite having access to
DoD databases that could allow them to easily accomplish the
required task. SVA encourages Congress to compel loan servicers
to automate this status confirmation process via DoD's
database, thus lifting the burden off of individual
servicemembers who may not be able to certify their status due
to deployments or other duties. This would increase the
timeliness of these confirmations as well as increase the
accuracy of the determinations, while reducing the requirement
to complete frivolous paperwork.
2. SCRA Durability--Consolidations:\11\ Servicemembers may be forced
to choose between the protections afforded through SCRA and the
option to pursue loan consolidation. SVA would like to see
SCRA's protections maintained regardless of how loans are
consolidated. We would also like to see rigorous consumer
education included when this financial option is pursued.
Aggregating loans into one payment allows those loans to keep
protections that are recognized by the law. This aggregation
will preserve the intent of the protections afforded under
SCRA.
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\11\ Additional alternatives to loan consolidation are also worth
considering for those with lower levels of debt. GAO, 2003, ``As
Federal Costs of Loan Consolidation Rise, Other Options Should Be
Examined'', http://www.gao.gov/assets/250/240559.pdf.
3. SCRA Durability--Refinancing: Similar to consolidations, SCRA
protections are often lost when individuals pursue refinancing
options for their loans. SVA would like to see SCRA protections
extended throughout the life of the loan, including if a
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servicemember chooses to refinance.
4. Disability Carryover: If a servicemember or veteran has a 100
percent disability rating by the Department of Veterans
Affairs, that status should automatically carryover to their
profile within the ED. To require recertification of an
individual's disability rating is shameful, causes unnecessary
paperwork and may also result in inaccuracies.
5. Aggregated Loan Data: Presently loan data is difficult to manage
and is rarely available in a single view unless consolidated.
The NSC's METEOR Program would enable this aggregated view of
loans for free, but is being held up in the Department of
Education. SVA recommends that this body compel ED to authorize
the program to access Direct Loan data to enable all students
to be able to benefit from METEOR.
6. Program Coordination: Many programs exist to support loan
repayment of student loans, though very few of these programs
have coordinated inter-program relationships. A major
opportunity exists if current programs were coordinated and
streamlined to function seamlessly. An example of this would be
to better coordinate the DoD State Loan Repayment Programs
(SLRP) and the Public Service Loan Forgiveness (PLSF). If
servicemembers and veterans could apply the PLSF as qualifying
payments, loans would be significantly more manageable. Putting
the pieces of this puzzle together would be an important step
forward.
These recommendations are humbly submitted to the Members of this
Subcommittee and represent obvious gaps in current law that have
common-sense solutions. SVA looks forward to working with the Members
of this body to develop and enact such necessary measures.
Our Final Thoughts
With the right tools and resources in place, SVA sees no limit to
what our servicemembers and veterans can achieve in higher education
and beyond. When empowered with environmental factors for success, the
investment America has made in the GI Bill and its veterans becomes an
even clearer asset to our economy. By reducing the debt burden on
servicemembers and veterans, we can set our veterans up for long-term
success.
We thank the Chairman, Ranking Member, and the Subcommittee Members
for your time, attention, and devotion to the cause of veterans in
higher education. As always, we welcome your feedback and questions,
and we look forward to continuing to work with this Subcommittee, the
Senate Committee on Banking, Housing, and Urban Affairs, and the
Congress to ensure the success of all generations of veterans through
education.
______
PREPARED STATEMENT OF ROBERT GEREMIA
Social Studies Teacher, Wilson High School, on behalf of the American
Federation of Teachers (AFT) and Washington Teachers' Union (WTU)
June 4, 2014
Mr. Chairman and the distinguished Members of this Committee:
Good morning. My name is Robert Geremia, and I am a social studies
teacher at Woodrow Wilson High School in the District of Columbia. I am
also a member of the American Federation of Teachers (AFT) and the
Washington Teachers' Union (WTU). On behalf of the Wilson community and
the members of the AFT/WTU, I want to thank Chairman Brown for the
opportunity to testify on my experiences with student loan debt and
repayment. I hope that sharing my experiences will lead to changes in
the financial aid process that will make it easier for students and
their families to pay for higher education, whether at the
undergraduate or graduate level.
