[Senate Hearing 113-548]
[From the U.S. Government Publishing Office]
S. Hrg. 113-548
FINANCIAL PRODUCTS FOR STUDENTS: ISSUES AND CHALLENGES
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HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING ISSUES RELATED TO FINANCIAL INSTITUTIONS AND POSTSECONDARY
EDUCATION, INCLUDING PRIVATE STUDENT LOANS, STUDENT LOAN SERVICING,
STUDENT LOAN DEBT COLLECTION, AND REFUND BALANCE CARDS
__________
JULY 31, 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
Laura Swanson, Deputy Staff Director
Jeanette Quick, Counsel
Phil Rudd, Legislative Assistant
Greg Dean, Republican Chief Counsel
Jared Sawyer, Republican Counsel
Dawn Ratliff, Chief Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, JULY 31, 2014
Page
Opening statement of Chairman Johnson............................ 1
Opening statements, comments, or prepared statements of:
Senator Crapo................................................ 2
Senator Moran................................................ 3
WITNESSES
David A. Bergeron, Vice President for Postsecondary Education
Policy, Center for American Progress........................... 5
Prepared statement........................................... 31
Responses to written questions of:
Senator Reed............................................. 49
Christine Lindstrom, Higher Education Program Director, U.S.
Public Interest Research Group................................. 6
Prepared statement........................................... 37
Kenneth Kocer, Director of Financial Assistance, Mount Marty
College, Yankton, South Dakota, and President, South Dakota
Association of Student Financial Aid Administrators............ 8
Prepared statement........................................... 39
Responses to written questions of:
Senator Reed............................................. 49
Richard Hunt, President and Chief Executive Officer, Consumer
Bankers Association............................................ 10
Prepared statement........................................... 42
Responses to written questions of:
Senator Reed............................................. 50
Additional Material Supplied for the Record
Letter from Kansas State Universities submitted by Senator Jerry
Moran.......................................................... 52
Statement submitted by Americans for Financial Reform............ 54
Statement submitted by The Institute for College Access and
Success........................................................ 57
Statement submitted by the Center for Responsible Lending........ 179
Statement submitted by the American Bankers Association.......... 184
(iii)
FINANCIAL PRODUCTS FOR STUDENTS: ISSUES AND CHALLENGES
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THURSDAY, JULY 31, 2014
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:02 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Tim Johnson, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. Good morning. I call this hearing to
order.
Financial institutions play a role in higher education in
many ways, from private student loans to student loan
servicing, debt collection, and campus banking. Student loan
debt is currently $1.2 trillion and continues to be the largest
form of consumer debt in the country after mortgages. This
issue is especially important to me, as my home State of South
Dakota has a higher percentage of students graduating with debt
than any other State in the country, at nearly eight in ten
students.
Rising student loan debt affects everyone and undermines
our economic recovery. Increasing numbers of Americans with
student loan debt are putting off buying a home, starting a
business, and saving for retirement, and high student loan debt
makes it harder for students to stay in rural communities like
South Dakota.
While the level of student loan debt is significant,
equally significant are the level of delinquencies and the
options for borrowers in repayment. Recent data shows that
nearly one-third of borrowers are delinquent and borrowers are
entering delinquency faster than before the financial crisis.
The CFPB has found that borrowers are unable to obtain
affordable repayment options and have difficulty working with
student loan services to correct payment errors. Last year, I
held a hearing on this issue, encouraging lenders to work with
borrowers to avoid default.
A few months ago, the CFPB began overseeing large student
loan servicers, which brings an estimated 49 million borrowers'
accounts under its watch. This is an important step. However,
we saw in the mortgage crisis that responsible servicing is a
critical component of loan management.
Both the Education Department, as the originator of Federal
student loans, and private student lenders have a duty to
ensure that their loans are effectively managed every step of
the way. This means making sure students have full access to
information about their loan options before taking on debt and
providing affordable loan repayment, responsible servicing, and
careful debt collection.
Financial institutions have also partnered with a number of
higher education institutions to offer debit and prepaid cards
to students, sometimes as a means to facilitate Federal student
loan refunds. I look forward to hearing more about these
arrangements, including what impact these relationships may
have on students.
With that, I turn to Ranking Member Crapo.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you, Mr. Chairman.
Beginning the path to higher education is filled with great
excitement and opportunity for students across the country.
However, students are faced with financial questions they might
not have considered until this point, such as how they will pay
for college, whether they should finally open a bank account,
and how they will budget their money.
Banks and credit unions throughout the country serve an
important role helping students sort through these financial
issues in this new chapter in their lives, and many entities
provide financial literacy tools to help students improve their
understanding of the financial burdens they are about to
undertake.
Today, I will focus on two issues that impact students and
their financial institutions in the higher education market.
First, in the student loan market, both Federal and private,
there has been a growing field of research focused on the high
student debt burden, now roughly $1.2 trillion, as the Chairman
indicated, and its impact on the financial opportunities and
decisions of recent college graduates.
Recently, the CFPB noted that the Federal Government's
share of outstanding total student debt topped $1 trillion for
the first time, roughly five times higher than existing private
student loan debt. I share my colleagues' concerns about the
negative impact of high student debt on the financial lives of
recent graduates. I also have concerns about the significant
and increasing role of the Federal Government in this market,
which ultimately leads to excess exposure for U.S. taxpayers
and diminished student borrowing choices.
The factors we should be focusing on are the rising cost of
college and failure to inform students properly about the loan
repayment process before starting school. Since 1974, the cost
of college has risen roughly 350 percent. There have been
relatively few market forces to keep costs down, as students
can borrow up to the cost of attendance for an undergraduate
program and take out almost unlimited Federal loans in graduate
school.
Students are not adequately educated about the impact their
borrowing will have on their life after graduation. It is
unclear if students have the proper information to compare loan
types, earning potential for different career choices, and what
their monthly payments will look like when they graduate. These
issues should be addressed before a student ever receives a
loan.
The second issue I would like to discuss today is the
Department of Education's proposed rulemaking for the Federal
student loan disbursement process, an issue that has received
bipartisan attention. As drafted, the proposal would impact
student accounts that are completely unrelated to the Federal
student loan disbursement process, which may cause unintended
consequences for students and colleges and universities.
With the proposed rule, the Department of Education creates
an indirect back door regulation of bank products, requiring
them to alter features for accounts that may never be used by a
student to receive a student loan disbursement. Unfortunately,
this could force banks and credit unions to simply exit campus
markets, leading to diminished student choice, restricted
convenience, and more unbanked young people. As the Department
of Education moves forward, it must work with the prudential
banking regulators to understand the compliance challenges its
rule may introduce and the negative impact it could have on the
supervision of banks and credit unions.
There is no doubt the financial challenges associated with
higher education today can be daunting for students. I look
forward to hearing from our witnesses about how we can improve
our student financial options, convenience, and financial
literacy.
Thank you, Mr. Chairman.
Chairman Johnson. Thank you, Senator Crapo.
Are there any other Members who would like to give a brief
opening statement?
Senator Moran. Mr. Chairman?
Chairman Johnson. Senator Moran.
STATEMENT OF SENATOR JERRY MORAN
Senator Moran. Mr. Chairman, thank you very much. I would
ask unanimous consent that a letter that I will submit to you
from the seven Regents institutions in Kansas be made a part of
the record.
Chairman Johnson. Without objection.
Senator Moran. Thank you.
Mr. Chairman, let me just for my opening statement
highlight, and it is the last part of what Ranking Member Crapo
was indicating. Our seven Regents Universities in Kansas--
Emporia State, Fort Hays State University, Kansas State
University, the University of Kansas, Pittsburg State
University, and Wichita State University--are all expressing
concern, while they support the general concepts of the
direction the regulations, the rulemaking is going. The
particular issue that Senator Crapo just mentioned in regard to
other accounts is a significant issue for them and for their
students.
The letter basically indicates that they agree with the
Department's stated objectives, to ensure that students have
safe, convenient, and free access to credit balances in their
accounts. They want to raise the issue in regard to the
regulation that would, quote, ``regulate any arrangement under
which a student opens or is referred to open a financial
account into which Title 4 HEA program funds may be
deposited.'' Such a regulation could be interpreted to cover
any account held by the student or parent if the financial
institution had any arrangement, however informal, with that
school, and regardless of when and why the student or parent
opened the account with that financial institution.
That would have a chilling, and in some cases terminal,
effect on good business partnerships that currently benefit
students and universities alike. Students, often far from home,
need access to safe and secure financial services. Financial
experience is a necessary part of student life and is essential
training in their long-term financial health. Knowing this,
many schools have signed agreements with banks to provide on-
campus financial institutions at low or no cost to students.
Such services include secure on-campus branches, ATMs, debit
cards, and financial education programs.
Any regulatory action that could potentially take away
students' safe, convenient, and free access to one group of
essential services while it simultaneously drives up the cost
of education for that same group of students deserves to be
studied with extraordinary care.
I would ask that, as I said, the letter be made part of the
record, and I hope the witnesses will address the concerns that
I have raised.