I have always known I wanted to become a teacher, probably going
back to kindergarten. Growing up in Rhode Island in a family of
teachers, I always felt I could make the world a better place by
helping kids. I graduated from Rhode Island College with a bachelor's
degree, having double-majored in secondary education and history. While
I was fortunate that my parents were able to cover my college tuition,
I still had to work to cover books and expenses during my undergraduate
years, so I started my teaching career, like so many of my colleagues,
with some credit card debt.
Upon graduation, one of my professors urged me to spend at least 2
years in an urban area and that is how I ended up in Washington, D.C.,
in 2003. I was hired by the District of Columbia Public Schools to fill
one of 200 vacancies. I have to say I was not fully prepared for the
high cost of living in Washington, D.C., on a starting teacher's
salary. My first position in 2003 was at H.D. Woodson Senior High
School; I then moved to Alice Deal Middle School, where I taught for 6
years, and have been teaching in my current position at Wilson High
School for the past 3 years.
After several years, I knew I needed to further develop my teaching
skills. But I didn't want to take time off from teaching, and I knew
that going to school for my master's degree at night would take my
energy and focus away from my students. In 2009, I was accepted into
one of the best and most respected teaching programs in the country,
and elected to attend the Intensive Summer Teacher Education Program
(InSTEP) at Teachers College, Columbia University. Through this
program, I was able to earn my master's degree in Social Studies
Education over three consecutive summers. The program was the right
professional choice for me.
In order to attend this highly regarded program, I had to take out
several loans, despite my full-time salary. On top of tuition and fees,
I had to account for two apartments--I could not contractually sublet
my apartment in D.C., and it was cheaper for me to find a place in New
York on Craigslist than stay in campus housing. In addition, I had to
pay for travel to New York, books and the other typical living
expenses. I would like to point out that while the focus of college
affordability is often on tuition, it was really these other expenses
that drove up my borrowing. After three summers, I graduated with my
master's degree and approximately $37,000 of debt. While I received
some grant money during my program of study and subsidized loans of
$25,500 for 3 years, I had to take an additional $11,500 in
unsubsidized loans.
As I am working to paying off these loans, I have been puzzled by
many things. First, my loans have switched providers twice. Originally,
my loans were processed through Direct Loan Servicing with the U.S.
Department of Education. They were transferred to EDGEucation Loans on
April 15, 2013, and transferred again on Aug. 5, 2013, to MOHELA. While
it has never been quite clear to me why the transfers were made, my
personal account information has evidently been transferred as well, as
the automatic withdrawal for payment continues without me having given
any consent. As a matter of fact, an additional amount was debited from
my checking account when the loans were transferred the last time.
Second, when I recently had time to set up an online account for my
loans, I found that information about my loan, including payoff dates
and interest rates, was available. That information was never provided
to me on my paper statements. These issues of transparency make me
wonder how individuals who do not have ready access to a computer, or
do not know that they should check their credit reports, keep track of
their accounts.
I have been teaching for 12 consecutive years and earned a rating
of ``Highly Effective'' teacher. Yet my financial life, in many ways,
has been put on hold because of the loans I have taken to stay in the
classroom with the level of training my students--and our community--
deserve. My loans have a current interest rate of 6.55 percent, meaning
that I will pay a total of $11,000 in interest on top of the $37,000
principal. It is hard to see how I can save to buy a home with this
debt burden, though I could secure a mortgage with an interest rate at
about 4 percent. My car loan has an interest rate of 1.9 percent. Yet
there is nothing I can do to lower my 6.55 percent student loan
interest rate. In fact, while we can all acknowledge that my interest
rate of 6.55 percent is high, the average interest rate for student
loans is expected to increase in a few short years, based on the new
formula to calculate interest rates passed by Congress last year. If I
thought the interest rate on my car or home was too high, with my good
payment history in today's market I would be able to refinance to a
lower rate. Yet I do not have this option for my student loans.