Thank you very much, Mr. Chairman.
Chairman Johnson. Thank you.
I would like to remind my colleagues that the record will
be open for the next 7 days for additional statements and any
other materials you would like to submit.
Now, I will introduce our witnesses. David Bergeron is Vice
President for Postsecondary Education Policy at the Center for
American Progress.
I recognize Senator Warren to introduce our next witness.
Senator Warren. Thank you, Mr. Chairman.
I would like to introduce Christine Lindstrom, the Higher
Education Program Director for U.S. PIRG Student Chapters. Ms.
Lindstrom is a 14-year veteran of the Student PIRGs and she now
works with a PIRG chapter to organize campaigns across the
country for more affordable, more accessible higher education.
Her work has helped make college more affordable for American
students, whether it is pushing for reforms through the College
Cost Reduction and Access Act or advocating for lower-cost
textbooks.
So, Ms. Lindstrom, it is good to have you here today. Thank
you for coming.
Chairman Johnson. Kenneth Kocer is the President of the
South Dakota Association of Student Financial Aid
Administrators and Director of Financial Assistance at Mount
Marty College in Yankton, South Dakota. Ken, I thank you for
traveling all this way from South Dakota to testify before us
today. I know you have been in the financial aid sector for
almost 25 years and I look forward to hearing more about your
expertise in helping students make smart decisions across South
Dakota and the country.
Richard Hunt is President and CEO of the Consumer Bankers
Association.
I thank you all for being here today. I would like to ask
the witnesses to please keep your remarks to 5 minutes. Your
full written statements will be included in the hearing record.
Mr. Bergeron, you may begin your testimony.
STATEMENT OF DAVID A. BERGERON, VICE PRESIDENT FOR
POSTSECONDARY EDUCATION POLICY, CENTER FOR AMERICAN PROGRESS
Mr. Bergeron. Thank you, Mr. Chairman, and thank you to the
rest of the Committee for inviting me to be here today.
We are at a critical moment of the year. Our young people
are in the process of preparing to go off to college, many for
the first time, and they are going to be dealing with issues
that they have never had to deal with before, as was mentioned
in a couple of the opening statements.
And, when we think about that experience that our students
have, it is different than the one we had. Today, 21.5 million
students will be enrolling in our 7,500 institutions and 12
percent of them will be going online. You know, when I went to
school, there was no such thing as online, never thought of
anything like that happening.
And, so, the student population is experiencing different
things, and one of the things that is very different is the
level of debt that they are taking on. Students graduating with
a Bachelor's degree in 2011-2012 graduated with $26,500 in
student loan debt. That was an increase in just 4 years of 33
percent. Graduate students graduated with $55,600 in debt. That
was an increase of 46 percent in just 4 years.
And, while I worry a lot about the students who graduate
from our institutions of higher education, the level of debt
they are taking on, I also worry, and probably worry more,
about students who are taking on debt and are failing to
graduate. And, 10 percent of the students who drop out from our
institutions reported debt levels of $33,000 or more. That has
to be a concern.
I am also concerned about the students who take on a mix of
private and Federal loans, and I point out in my testimony the
difference in borrowing levels for those students who take on
both private and Federal loans. It is much higher. It is much
more concerning. And this affects, as several of you indicated
in your statements, the life choices that students can make--
whether they form a household, whether they buy a car, whether
they buy a house, whether they start a small business. So, we
know that there are concerns, and legitimate concerns.
Some people argue that this is not new. You know, there is
a recent study by another organization that said things have
really not changed, and I would assert they really have
changed, because the authors of the study, I think, discount
one of the findings, and that is the length of time that it
takes to repay student loans. They say that it went from 7.4
years or 7.5 years to over 13 years. That is a huge impact on a
family's ability to save for retirement, for their own
children's college education. And, so, we need to pay
particular attention to that.
The Center for American Progress has indicated very strong
support for doing something about refinancing student loans,
both Federal and private, and we believe that that is a
critical issue and one that we need to address.
We have also indicated that there needs to be some reforms
in the bankruptcy protection that is afforded to student loans,
both Federal and private. Private and Federal student loans are
not dischargeable in bankruptcy currently today. That is
something that exists for nearly all other borrowers in our
economy, whether small businesses or individuals, and it really
needs to be rethought so that students who enroll in programs
that were of high quality but where the industry they were
seeking to enter disappears because of changes in technology or
the economy should not have that hamper them permanently and
hamper them in ways that prevent them from being able to do the
things that they need to do for their families or to improve
our society by starting small businesses.
I would like to talk for a minute about the issue of
student loan servicing. I tell the story in my written
testimony of the development of state-of-the-art world class
regulations for servicing debt in the 1970s, and clearly,
things have changed since the 1970s and we really need to
update the way that we service and handle our student loan
portfolios, whether they are Federal or private. We need to
really improve those and develop and implement state-of-the-art
tools.
With that, I am happy to answer any questions that you have
when you get to that point in the hearing.
Chairman Johnson. Thank you.
Ms. Lindstrom, please proceed.
STATEMENT OF CHRISTINE LINDSTROM, HIGHER EDUCATION PROGRAM
DIRECTOR, U.S. PUBLIC INTEREST RESEARCH GROUP
Ms. Lindstrom. Thank you, Chairman Johnson and other
distinguished Senators, for giving me the opportunity to speak.
Once again, I am Chris Lindstrom with the U.S. Public Interest
Research Group.
The topic of today's hearing is broad, so I will focus my
remarks on issues that U.S. PIRG has been actively tracking and
promoting, specifically in the campus banking space, which has
come up in several Senators' introductions.
Since 2007, we have worked to ensure that students are
protected from tricks and traps that are layered into high-cost
products like campus credit cards, private student loans, and
campus bank accounts and debit cards. Right now, students are
being hit with high fees that are hard to avoid as they try to
access their Federal aid refunds through campus-sponsored bank
accounts and prepaid debit cards.
We found in our 2012 report, ``The Campus Debit Card
Trap'', that two in five student students in the country are
exposed to debit cards on campus that may drive up their costs.
Students at some campuses are charged steep and unusual fees to
get to their Federal financial aid, including PIN transaction
fees at the point of sale, overdraft fees at $37 or more. On
the whole, these accounts are not necessarily a better deal for
students than what they might find through a bank not
affiliated with the campus.
Still, industry leading banks and financial firms can see
40 to 75 percent of students on a campus using the campus bank
product after--a campus-based product after a few years of
marketing. So, how do they do it?
First, banks and financial firms behind these products
often rely on multimillion-dollar revenue sharing agreements
with campus administrations. The contracts include receiving
direct payment to use the school's logo, providing bonuses for
recruiting students, and discounted pricing in exchange for
marketing access.
In addition, they use push marketing and other strategies
to steer students into opening up these new accounts over using
their existing bank accounts. Higher One, a prominent financial
firm in this market, premails a card to every student on campus
before they have opted in or out. The cards are cobranded with
the college logo, giving the impression that the student must
open the account.
At another college, bank representatives actually set up
tables right outside the student ID office, essentially
aggressively promoting their accounts that students can link to
the student ID cards. Students can get freebies, like bags and
T-shirts, for signing up.
Finally, the fees can be high, as I mentioned, and unusual.
Fees on university-sponsored cards include a variety of PIN
swipe fees, inactivity fees, overdraft fees, ATM surcharges,
fees to reload prepaid cards, fees to check your account
balance. I could go on. The fees can be hard to avoid, for
example, if a merchant only accepts PIN debit or there is no
fee-free ATM available.
All campus bank accounts and prepaid card services can
charge overdrafts. Overdraft coverage is a form of credit,
since the financial institution covers the consumer's shortfall
and is subsequently repaid the amount extended plus a fee. Some
banks engage in the abusive practice of purposely reordering
transactions to maximize overdraft fees. Many banks and
financial firms that are playing on campus right now have been
held accountable for their abusive practices in this arena.
Overdraft fees are inconsistent with the Department of
Education's existing rules on school-sponsored accounts.
Department of Education rules also require that students be
provided convenient fee-free ATM access. In practice, access
can be limited.
One argument that is being made in defense of these campus
banking products is that too many low-income students are not
able to acquire a bank account other than on campus. These are
the unbanked students. The Consumer Financial Protection Bureau
found that less than half a percent of college students in
America are legitimately unable to secure a bank account. So, a
new student who comes onto campus without a bank account, she
does not have one because she chose not to have one or she has
not gotten one yet. Students do not need campus-sponsored bank
accounts.
So, I urge you to consider legislation that bans revenue-
sharing agreements between colleges and banks or financial
firms crafted specifically to offer bank accounts and related
banking products to students on campus. The conflict of
interest inherent in these accounts is problematic for the
student consumer and it needs to be addressed. Thank you.
Chairman Johnson. Thank you.
Mr. Kocer, please proceed.
STATEMENT OF KENNETH KOCER, DIRECTOR OF FINANCIAL ASSISTANCE,
MOUNT MARTY COLLEGE, YANKTON, SOUTH DAKOTA, AND PRESIDENT,
SOUTH DAKOTA ASSOCIATION OF STUDENT FINANCIAL AID
ADMINISTRATORS
Mr. Kocer. Chairman Johnson and Members of the Committee,
thank you for inviting me to testify this morning on the
important topic of private education loans.
At Mount Marty College, we actively promote the Federal
Student Loan Programs for students as their first and best
option when considering a loan to assist with educational
costs, as do my colleagues across South Dakota. In particular,
Financial Aid Administrators counsel students on the many
benefits of the Federal Student Loan Program, including the
availability of subsidized interest for certain borrowers,
options for loan forgiveness, and multiple generous repayment
plans. Beyond these benefits, the Federal Direct Loan Program
also offers deferment and forbearance options, Federal
consolidation opportunities, and in many instances, lower
interest rates.
Even with students being counseled to utilize and exhaust
the Federal student loans available to them, some still find
that they need additional resources. Private loans can fill the
gap in certain cases by funding a student's educational costs
when Federal resources fall short.
Institutions in South Dakota generally have a lower tuition
rate when compared to other States, yet even we find that some
students need to utilize private education loans. In surveying
my colleagues throughout the State, as many as one-third of
students on some campuses receive private education loans.
I would like to share with you an example of the gap I
described that may cause a student to utilize a private student
loan in order to cover educational costs. Let us say an
institution costs $18,000 for tuition, fees, room and board,
setting aside now any indirect costs, like books,
transportation, and personal costs they may incur. If the
student is not Pell Grant eligible, the only guaranteed Federal
eligibility the student has as a first year dependent
undergraduate student is a direct loan in the amount of $5,500.
Going back to our $18,000 school, this leaves over $12,000
which the student would need to find a way to fund. Lacking
parental support, this shortfall in Federal loan eligibility
leaves a student looking to other options. For this reason,
private student loans with proper consumer protections do fill
an important need for some students.
I would like to now briefly walk through the processing
procedure for private student loans. It begins with the student
selecting a private lender they feel best suits their needs. In
South Dakota, a number of schools provide a site where the
students can access a historical list of private loans that
students at that institution have utilized in the past.
Importantly, providing historical lists of private education
loans is different than providing a preferred lender list, in
which case the schools recommend specific lenders to students.
A historical list displays features of different private loan
programs, enabling students to make comparisons that hopefully
lead to an informed decision.
Once a student selects the private loan they wish to
borrow, they apply for the loan directly through the private
lender. The lender approves the loan. The certification request
is sent to the school. The school reviews the student's
educational cost of attendance and the financial aid resources
that the student has already received, for example, Federal
loans and grants, to determine the amount of the private loan
for which the student is eligible. An appendix to my written
testimony provides a specific example of this.
By involving the school in the private loan certification
process, it allows the school to track all borrowing the
student is incurring and counsel the students on the overall
amount of their loan debt. From an institutional perspective,
we consider this a good practice, as it provides us with more
information to assist in preventing students from over-
borrowing. Through the process of certifying private loans, the
school can ensure the student has not borrowed beyond the
calculated cost of attendance.
There are quite a few private lending institutions that
currently utilize school certification as a prerequisite in
determining whether the student is eligible for their private
loan or not, but lenders are not required to do so.
Having provided some context on private education loans, I
would like to offer the following recommendations to improve
the private loan process for all borrowers.
Recommendation one is to require school certification for
all private education loans. The current private education loan
application process should be revised to continue to counter
the impact of lender marketing and to assist in managing
student over-borrowing. Replacing student self-certification
with full school certification would give institutions the
opportunity to ensure that a student is aware of the benefits
of the Federal loans before a student commits to a potentially
less favorable private loan. Additionally, by requiring that an
aid administrator review the student's remaining eligibility
under the cost of attendance limits, we can help reduce
unnecessary or inappropriate student borrowing.
Recommendation two, provide one single Web site where
students can see all their educational borrowing from the
Federal, institutional, and private sources. SDASFAA supports
NASFAA's recommendation to create a universal loan portal for
students. Congress should mandate the creation of a single loan
portal where students can easily access information on all
their student loans. This would allow all educational loans
from the Federal Government, private lenders, and colleges and
universities to be reported to one central data base.
Students need an accessible one-stop shop where they can
manage their student loans. Many borrowers have multiple loans
with different loan holders that may be in various stages of
repayment. Having a central Web site where students can view
their access on all their loans would significantly help
students as they manage their borrowing and repayment.
The creation of such a resource could result from the
expansion of the data collected by the National Student Loan
Data System, NSLDS, which only partially serves the purpose at
this time.
Thank you for the opportunity to speak today, and I look
forward to any questions you may have.
Chairman Johnson. Thank you.
Mr. Hunt, please proceed.
STATEMENT OF RICHARD HUNT, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CONSUMER BANKERS ASSOCIATION
Mr. Hunt. Chairman Johnson, Ranking Member Crapo, Members
of the Committee, a very good morning. My name is Richard Hunt.
I am President of the Consumer Bankers Association, a trade
association for today's leaders in retail banking.
This hearing is most timely, as many of the Nation's 21
million students are preparing to head for campus. The need for
fair, clear, and transparent products for these students has
never been more important. CBA's members provide student loans
and banking services to some of the Nation's college students
and their families. I appreciate the opportunity to offer
insights on these products, services, and associated
marketplaces.
Before I address the topic of today's hearing, we cannot
ignore the real crisis facing students and their families, the
rising cost of a 4-year college education. Since 1980, the
average tuition for a 4-year degree has risen 1,100 percent,
more than four times the rate of inflation. Over half of our
college students need some form of financial need. We must make
college more affordable or we allow this to snowball to the
detriment of our Nation's future leaders.
We strongly believe in the pursuit of higher education. It
is absolutely critical for economic mobility, the success of
our Nation's economy, and international competitiveness. We
have a sacred bond with our students and play an important role
as they begin their financial and professional futures by
developing a good credit rating and aiding them in earning a
college education.
Private and Federal loans have a complementary role in
helping students achieve their educational goals. However,
private student loans are but a sliver of the overall
marketplace. Today, 92 percent of all student loans are
originated by the Department of Education, and they alone have
over $1 trillion on their balance sheet.
Unlike Federal loans, private student loan applications
undergo a robust underwriting process based on a variety of
factors, including, and most importantly, a determination of
the borrower's ability to repay the loan. Private lenders
encourage the use of cosigners, resulting in lower interest
rates for the student. Ninety percent of student loans have a
cosigner. Since private student loans do not carry a Government
guarantee, the lender bears the risk of loss, not the taxpayer.
Private lenders have strengthened underwriting standards,
resulting in remarkably lower delinquency and default rates.
Just this week, a new report came out by MeasureOne that found
that less than 3 percent of private student loans were 90 days
or more delinquent--three percent. On the other hand, the
Federal Loan Program has a current default rate of 14 percent,
with some reports estimating more than 40 percent of the loans
will be in default or become delinquent.
We are committed to working with students one on one,
utilizing every tool necessary, including restructuring,
refinancing, and deferment. Private student loan lenders are
required to provide disclosures at multiple times throughout
the origination process. These urge students and their families
to look at the Federal Loan Programs before opting for private
loans. It is up to each borrower to determine the right mix of
Federal and private loans to meet their educational needs.
In addition to the small but critical role in the student
lending market, CBA members play an important role by offering
basic banking services on campus, such as checking and savings
accounts designed to meet students' unique needs and help
establish their credit history. In some cases, banks do partner
with educational institutions to offer services, such as
accounts linked to student ID cards, financial literacy
programs, and assistance with financial aid systems. The
accounts offered through negotiated agreements often have
student-friendly fee structures, are fully and transparently
disclosed, and are completely optional for students.
Recently, the Department of Education entered into a
negotiated rulemaking on the topic of cash management. This
includes the disbursement of student aid refunds, or Federal
aid in excess of what is needed to pay school tuition and fees.
We worked in good faith with the Department and are
disappointed a consensus was not reached. We have serious
objections to the direction of this draft rule. A bipartisan
group of 54 of your House and Senate colleagues, including
Senators Klobuchar, Franken, Heller, and now Moran, have
similar concerns.
While the Department has the authority to write rules
concerning Title 4 financial aid disbursement, the proposed
rule would go much further by regulating the availability and
terms of financial accounts. This includes debit and prepaid
cards available to students from already heavily regulated and
well supervised depository institutions. We believe this to be
outside the Department's scope. Whether it is a college-
affiliated checking account or a private student loan, we want
to offer these products in a way that serves the student well.
Thank you for the opportunity to testify.
Chairman Johnson. Thank you for your testimony.
As we begin questions, I will ask the Clerk to please put 5
minutes on the clock for each Member.
Mr. Bergeron, many student loan borrowers are unable to
refinance their student loans and have thus been locked out of
taking advantage of historically low interest rates. What
challenges exist in refinancing student loan debt, and what
recommendations do you have to address this issue?
Mr. Bergeron. As I indicated in my testimony, Mr. Chairman,
I think the issue of refinancing student loans is perhaps the
most critical. It would give the borrowers the ability to take
Federal loans, combine them with private loans, and repay them
as a single package with their total debt being considered.