Unfortunately, I am not even close to alone in facing these
difficulties. According to a report recently released by researchers at
the Center for Culture, Organizations, and Politics at the University
of California, Berkeley, ``Borrowing Against the Future: The Hidden
Costs of Financing U.S. Higher Education,'' America's entire higher
education system is costly and largely inequitable. In 2012, the United
States spent nearly $525 billion on higher education, which amounts to
about twice as much per student as comparable industrialized countries.
In that same year, $45 billion--that is, nearly 1 of every 10 dollars
spent on higher education in the United States--was pure profit that
commercial banks made from servicing the institutional debts of
colleges and universities, from student loan interest payments, and
from profits made by for-profit educational institutions. It was not
spent on instruction or student support services.
Student loan interest payments were a major cause of this cost
increase. The mean total debt of new graduates with 4-year degrees
increased dramatically from 2001 to 2009. For graduates of public
institutions, it increased from $9,437 to $21,100; for graduates of
private nonprofit schools, it increased from $13,650 to $21,113; and
for graduates of for-profit schools, it climbed from $19,220 to
$36,536. More debt, higher interest rates, and more profit for the
commercial sector--all at the cost of our future economic producers,
our students.
With more and more students being forced to take on debt, I believe
we must make it easier for them, whether they are pursuing their
undergraduate degrees or returning to school for graduate studies, not
only to have access to grants and loans, but also to be guaranteed that
the conditions of the loans will be transparent, secure and locked in
at a fair rate, certainly one comparable to or lower than that for a
car or home loan. Ideally, students should leave college with little or
no debt and be able to invest in upgrading their skills at a low cost.
I want to note that I took these loans as an adult who already had
a bachelor's degree and had been in the workforce for several years. I
made a decision to get an advanced degree to be able to further my
career and benefit the students I am committed to serving. In Finland,
for example, where students outperform ours on international
assessments, master's degrees are required for all teachers but are
fully subsidized by the government. I recently learned that I am likely
eligible for two programs that could help lower my monthly payments and
shorten the life of my loan: income-based repayment (IBR) and Public
Service Loan Forgiveness. And I know there is another Teacher Loan
Forgiveness program and a Perkins loan forgiveness program I do not
qualify for. These confusing and sometimes contradictory programs are
no way to build a high-quality teaching force. I think many college
students would be more likely to pursue teaching, and many of my
colleagues would be more inclined to pursue advanced degrees, if these
programs were streamlined and better understood. I suggest Congress
find a way to reach out proactively to teachers about these options.
Because the process was so convoluted for me, I worry about what
will happen to my students, many of whom, as I testify today, are about
to graduate and take on loans. Many will be the first generation in
their families to attend college. Others have worked hard and been
admitted to the Nation's top colleges and universities, but will be
unable to attend because of costs. I'm afraid some of my students don't
understand the ways high interest rates and basic living expenses will
multiply their debt, and I hope they do not have to learn the way I
did. Why should the terms of the loans and the complications of the
loan process dictate where they decide to go to school or what careers
they will pursue? When they graduate, I don't want them to be faced
with the same lack of transparency and confusion I have faced in
financing postsecondary education. I hope that Congress can find a way
to ease the burden on students and families, and make attending college
and continuing education more affordable. I fear if we do not, the
economy will fail to fully recover, as a generation of workers, like
myself and my peers, will be too saddled with debt to invest in housing
or businesses, or to make career choices based on anything other than
earning potential.
Thank you, Mr. Chairman. I look forward to responding to your
questions.
______
PREPARED STATEMENT OF LINDSEY M. BURKE
Will Skillman Fellow in Education Policy
The Heritage Foundation
June 4, 2014
My name is Lindsey M. Burke. I am the Will Skillman Fellow in
Education Policy at The Heritage Foundation. The views I express in
this testimony are my own, and should not be construed as representing
any official position of The Heritage Foundation.
For many, earning a college degree is the way to climb the ladder
of economic mobility. Higher educational attainment is associated with
greater earnings. Median earnings for individuals whose highest degree
was a high school diploma totaled $30,000 in 2011, compared to $45,000
for those earning a bachelor's degree.\1\ College graduates, on
average, earn $650,000 more than those with a high school diploma over
the course of a 40-year career.\2\ While a college degree isn't the
only route to upward mobility, for many, it represents the most
promising path for achieving their full earnings potential.
---------------------------------------------------------------------------
\1\ U.S. Department of Education, National Center for Education
Statistics. (2013). The Condition of Education 2013 (NCES 2013-037),
Annual Earnings of Young Adults, at http://nces.ed.gov/fastfacts/
display.asp?id=77.
\2\ ``The Monetary Value of a College Education,'' Pew Research
Center, March 7, 2012, at http://www.pewresearch.org/daily number/the-
monetary-value-of-a-college-education/.
---------------------------------------------------------------------------
The value of earning a college degree is demonstrable. The cost of
earning that degree, however, has become prohibitively expensive for
many as college costs have risen. Average tuition at 4-year public
institutions for out-of-State students reached $22,200 this academic
year, and at private universities, average tuition now exceeds $30,000
annually.\3\ Many students leave with a bachelor's degree in hand, but
burdened with tens of thousands of dollars in student loan debt. Worse
still, many students leave college without graduating, burdened with
debt and lacking the paper credential they had hoped would put them on
a path toward middle-class stability or better.
---------------------------------------------------------------------------
\3\ ``Average Published Undergraduate Charges by Sector, 2013-14,''
The College Board, Annual Survey of Colleges, 2014, at http://
trends.collegeboard.org/college-pricing/figures-tables/average-
published-undergraduate-charges-sector-2013-14.
---------------------------------------------------------------------------
Well-intentioned Federal policies have failed to drive down college
costs. An easy flow of Federal student aid has enabled students to take
out sizable student loans, with little if any credit check or
consideration of their future earnings potential. Some have even argued
that such policies have enabled universities to raise tuition,\4\
creating a vicious lending and spending cycle.
---------------------------------------------------------------------------
\4\ Former Education Secretary William J. Bennett posited, ``If
anything, increases in financial aid in recent years have enabled
colleges and universities blithely to raise their tuitions, confident
that Federal loan subsidies would help cushion the increase.'' See:
William J. Bennett, ``Our Greedy Colleges,'' The New York Times,
February 18, 1987.
---------------------------------------------------------------------------
Increases in Federal Higher Education Subsidies
Federal higher education subsidies have increased substantially
over the past decade, and now represent 71 percent of all student
aid.\5\
---------------------------------------------------------------------------
\5\ Trends in Student Aid 2013, College Board, 2013, at http://
trends.collegeboard.org/sites/default/files/student-aid-2013-full-
report.pdf.
---------------------------------------------------------------------------
Federal student loans. According to the College Board, during the
2012-13 academic year, 43 percent of all student aid was in the form of
Federal student loans.\6\ Thirty-four percent of undergraduate students
took out Federal student loans that year, up from 24 percent during the
2002-03 academic year. The College Board notes that, over the past 10
years, the number of students borrowing through Federal student loans
increased by 69 percent, from 5.9 million students during the 2002-03
academic year to 10 million in 2012-13.\7\
---------------------------------------------------------------------------
\6\ Ibid.
\7\ Ibid.
---------------------------------------------------------------------------
Federal grant aid. Since 2008, grant aid per full-time enrolled
student has increased over 30 percent. Between the 2007-08 academic
year and the 2012-13 academic year, Federal grant aid doubled in real
terms, and State grant aid increased 11 percent.\8\ Pell Grant funding,
which is available to income-eligible students and does not have to be
repaid, has more than doubled in real terms since the 2002-03 academic
year, increasing from $14.8 billion to $32.3 billion.\9\ Increases in
total Pell expenditures are due in large part to increases in the
number of grant recipients, which has grown from 4 million during the
1992-93 academic year to 8.8 million during the 2012-13 academic
year,\10\ nearly doubling in the past decade.
---------------------------------------------------------------------------
\8\ Ibid.