The Center for American Progress released a report last
year where we made specific recommendations for refinancing and
we have worked with staff from both the House and Senate, and
Republicans and Democrats, to propose and work on legislation
to carry out that. Senator Warren has a bill that was voted on
and did not reach the requisite number of votes to move
forward, and I hope and expect that that will be something that
is taken up again by the Senate. I think, in the long term, we
have to find a solution, and the solution that has been offered
by Senator Warren is a good one.
I think that if we cannot move forward with that, there are
other proposals that have been put forward by members that
should be considered. The idea of creating a conduit-like
vehicle, as was done under the Ensuring Continued Student Loan
Access Act a couple of years ago to make student loans
available during the credit crisis provides a mechanism, a
model for the kinds of public-private partnership that could be
created to create a marketplace for consolidation loans,
particularly those that are distressed.
But, I think, as a first order, we should look really hard
at what already is pending before the Senate.
Chairman Johnson. Mr. Kocer, do you support mandatory
certification of private student loans? How does certification
help student borrowers, and in what way does your institution,
Mount Marty College, use certification to meet its own need for
information about student debt?
Mr. Kocer. It is very important for school certification,
because it gives us more contact with the borrowers, first of
all. So, when a school certification comes in, we know that
there is an additional loan that student is looking for, and
then we have the opportunity to counsel them on how that loan
will affect them and what the possible repayment could be for
them. So, that is the first advantage of having them all school
certified, is we get that contact with the borrower to give
them that up-front counseling on how it could affect them
further on.
And, it also helps us with school certification to prevent
over-borrowing for a student, because using school
certification, we only allow them to borrow up to the maximum
cost of attendance at our institution, so that will prevent
them from over-borrowing and taking out additional loans not
specifically for educational purposes.
Chairman Johnson. Ms. Lindstrom, last month, President
Obama announced an expansion of the Pay as You Earn Program.
Can you discuss why this proposal is important and whether you
believe more needs to be done to improve repayment options for
borrowers.
Ms. Lindstrom. Yes, absolutely. I mean, David mentioned the
$1.2 trillion, as did you, Mr. Chairman. Obviously, that is not
only a drag for the individual borrowers behind that figure,
but a drag on the economy more generally. So, it is important
to make income-based repayment options attractive to as many
borrowers as possible. And, President Obama's action would
enable more than five million more borrowers to take part, or
partake in that benefit than previously, and so I do think that
that is very important and it is, as I mentioned, important to
make those opportunities attractive for borrowers.
That said, I do think that borrowers who do qualify for
these benefits are not getting into these programs, and that
actually is another big problem that I would love to see
lawmakers tackle. There is a major system failure where
borrowers who qualify for these alternatives that could be
beneficial to them are not getting into these programs. So, we
have to figure out a way to deal with that, to look at the way
the servicers are being compensated, and to ensure that there
is a smooth path for borrowers in distress to be able to access
the Pay as You Earn Program, now with an expansion component,
and some of the other alternatives that are there.
Chairman Johnson. Senator Crapo.
Senator Crapo. Thank you, Mr. Chairman.
Mr. Hunt, since the termination of the Federal Family
Education Loan Program in 2010, there has been a dramatic
change in the student loan market structure. The private sector
markets are contracting and the Federal market is growing
significantly. I am concerned that this reduces student
borrower options. Could you describe the current state of the
private student loan market and how that compares to the
Federal market and maybe explain why we are seeing this
dynamic.
Mr. Hunt. Sure. Thank you very much for the question. We
have gone from about a $24 billion industry to about an $8
billion industry, and yet performance rating for our banks have
gotten much better. Many of our banks have exited the student
lending business. There are a few others that are thinking
about it as we speak. We have a 3-percent default rate.
We flipped the equation, Senator. We do not want to look at
a refinancing option. We do not need to because we do all the
work at the front end. We make sure consumers have an ability
to repay. There is nothing worse than telling a student at the
very beginning of their career, we are not sure you can afford
the loan we are about to give you. We do have self-
certification. Ninety-seven percent of our loans are certified
by the institution. When it is time to repay the loan, we work
with the student many, many different ways, including offering
deferment and refinancing the student. That is why we are at a
3 percent default rate.
And, just because we consider the ability to repay does not
mean it is a guarantee that the student is more likely to repay
at the very end. That helps quite a bit. So, 6 months after
graduation, or 6 months after one is no longer a full-time
student, we give them 6 months' grace period. Hopefully, they
will start paying back after that. If they cannot, we can go
into a 6-month forbearance. So, a student who is having trouble
maybe finding a good paying job, cannot pay back their loan, we
give them an additional 6 months, and then we work with the
OCC, with safety and soundness guidance, to ensure we are
adhering to that safety and soundness and helping out the
student. There is nothing more sacred for us than making sure
our students, especially so early in their career, can repay
their loan.
Senator Crapo. Thank you. And, in your testimony, you
discussed the Department of Education's new rulemaking dealing
with student loans and the disbursement process. It has been
mentioned several times here today. I am concerned that the
Department has not worked through all of the compliance
challenges for banks and supervision challenges for banking
regulators. Can you share with us in a little more detail how
the Department's rule as it is currently proposed would impact
student bank accounts and what kind of compliance challenges
would be introduced for banks.
Mr. Hunt. Well, if the Department of Education goes down
the path where I think it may be going, there will not be much
concern for us on the regulatory structure because I think most
of our banks would exit. Right now, the Department of Education
want to apply rules and requirements of a cash management
program to banks and students that have nothing to do with
Title 4 disbursement. It is apples and oranges. So, I am afraid
that is the direction they are going.
We negotiated in good faith, with a lot of other consumer
groups, to come to a consensus. Quite frankly, I thought there
was going to be consensus until the very end and they did not
do it. So, we are hoping they will have common sense. They want
to apply the same rules and regulations to campus affiliations
that have nothing to do with Title 4.
Senator Crapo. According to one measure--and, again, Mr.
Hunt, according to one measure--a report, actually, by
MeasureOne, a private research firm, substantial loan
performance differences exist between the Federal and private
loans, and I think you mentioned that in your testimony, as
well. According to the numbers I have, private student loan
borrowers only default in the low single digits, I think you
said 3 percent----
Mr. Hunt. Correct.
Senator Crapo. And, the number I had here for Federal loans
is close to 20 percent. I think you said 14 percent. But, can
you describe some of the features of the--you already did
describe some of the features of the private student loan
system. Can you explain why that difference exists. What is it
about the Federal loans that generates such a higher statistic?
Mr. Hunt. Sure, Senator. Actually, I think it is a tale of
two cities. Our default rate is going down. It was 3.13 percent
last year and it is down to less than 3 percent, at 2.89. I
think the biggest difference is the ability to repay. I think
many of our Federal programs do not take into consideration the
borrower's ability to repay after graduation. There are no
underwriting standards on Federal loans, while on the private
side there are extensive underwriting standards. There is
nothing worse we can do than give someone a loan they cannot
repay. That is something actually Raj Date of the CFPB once
told me, that he would never even consider giving someone a
loan unless we thought they could repay the loan.
And, you mentioned the number 20 percent. There are some
people who are estimating the actual default rate on the
Federal side will be as high as 40 percent when you look at the
IBR forgiveness that will happen down the road.
Senator Crapo. Thank you, Mr. Chair.
Chairman Johnson. Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman.
We are talking about these bank products that essentially
are used to take Federal grants and loans and pay tuition, but
then the excess is moved into a banking account. And, in your
testimony, Ms. Lindstrom, you indicate that there are some
arrangements between banks and colleges that appear to be
detrimental to students. Is that fair?
Ms. Lindstrom. That is right. Yes. You know, on a college
campus where students are a captive audience and a bank is
getting an exclusive deal, that deal should actually be far
superior for the students who are exposed to that deal and
being marketed to than what is available to them on the open
market. But, in fact, that is not the case. In quite a few
instances, the deals that students are driven into are equal to
or, in some cases, worse than what is available right off
campus. And, obviously, we think that that is a huge problem.
The reality is that student aid is ending up in all types
of bank and financial firm accounts that are offered to
students on campus. So, the mainstream banking industry, during
the negotiations with the department of rulemaking [sic] were
touting figures of between 20 to 40 percent of students at the
places where they had deals with the campus were taking up
those accounts. Seven out of ten college students these days
are graduating with student loan debt. It is obvious that aid
is ending up in those accounts as well as the others, and,
therefore, the Department is right on point in terms of
extending its protections to students in all the various
accounts that are there.
Senator Reed. Is not the solution--at least in concept--to
require the school, who is the intermediary, to act as a
fiduciary for the student, that----
Ms. Lindstrom. Absolutely.
Senator Reed. ----they would be required, because they are
dispensing Federal funds, to ensure that they do so for the
benefit of the student, and if there is an arrangement with a
financial institution, it benefits the student----
Ms. Lindstrom. That it should benefit, and they should act
in the best interest of the students. Actually, that is a
criterion that was put into place after the debate over the
aggressive private student loan marketing tactics that were in
effect previous to the credit crisis, and that was put into
place there and it has really helped make the marketplace more
fair on campus for students when it comes to steering that was
occurring, steering students into those private student loan
products. And, we would be thrilled if something similar were
in place for students when it comes to campus bank accounts and
campus debit cards.
Senator Reed. Mr. Kocer, you are on campus. Do you think
that you should act as a fiduciary for the students?
Mr. Kocer. All I can comment is our experience at Mount
Marty College and our colleagues in South Dakota, there are no
arrangements that I know of with any of our colleagues. All of
our disbursements are by check or direct deposit, and so I
cannot comment on anything as far as arrangements----
Senator Reed. Well, that seems to be sort of a sensible
approach. I would guess it would be direct deposits to the bank
where the student indicates, correct?
Mr. Kocer. That is correct.
Senator Reed. So----
Mr. Kocer. The student has a choice of giving us the bank
account to deposit into their account.
Senator Reed. So, the choice is either let the student
decide or, if you are deciding for the student, you have to do
it in the best interest of the student. That seems to make
sense.
Mr. Hunt, does that make sense?
Mr. Hunt. Sure. Actually, the student does have options.
When the student has a disbursement measure, they can choose
one of three things. They can go to the bank that has a
relationship. They can go to their own institution, wherever
that institution is. Or, they can simply check the box and say,
I would rather have a check sent to my mailing address. So,
there are many choices. All of these campus affiliation
products are optional for the student. The student does not
have to go to the campus affiliated institution. It is
certainly their choice. We think this has provided safe,
transparent access for funds for everybody.
Senator Reed. Ms. Lindstrom, I think in the comments, some
of these choices are harder than others, it seems, on campus.
Can you elaborate, because it--in fact, there is a suggestion
that there are some very preferential deals between financial
institutions and the campus which are giving the campus an
incentive, and they use the incentive to put people in these
accounts. Is that--is there data there?
Ms. Lindstrom. Yes. Yes. So, as I mentioned, the Consumer
Financial Protection Bureau has actually gathered quite a few
contracts and taken a look at what is in those contracts, and
there are some reimbursements that schools are getting,
essentially a bounty per student that takes up the account. So,
then, the student--or the school--has an interest in helping to
steer students into those accounts, and obviously, those are
written into the contracts deliberately. Yes. So, there is that
component, absolutely.
And then in terms of how that faces, or interfaces with the
student consumer, as I mentioned in my previous testimony, if
you are premailed a card when you have not even made a choice
yet and it has got the campus logo on it and the letter is
telling you that you should do this right now as a function of
receiving your financial aid refund, of course, you are going
to log on to the computer and get started enrolling. And, that
is in some models where the rubber hits the road.
So, when students actually log onto that screen, it is a
screen that is designed by the industry. They are making the
choice on the industry Web page, not on the campus or the
bursar Web site. The choice to opt into the industry or the
campus sponsored account is more prevalent and more prominent
and written in a way that, again, steers you to that choice.
You might have to click through four or five or six screens to
make the choice to steer the aid into your own bank account.
In some instances, you cannot actually make that choice
online. You actually have to snail mail or fax information
about your own bank account in order to get your aid steered in
that direction. So, in fact, it is harder and there are
barriers that are set up, and as a result, students are
compelled into this campus sponsored choice.
Senator Reed. Thank you. My time has expired. Thank you.
Chairman Johnson. Senator Heller.
Senator Heller. Mr. Chairman, thank you, and to the Ranking
Member, for having this hearing today, and also to our
witnesses that are also here. Thanks for taking time and
enlightening us on this particular issue.
I have probably a better understanding, for all the wrong
reasons, on this particular issue. I have four children. They
are either attending school or have just graduated from
college, and so I have got a pretty good idea firsthand of the
financial burdens that these students are facing, and on top of
that, the difficult job market that our youth are currently
facing. I think it is a--we do have two issues here, and that
is, obviously, the financial burden of student loans, but also
a jobless recovery over the last 5 or 6 years.
If you talk to some of these students, as I have, their
friends and my own children and those back in the State of
Nevada, they will tell you, you want to solve this problem, get
me a job. And, they said, we can solve the burden of our loans
if there were jobs created. And, they are very disappointed
that this Congress--and they keep asking, when is this Congress
going to do something that will help spur this economy and
create the jobs necessary so that these young men and women can
go into society and take care of themselves. But, obviously,
this is a hearing only about student loans, so we will keep it
in that direction.
I do not know if this was mentioned--I am sorry I missed
the opening statements--but the theme of Know Before You Owe,
the initiatives. Mr. Hunt, could you expand on what the private
sector is doing with this initiative.
Mr. Hunt. Sure. The private student loan process is like a
mortgage. You sit down with the said lender and you fill out an
application providing your assets, your liabilities, your
income and so forth. If it is approved, it is then sent to the
financial institution. The financial institution takes a look
at your request, takes a look at the assistance you may be
receiving from the Federal Government compares it to the cost
of education at that specific university, and then tells the
lender, the bank, here is the amount of money this person
should receive. It is the ability to repay and it has been
very, very successful.
And, if I may just take a moment, Senator, to respond to
just a couple of things Ms. Lindstrom said about the campus
affiliation. Her report of 2 years ago was very good in the
fact that it identified a single bad actor in the industry.
That bad actor had enforcement action from the FDIC and we
supported every single bit of that enforcement action.
I would tell you, these campus products are very popular,
very low complaint rates received by the CFPB. They help stunt
the tremendous growth of tuition. It helps to retain and
recruit faculty. Many institutions provide scholarships based
on this arrangement we have. Many of the banks hire interns
from that university if they have an alliance, as well. And, I
think most importantly, they provide financial literacy on
campus to those students. So, it provides safe access to funds.
It has been very well received from students and from
institutions.
And, I assure you, Senator, we have a lot of regulators in
our banks. If they thought we were unfair, deceptive, or
abusive, they would have no hesitation calling us to the mat
like the FDIC did with the one bad player.
Senator Heller. Mr. Hunt, in your understanding of Know
Before You Owe, do private lenders work with these students and
share with them what alternative financing may be available
outside of that institution, like Pell Grants and those kind of
issues?
Mr. Hunt. Sir, not only do we want to, we have to. It is
required by law. At three different steps throughout the
private loan application and disbursement process, we have to
provide disclosures to borrowers. There is no question there
are some benefits, obviously, to having Federal assistance
before you have private assistance. Then, I think, after you
exhaust some of the private matters, then you should go to a
private entity to do that. Most students do go to the Federal
Government assistance first before they come back to the
private. But, we have to. We want to.
We work with the students throughout, because you have to
remember, Senator, we have relationships already, usually with
their parents, and 97 percent of applications are cosigned by
parents or another family member. So, it is a family
generational thing. It is not just the first time we are
meeting the student.
Senator Heller. In this jobless recovery, if a student is
having a repayment problem, how do you work with them?
Mr. Hunt. Several opportunities, Senator. The last thing we
want to do is have someone's credit rating destroyed at the
very beginning of their career. We start notifying them months
ahead of time when their first payment is due. Then we work
with them in case they have hardship, undue hardship
especially, do not have the high-paying job, to either extend
their payments, refinance their payments, either one.
Senator Heller. Give me one more time--you may have
mentioned this--what is the average complaint rate for private
loans?
Mr. Hunt. Well, the CFPB, as you well know, and that is a
whole different subject on my plate, they receive complaints
from the public and then they disperse them to the public
without verifying whether the complaints are actually valid,
whether they are true or not, and then it is up to us to
disseminate whether it is true or not. But, even if you were to
take every single complaint as valid, if you look at the total
number of loans we produce, 8.5 million, there were 2,600
complaints about student lending in general. That equates to
0.03, three-one-hundredths of 1 percent, Senator.
Senator Heller. All right. Mr. Chairman, thank you.
Chairman Johnson. Senator Warner.
Senator Warner. Thank you, Mr. Chairman. I appreciate you
and the Ranking Member holding this hearing.
A couple of opening comments and then I want to make a few
advertisements for some solutions and get some response from
the panel and maybe again alert my colleagues to some ideas.
First, I hear more about student debt around Virginia than
I do about Obamacare. People are concerned. It is raised
everywhere. We all know the numbers. Mr. Bergeron's comments, I
supported Senator Warren's approach on refinancing. If we
cannot get that, we need to figure out some other option on
refinancing and recognize the combination between the Federal
and the private side that is going to have to come together.
Mr. Kocer mentioned something, and Senator Heller mentioned
Know Before You Owe. I actually think long before you get Know
Before You Owe, we ought to be doing something called Know
Before You Go, which is a bill that Senators Wyden and Rubio
and I have that would basically build on your idea, Mr. Kocer,
of we ought to have a common, easily accessible Web site, not
just in terms of student debt, but in terms of all the choices
a parent or a student makes before they go to college--
retention rates, graduation rates, if you choose a field, as
one of my daughters did, in art history--God bless her--what is
your chance of getting a job in that field----
[Laughter.]