\9\ Ibid.
\10\ Ibid.
---------------------------------------------------------------------------
Student debt. Approximately 60 percent of students who earned a
bachelor's degree during the 2011-12 academic year left school more
than $26,000 in debt.\11\ Total cumulative student loan debt now
exceeds $1 trillion, which, as is often noted, is more than cumulative
credit card debt.
---------------------------------------------------------------------------
\11\ Ibid.
---------------------------------------------------------------------------
Increases in College Costs
Increases in debt have been driven by increases in college costs.
In the last 30 years, inflation-adjusted tuition and fees at private
colleges increased by 153 percent; tuition and fees at public
universities for in-State students increased 231 percent.\12\ College
costs have risen more than health care costs--by some estimates, twice
as much \13\--and faster than increases in the price of food.
---------------------------------------------------------------------------
\12\ ``Published Tuition and Fees Relative to 1983-84 by Sector,''
Trends in Higher Education 2013, The College Board, at https://
trends.collegeboard.org/college-pricing/figures-tables/published-
tuition-and-fees-relative-1983-84-sector.
\13\ Chase Peterson-Withorn, ``Rising Prices: College Tuition vs.
the CPI,'' The Center for College Affordability and Productivity, March
19, 2013, at http://centerforcollegeaffordability.org/archives/9623.
---------------------------------------------------------------------------
Increases in tuition and fees over the past 30 years suggest that
growth in Federal subsidies such as loans and grants has done little to
mitigate the college cost problem.
A Better Path Forward
In order to make college more affordable, Federal policy should do
three things:
1. Stop the higher education spending spree;
2. Employ fair-value accounting to understand the cost of Federal
student loans; and
3. Decouple Federal financing from accreditation.
Stop the Higher Education Spending Spree
If history is any guide, continuing to increase Federal subsidies
will fail to drive down college costs. Some experts and economists even
argue that such subsidies enable universities to raise tuition,
confident that students will be able to access a virtually open spigot
of Federal funds.
In 2014, the $33 billion Pell Grant program provided grants to 9
million college students, making it the largest share of the Federal
education budget.\14\ Congress grew the Pell Grant program in 2007 by
expanding eligibility and funding, resulting in a doubling of the
number of Pell recipients since 2008. In order to control higher
education spending, Pell Grant funding should be targeted to the low-
income students the grants were originally intended to help.
---------------------------------------------------------------------------
\14\ ``Federal Pell Grant Program,'' Project on the Budget, New
America Foundation, at http://febp.newamerica.net/background-analysis/
federal-pell-grant-program.
---------------------------------------------------------------------------
In addition, as long as the Federal Government finances Federal
student loans, it should use fair-value accounting practices to get an
accurate measure of what these programs are costing taxpayers, to
ensure the loans use a nonsubsidizing interest rate.
Fair-Value Accounting
In a report released last month, the Congressional Budget Office
(CBO) calculated that the four largest Federal student loan programs--
Subsidized Stafford Loans, Unsubsidized Stafford Loans, PLUS Loans, and
Parent PLUS Loans--will cost taxpayers money, not result in a net gain
(a negative subsidy) for the Federal Government as is often claimed.
While the report states that the four loan programs will yield a
savings of about $135 billion from 2015-24, CBO calculates in the same
report that using fair-value accounting measures, the four loans would
actually have a net cost of $88 billion over the next 10 years, not
including administrative costs. In other words, the four largest
student loan programs represent an $88 billion taxpayer-financed
subsidy.\15\
---------------------------------------------------------------------------
\15\ ``Fair-Value Estimates of the Cost of Selected Federal Credit
Programs for 2015 to 2024,'' Congressional Budget Office, May 22, 2014,
at http://www.cbo.gov/publication/45383.
---------------------------------------------------------------------------
CBO explains the utility of using a fair-value accounting model to
fully understand the cost of Federal lending, noting that ``The
Government is exposed to market risk when the economy is weak because
borrowers default on their debt obligations more frequently and
recoveries from borrowers are lower.''\16\ Fair-value estimates take
this market risk into account, and as a result, are a more accurate
reflection of the cost of Federal student loans.
---------------------------------------------------------------------------
\16\ Ibid.
---------------------------------------------------------------------------
Congress should not expand Federal student loans without requiring
that fair-value accounting be used to calculate the cost of those
loans. Any loan program should use a nonsubsidizing interest rate,
e.g., the rate at which the program breaks even; absent fair-value
accounting, it is impossible to tell the extent to which the student
loan programs are providing a subsidy to borrowers. Specifically, the
Department of Education should be required to use fair-value accounting
estimates calculated by CBO and adjust loan rates accordingly going
forward, on an annual basis. This would help determine whether the loan
programs are costing money for taxpayers, and where to set interest
rates to ensure the programs break even.
Decouple Federal Financing from Accreditation
If Federal policymakers want to drive down college costs and
increase access to higher education for those historically underserved
by the traditional 4-year system, the single most important reform to
consider is decoupling Federal financing from accreditation. College
costs are at an all-time high at a time when access to knowledge is
cheaper than at any other point in human history. Online learning and
competency-based options that favor knowledge and skill acquisition
over seat time have laid the groundwork to significantly lower college
costs and increase access for students. In order to harness the
potential of new learning modes, policymakers must free higher
education from the ossified accreditation system.
Accreditation as it currently exists creates barriers to entry for
innovative new startups to enter the higher education market, and it is
a poor gauge of course quality and the skills students gain (or fail to
gain) while attending college. What began as a voluntary system of
accreditation in the 19th century became a de facto requirement in 1952
when Federal financing and aid, which constitutes so much of colleges'
budgets, became tied to accreditation.\17\ Now it is a near requirement
for colleges to operate, and as a result, being accredited has lost any
real value.
---------------------------------------------------------------------------
\17\ American Council of Trustees and Alumni, ``Why Accreditation
Doesn't Work and What Policymakers Can Do About It,'' July 2007,
https://www.goacta.org/publications/downloads/
Accreditation2007Final.pdf.
---------------------------------------------------------------------------
Requirements for an institution to be accredited in order for
students to access Federal student loans and grants has put roadblocks
in the way of models that hold the prospect of fundamentally
restructuring higher education to bring down college costs. Unless
accreditation is delinked from Federal financing, that revolution could
be postponed longer than it need be, while students continue to incur
untenable levels of debt to pursue bachelor's degrees that may not be
preparing them for the workforce.
In addition to favoring existing business models, accreditation
rates entire institutions--not specific courses--and as a result, is a
poor gauge of course quality and the skills acquired by students. State
policies should be crafted to place a greater emphasis on credentialing
skills and specific courses--not institutions--if higher education is
to keep pace with the demands of future economies.\18\
---------------------------------------------------------------------------
\18\ Lindsey M. Burke and Stuart M. Butler, ``Accreditation:
Removing the Barrier to Higher Education Reform,'' Heritage Foundation,
Backgrounder No. 2728, September 21, 2012, at http://www.heritage.org/
research/reports/2012/09/accreditation-removing-the-barrier-to-higher-
education-reform.
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******************************
Continuing to simply increase Federal subsidies for higher
education will fail to solve the college cost problem. Moreover, such
subsidies shift the responsibility of paying for college from the
student, who directly benefits from attending college, to the taxpayer.
Transferring the burden of student loan financing from university
graduates--who will earn significantly more over the course of a
lifetime than someone with a high school diploma--to the three-quarters
of taxpayers who do not hold bachelor's degrees, is inequitable.\19\
---------------------------------------------------------------------------
\19\ Dan Lips, ``Ways to Make Higher Education More Affordable,''
Heritage Foundation WebMemo No. 2785, January 29, 2010, at http://
www.heritage.org/research/reports/2010/01/ways-to-make-higher-
education-more-affordable.
---------------------------------------------------------------------------
In order to drive down college costs and increase access to higher
education opportunities, policymakers should stop the Federal spending
spree, employ fair-value accounting practices, and ultimately, work to
decouple Federal financing from accreditation.
******************************
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