Senator Warner. And, we have got a Zillow Web site on real
estate. Why can we not create the same for folks making, next
to purchasing a home, their most expensive choice they are
going to make, the cost of higher education? And, I would
include 4-year, 2-year, trade schools, as well. And, so, I
wholeheartedly endorse your idea. And, the remarkable thing is,
we do not even have to create any new reporting requirements.
We have all this data.
And, again, some of the conversation between Ms. Lindstrom
and Mr. Hunt, and I do believe we have got some legislation on
prepaid credit cards that, I think, would help clear up some of
these mistakes, but this Know Before You Go, one option.
Second, and again, apologies to the panel--I am going to
take their all nods on Know Before You Go--Mr. Bergeron, I am
going to take all your nods as that is a good idea. You are
going to get to weigh in on the second one.
There are times when I kind of scratch my head, when there
seems like there are certain kind of partial no-brainer
solutions that still are not law, and let me point out one
right now. And, this is not a full silver bullet to our
problems of increasing student debt. But, current law allows an
employer to take up to $5,000 of an employee's salary and
directly apply it to tuition. You know, we all hear about
employers who say, you know, come work with us. You are going
to get a Master's. We are going to help pay for it.
Senator Thune and I have said, well, why not take that same
concept on the question of student debt. Allow up to $5,000 of
a student, or a young person, or a not-so-young person's
payment and have that go directly against the debt. Obviously,
a great retention tool for the employer. The young employee
could opt in or out of this. But, obviously, the employee would
receive the benefit of having this money going pretax against
the debt.
To me, it seems like a no-brainer. Is there any sense from
the panel of whether you would think--and, hopefully,
relatively short answers on this--whether this makes sense or
not?
Mr. Bergeron. So, let me just agree with you totally on
this issue of the Know Before You Go. One of the things I did
before I joined----
Senator Warner. Get to the second part, too----
Mr. Bergeron. I will----
Senator Warner. ----because I have got one more commercial
to make before I am done in a minute and 18.
Mr. Bergeron. So, I will do it real fast. I really love the
Know Before You Go, but I think there is something that
employers should be doing, and whether it is a change in the
tax code to permit it or employers just doing it, just like
Starbucks has partnered with ASU. There is no reason an
employer could not do exactly what you want to do today.
Senator Warner. My understanding is there are preclusions
that would allow them to have that apply directly pretax----
Mr. Bergeron. Pretax, yes. You would have to change the tax
code. But, I think it is a great idea.
Senator Warner. Can we--I will settle for a ``yes.''
Ms. Lindstrom. Yes.
Mr. Kocer. Yes.
Mr. Hunt. Anything you can do to help the student would be
terrific.
Senator Warner. Right, and it is a retention tool for an
employer. A student or young person, not so young, necessarily,
with some of these debt burdens, makes sense.
Final, and it has been touched upon, income-based
repayment. Senator Rubio and I have an approach that would
say--we have got that out there as an option right now. It is
cumbersome, complicated. Why not allow income-based repayment
to become the top default mechanism, allowing, again, a student
to withdraw if he or she chooses not to, but would that not
provide more flexibility to folks to have the kind of career
choices that otherwise are being precluded? I know my time has
expired.
Mr. Bergeron. Yes. I absolutely agree that we should have
that as the default option, as I indicated in my testimony.
Ms. Lindstrom. I think we would prefer ensuring that
students go into the--or borrowers move right into the
repayment plan that is going to keep their costs as low as
possible, and IBR does not always work out that way for
borrowers, and, therefore, I do not think that IBR as the
default is necessarily the right thing.
However, for borrowers who are in delinquency and have been
going on in delinquency for 3 months, 6 months, I do believe
that some kind of automatic move into IBR makes sense for those
borrowers to help them protect their credit and get into
something that is clearly going to be more manageable than
unchecked delinquency.
Mr. Kocer. I agree with that response, too. It is not
always the most advantageous for students. It is good to see
which program would be best for them. But, it is a good back-up
for, if they are going to delinquency, to get them in a program
that they can better afford to spend.
Mr. Hunt. IBR--on the Federal side. It is not on the
private lending side. We have our own options, as well. But,
anything you can do to reduce the debt on the Federal side is
welcome.
Senator Warner. My time has gone on, but I would just say,
Mr. Chairman, there are a lot of folks who fall into default
because of if you take that straight 10-year payment, your
payments are so high coming out of school, and Income-Based
Repayment will give a lot more flexibility. Thank you, Mr.
Chairman.
Chairman Johnson. Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
Borrowers who are in serious financial trouble, either
because they have lost a job, they have lost a spouse, they
have had serious medical problems, can get a fresh start on
pretty much every kind of debt by declaring bankruptcy. They
can deal with credit card debt. They can deal with mortgages,
with payday loans. But, student loans are treated differently.
There is, essentially, no discharge, no matter how much trouble
you are in or why you are in trouble.
Federal student loans have been excluded from bankruptcy
since 1998, and in 2005, the banks successfully lobbied
Congress to end bankruptcy protection for private student
loans, as well. Now, the Federal Government at least offers
Federal borrowers programs for loan modifications, for default
rehabilitation, and for Income-Based Repayment, as we were just
talking about, that at least give people some chance to get
back on their feet. Look, it is nothing like a fresh start in
bankruptcy, and the Federal Government is still making huge
profits off these loans, but at least it is something.
Banks, by comparison, get the benefits of the bankruptcy
exclusion and do not offer much of anything in exchange to help
struggling borrowers. So, last summer, the Federal regulators,
including the FDIC, the OCC, and the Federal Reserve, made it
crystal clear that private student lenders could offer loan
modifications, like reduced interest rates, to struggling
borrowers without any penalty. But, according to the Consumer
Financial Protection Bureau, banks still, effectively, are not
offering that help.
So, what is the impact of that? Well, just 3 days ago, CNN
published a story that gave an idea. It was a story about a
woman who died, leaving her parents to care for three small
children and also leaving them with $100,000 in student loan
debt that the couple had cosigned. I think I just heard Mr.
Hunt say that the private student loans have about a 97 percent
cosigning rate. So, the grandparents of these little children
contacted the private lenders, but they could not get much help
to manage the huge monthly payments. The couple considered
bankruptcy over their daughter's student loan debt, only to
discover that bankruptcy is not an option to them.
So, here is my question. If struggling borrowers cannot
discharge their loans in bankruptcy, and if your banks will not
give them loan modifications, Mr. Hunt, what are they supposed
to do?
Mr. Hunt. So, Senator Warren, thank you very much for the
question. We share the same concern you do, is making sure that
we do everything we can to make sure that students' debt is
paid off in a timely manner, especially when you have life
circumstances that arise. A very tragic incident that happened.
I saw that on CNN and also read the extensive report by Senator
Reed on Christopher's Law.
I do not agree with you when you say there are not many
options for people to refinance. Citizens Bank, which has a
huge presence in Massachusetts, headquartered in Rhode Island,
does offer now refinancing----
Senator Warren. Now, wait, wait, wait. Let us just be
careful here when we are talking about refinancing.
Mr. Hunt. Sure.
Senator Warren. We are not talking about performing loans
and you like to reach out to your customers and say, have we
got a deal for you. We will lend you some more money. Here is
refinance. We are going to change your interest rates.
What I am talking about are loan modifications that reduce
the interest rate, that forgive interest, that reduce
principal. Do you have any data suggesting that the banks are
doing this, because Consumer Financial Protection Bureau says
they are not.
Mr. Hunt. Well, I think it is very important, Senator, that
when a person does restructure their loan for a lower interest
rate, it is loan modification and it is refinancing----
Senator Warren. So, you are----
Mr. Hunt. In Massachusetts, there is a $126 per month
savings for your constituents, and in Rhode Island, it is $149,
just by Citizens Bank----
Senator Warren. So----
Mr. Hunt. ----doing a refinancing----
Senator Warren. So, that is my question, again, Mr. Hunt.
Mr. Hunt. Yes.
Senator Warren. Are you telling me that all banks today in
America, or even a majority--do you have some data to suggest
how many are offering loan modifications for student borrowers
that will reduce interest rate or will reduce principal for
them? Do you have some data on that?
Mr. Hunt. I will tell you, when it comes to refinancing,
the actual amount of the interest rate, it is discovered. Wells
Fargo--Wells Fargo----
Senator Warren. I am sorry----
Mr. Hunt. ----has been doing this for 10 years----
Senator Warren. The question was, do you have any data to
suggest that the banks are offering the kinds of loan
modifications that will help people who are in financial
trouble get a chance to get back on their feet? After all, Mr.
Hunt, the banks lobbied to get nondischargeability in
bankruptcy. The question I started with here is what are people
supposed to do? What is this family supposed to do that now has
three children to take care of and $100,000 in nondischargeable
student loan debt from a child who died?
Mr. Hunt. So, Senator, thank you. Two things. There is now
loan forgiveness for a student who passes away. Many of our
banks are now formalizing that into their contract. I know one
is----
Senator Warren. I am sorry. You are telling me that this is
now available from all banks, that there is loan forgiveness,
and this couple can take advantage of this loan forgiveness
since their daughter died? I had not heard this.
Mr. Hunt. That is mostly right.
Senator Warren. Is this right?
Mr. Hunt. That is mostly right.
Senator Warren. I do not understand what mostly right
means----
Mr. Hunt. And I will let you know----
Senator Warren. Is it available or not?
Mr. Hunt. Not all banks. There are many more banks that are
giving loan forgiveness throughout the country.
Senator Warren. What number is ``many more''? More than
one----
Mr. Hunt. I would say right now, Senator----
Senator Warren. More than zero?
Mr. Hunt. Yes, ma'am. There are more than zero. In fact, I
know of about four, at least four that are doing it right now.
Senator Warren. Four out of 7,000?
Mr. Hunt. Well, not all 6,700 banks provide student
lending, and we do not represent all 6,700. I will tell you,
one large institution since 2011 has forgiven $26.8 million
because the student, unfortunately, passed away. I think you
are going to see more of our banks formalize that into their
contract. When a student does pass away----
Senator Warren. And when it goes----
Mr. Hunt. ----they are going to start forgiving----
Senator Warren. Thank you, Mr. Hunt----
Mr. Hunt. ----those loans more and more.
Senator Warren. And when it goes from four to eight, I am
sure you will announce that you have seen a hundred percent
increase.
Mr. Hunt. Well, keep in mind, Senator, you only have about
eight banks that dominate the market. So, we are making
progress. A lot of these banks do it by a case-by-case
scenario. There is nothing worse than the tragic accident that
happened.
Senator Warren. Yes, actually, there is something worse,
and that is when something like this happens and the family is
left with $100,000 in debt and three orphans to take care of.
That is worse. So----
Mr. Hunt. And I am hoping that bank forgives that loan.
Senator Warren. Well, I am hoping that bank will forgive
that loan, too.
Mr. Hunt. Sure.
Senator Warren. So far, what that bank has said is no. The
banks have not forgiven those loans. They have not provided
adequate relief to this family, and I do not know how many
other families are in those circumstances.
Thank you, Mr. Chairman.
You know, there really is no substitute for bankruptcy
protection. But, the banks went out and lobbied to make sure
that they were going to be exempt from the bankruptcy laws, and
now they will not even provide the modest relief that is
provided on Federal loans for people who end up in terrible
financial circumstances. I think this is wrong.
Chairman Johnson. Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
I want to kind of begin with a discussion about the
baseline problem, which, to me, is that we do not have a
financially literate population, especially among youth, and a
lot of what we are talking about today really requires a level
of sophistication in terms of understanding the obligations,
understanding time value of money, understanding what compound
interest can do to you long term, and making sure that they are
in the best position. The first line of defense to helping a
student is the student themselves and the student's family.
And, so, I have some questions for Ms. Lindstrom. Number
one, when you looked at this whole report, you talked about
transparency, and I could not agree more, and I think Senator
Warner made a great point about let us let people know on the
front end, even beyond student debt.
But, what recommendations would you have for us in terms of
providing greater transparency on all of these financial
transactions, not just debit cards, but student loans in
general so that we have more truth in lending, if I can kind of
put it that way.
Ms. Lindstrom. Well, I mean, we are also supportive of the
Know Before You Owe provisions that have been discussed. So, in
that regard, I think that would be a great start.
Senator Heitkamp. But, would you not agree that sometimes
students make some pretty bad decisions, even if they have
access to all that information?
Ms. Lindstrom. Yes. I mean, I do think that financial
education plays a role, but it is not the primary way that you
are going to clean up or make the marketplace fair for
students. I mean, in reality, these are uninformed consumers
who are just emerging in the marketplace and they need stronger
protections.
Senator Heitkamp. You know, I am disturbed a little bit by
that answer, that it is not the primary way, because we can
deal with student loan debt, and we have dealt with mortgage
loan debt, and we can deal with credit card debt, but the most
important thing that we can do, in my opinion--and I have been
in this fight since the bankruptcy days, since I was Attorney
General and represented and was responsible for consumer
protection----
Ms. Lindstrom. Mm-hmm.
Senator Heitkamp. I see over and over again an
unwillingness to kind of get the base of information that
consumers need to provide themselves with the first line of
protection. And, so, I mean, I can appreciate and understand
what you are saying, that things can be clouded and masked and
we need to take care of that. We need to make sure it is as
transparent as what it can.
But, transitioning to maybe a bigger discussion, what are
campuses doing? What are student organizations doing? What are
you doing on campuses to provide better consumer education to
students so they do exercise either the political clout that
they have to tell the administration, I want more options, or
the wherewithal to make a different choice.
Ms. Lindstrom. Mm-hmm. Well, yes. So, specifically, we do
run financial education campaigns from time to time. We
actually are a student-run organization----
Senator Heitkamp. Yes, I know.
Ms. Lindstrom. ----so students make those choices.
Currently, I do not have anything that we are running right
now, but in the past, we have run--previous to the passage of
the CARD Act, we ran a big campaign called FEESA, F-E-E-S-A,
where students ran a tongue-in-cheek bank marketing campaign on
campus. They dressed up like credit card marketers and they
gave out free T-shirts and lollipops, et cetera, and consumer
education guides for students on how to navigate the credit
card deals that were being hocked on campus at the time. So,
that is an example of the type of education that we have
engaged in.
And, right now, we are considering engaging in an education
campaign around keeping your interest low when you get into
repayment----
Senator Heitkamp. I would just suggest that on the
University of North Dakota, they have absolutely created within
their Student Financial Office a consumer protection kind of
division with consumer education, you know, trying to figure
out debt.
But, I have one other question for you. As you look at
this, and as you look at not only Federal Government responding
but the State governments responding, have you seen any States
pass any kind of laws that you think provide a pretty good
example of the right kind of protection for consumers?
Ms. Lindstrom. Right now, the State of California has been
considering legislation in the campus banking arena to provide
more disclosures for students up front, as has the State of
Oregon. Neither of those have actually passed, but I know that
those have been--I have spoken to legislators at the State
level who are considering those types of things.
Senator Heitkamp. The example that I have is ``no use''
fees. There are a number of States that do not allow ``no use''
fees. I think North Dakota is one of them. I mean, you cannot
discount from the card if you do not use the card.
And, so, these are the kinds of things that I think we need
to have a broader understanding, because way too often here, we
think that the only people who are concerned about these issues
in the U.S. Congress or the Federal Government or a Federal
agency, when, in fact, there is a whole campus involvement,
State law involvement, local State regulatory involvement. And,
so, I think we need to have a better understanding of what the
whole effort is so that we can continue to provide students
with the opportunity to seek other--you know, a broad array of
funding options, but also the opportunity to make choices and
the education to help them make good choices.
So, thank you, Mr. Chairman.
Chairman Johnson. Senator Manchin.
Senator Manchin. I want to follow up on what Senator
Heitkamp, because, as usual, she and I are on the same
wavelength here. I just want to read to you--and you all can
then tell me if you agree or not--but, this is the information
I received. As of the fourth quarter of 2012, nearly half of
the 25-year-old age group has student debt, and overall student
debt levels tripled between 2004 and 2012. Further, nearly one-
third of the borrowers in repayment are delinquent on student
debt--one-third are delinquent on student debt. And, recent
data shows shifting demographics of borrowers, with increasing
proportions of borrowers in the 40 to 49 age group, 50 to 59,
and 60-plus age groups. Student loan debt has quadrupled
between 2003 and 2014, while other forms of nonmortgage debt
have decreased or seen little growth during that same period of
time. And, it says, during the same period of time, the number
of students with student loan debt increased by 70 percent, to
almost 40 million individuals, and the average balance per
borrower also increased by 70 percent, to nearly $25,000 per
borrower.
It seems like there is an awful lot of easy money being
pushed in one direction to where you have the best chance of a
return. I am just simply looking at it without blinders on. It
has got to be the best game in town from the banking
standpoint, because, I mean, you can sign them up for life and
try to collect that for life and they cannot escape it, if
there is any way to collect it.
And I know it is very emotional, and we all are, but I have
talked to some of the people at West Virginia University, and
they told me, they said, it is a hard time denying anybody. You
cannot deny them, and you cannot tell them that they do not
need all that money. You can tell them that maybe they--but, we
do not have any authority or any law to tell them or advise
them. So, they might be getting an apartment they cannot
afford, or using the money to buy a car, and using the money
for almost everything except their education and then throwing
the debt on education. This is what I am being told by the
University. And, when they are reaching out, something is
wrong. There is a problem.
And, then you look at the statistics. When everything else
is going one way, this continues to go up disproportionately to
everything else. So, that is why you are seeing an awful lot of
movement and pressure on this, and something has to be done.
So, we will start--we can start, Mr. Hunt, with you and go
right down the line and see if you all have two sentences on
this.
Mr. Hunt. Senator, you are 110 percent correct. Something
has to be done about the cost of college, A, number one. If we
do not address the cost of college, we are going to be right
back here every single year, talking about----
Senator Manchin. But, if you are--would you agree that--and
I am not being, I mean----
Mr. Hunt. Right.
Senator Manchin. ----if it was not for bankers, I would be
in trouble, because I borrow. We all borrow. But, the bottom
line is, this seems to be pretty lucrative from the banking
standpoint.
Mr. Hunt. I do not agree with that.
Senator Manchin. OK.
Mr. Hunt. If this was lucrative, we would not have gone
from a $24 billion industry to $8 billion, and we would not
have had banks exit instead of getting into it. I assure you
that if it was lucrative, you would see more banks getting in,
not getting out.
Senator Manchin. How many----
Mr. Hunt. That is not happening.
Senator Manchin. What is your percentage of denials on
college loan requests?
Mr. Hunt. Oh, about half.
Senator Manchin. You think----
Mr. Hunt. It is hard. It is hard to get a student loan,
sir----
Senator Manchin. You think you all turn down about 50
percent right now?
Mr. Hunt. That is about right. That is about right.
Senator Manchin. And that has been about the same all the
way? And if I asked all these----
Mr. Hunt. Probably a little bit higher now than it was----
Senator Manchin. If I asked all these students how hard it
was, all these students out here, did you have a hard time
getting a loan, any of you? If you had a hard time and they
turned you down, raise your hand.
OK. One hand went up out of the whole room. So, sir----
Mr. Hunt. I do not know if they are doing private. Look, it
is almost impossible not to get a Federal loan.
Senator Manchin. It is almost impossible not to get one?
Mr. Hunt. Not to get a Federal loan.
Senator Manchin. That is what----
Mr. Hunt. It is hard to get a private student loan. The
Federal student loan process----
Senator Manchin. A private school loan----
Mr. Hunt. ----has no underwriting. The Federal Government
has no underwriting standards.
Senator Manchin. Uh-huh.
Mr. Hunt. We have all the underwriting standards.
Senator Manchin. OK.
Mr. Hunt. If you get a loan from us, we have a pretty good
reasonable expectation you are going to pay it back. That is
because you qualify for it.
Senator Manchin. OK.
Mr. Hunt. And, you have to keep in mind----
Senator Manchin. But, now, the Federal--so, you are saying
we are lax on our end.
Mr. Hunt. Absolutely.
Senator Manchin. OK.
Mr. Hunt. And, so, there is your cost of college.
Senator Manchin. So it is us. We have got to change it.
Mr. Hunt. You have got a higher default rate. You have got
a 15 percent default rate. You need to have a serious
conversation about the cost of college.
Senator Manchin. We have got a 33.
We will go right down. Mr. Kocer, if you----
Mr. Kocer. Just a comment there as far as the Federal loan
programs are concerned, is when you are saying to find ways to
reduce the amount of borrowing for students who do not really
need it, if we, the Financial Aid Administrators----
Senator Manchin. I am not--I am just saying that you all
can evaluate, is that truly the cost? Is that $1,200-a-month
apartment and that $500-a-month car payment, should that be
part of your student loan?
Mr. Kocer. No, and it is not.
Senator Manchin. OK.
Mr. Kocer. When we figure costs of attendance, we figure
out a standard cost that would fit an average person, not
students who have borrowed or would borrow above that.
Senator Manchin. Can students borrow more than what is--I
mean, as long as what they qualify for, can they borrow as much
as they qualify for?
Mr. Kocer. They can borrow up to a cost of attendance, but
one thing that the Federal Government does not allow schools to
do is to lower the amount of Federal loans that we can give
students. So, if they are at a low-cost----
Senator Manchin. Do you think the Federal Government needs
to change the rules of how we do Federal loans?
Mr. Kocer. I think they should give Financial Aid
Administrators more control over making situations like that
possible. If the student is a part-time student, they may not
need to take the full student loan that they are taking out.
Or, if they are going to a low-cost institution, they may not
need that, even though they can qualify it under the cost of
attendance.
Senator Manchin. Mr. Chairman, would it be possible to hear
the other two, if you do not mind? Is that OK? Thank you, Mr.
Chairman.
Ma'am, if you would, Ms. Lindstrom.
Ms. Lindstrom. Yes. I would say that we do not want
underwriting criteria for Stafford student loans. Student loans
are an access tool. They keep the doors of college open for
everybody----
Senator Manchin. So, what you are saying----
Ms. Lindstrom. ----regardless of your background.
Senator Manchin. ----is you do not think there should be
any more Federal rules on that. Just let the good times roll.
Ms. Lindstrom. Correct, for Stafford student--for
undergraduate Stafford loans, we absolutely need to ensure that
that stays as aid, student aid to be able to access college.
Now, when it comes to Parental Plus Loans, which is another
Federal----
Senator Manchin. So, you are in disagreement with her
completely.
Mr. Kocer. Well, just to give you an example of----
Senator Manchin. I am. I am just asking if you are.
[Laughter.]
Mr. Kocer. Well, to give you--yes----
[Laughter.]
Ms. Lindstrom. Woo-hoo.
Mr. Kocer. To give you an example, if somebody is a half-
time student and they stay a half-time student, they will run
out of their loan eligibility before they can get a 4-year
degree.
Senator Manchin. Got you.
Mr. Kocer. And, so you can counsel them and counsel them
and counsel them, but if they can get the money before they can
achieve that degree, then they will have----
Senator Manchin. We are getting somewhere----
Mr. Kocer. ----private loan----
Senator Manchin. OK. And, I enjoy your passion. I really
do.
[Laughter.]
Ms. Lindstrom. I enjoy yours.
[Laughter.]
Ms. Lindstrom. So, at any rate, that is how I would view
that. I think when it comes to private student loans, I mean,
the reality is that complaints are on the rise, absolutely, and
thank goodness, private student loan consumers have a place to
complain. The market is expanding once again. Previous to the
credit crisis, there were all sorts of collusion and aggressive
marketing tactics and steering occurring on college campuses.
There is absolutely no indication that that--well, some of
those problems have been solved. Others have not.
We should be making sure that there is a bankruptcy
provision available for private student loan borrowers. We
should be making sure that private student loan----
Senator Manchin. Well, if we do that----
Ms. Lindstrom. ----certification----
Senator Manchin. ----you would agree that we are going to
have to change the rules a little bit differently than what
they are----
Ms. Lindstrom. For private student loan borrowers.
Senator Manchin. I am saying for the Stafford, too. If you
are going to be able to use bankruptcy to not pay your Stafford
loan back, then you have got to make sure----
Ms. Lindstrom. I am sorry. For private student--so, I,
actually, I am talking about the private student loan product
and not the Federal student loan product. So, I do think----
Senator Manchin. Well, the Federal, I mean, it is your tax
dollars. I do not care how they come. We are still spending
your money or giving it away. So, as an investor, you would
want to make sure you are protected the best you can. So, if
you are going to let me escape because of bankruptcy, but you
are going to make sure I am not a worthy borrower, but you want
that to be open, then you are saying you want the Federal
Government and the taxpayers to pick up a--now they going to
pick up a great loss ratio.
You believe it should be supplemented. I understand. I
think I know where you are coming from, and we have a lot of
our members that feel the same.
Ms. Lindstrom. I was making the point around the private
student loan product, in particular----
Senator Manchin. OK. If I can----
Ms. Lindstrom. ----completely separate from the Federal
student loan product.
Senator Manchin. ----I want to give Mr. Bergeron just a
little bit of an opportunity. I am sorry.
Mr. Bergeron. Thank you, Senator. I want to go back to the
point that Senator Warner was making earlier, that it is really
important for us to do a much better job helping students----
Senator Manchin. Right.
Mr. Bergeron. ----as they are leaving high school and make
decisions about where to go to college so that they take cost
into consideration as they do that--cost, graduation rates.
When I worked for the administration, we did a College
Scorecard, which made sure that those pieces of information, as
well as the default and loan burden, were taken into account.
But, I do think on this issue of bankruptcy protection, we
at the Center for American Progress wrote a paper where we said
some Federal student loans should be dischargeable in
bankruptcy, but they are different--they are very specific,
where the economy changes and what people are prepared for,
those jobs disappear because of broader economic changes. You
know, I would use the example of closed captioning, real-time
writing, where, at some point, technology is going to just
overwhelm that.
So, I think that there is a limited dischargeability in
bankruptcy that should be applied to Federal loans, but I also
think that private student loans should offer the kinds of
protections that the Federal programs do in order to get that
bankruptcy protection, and I think there are commercial
products that could be developed that would meet that test,
and, so, it would address the concerns that----
Senator Manchin. Let me----
Mr. Bergeron. ----that Senator Warner was raising--Warren
was raising earlier today.
Senator Manchin. The Chairman has been so kind here. Let me
just make sure that--we know that education is the great
equalizer. It is the thing that has made this country what it
is today and it is the thing that will continue to keep us the
country that we should be, as long as we have the availability
of education. So, I think we are all passionate about that.
The numbers are going the wrong direction. You all saw the
problems we had in the student loan, just trying to get it back
down to the 3.8 and trying to stay within market rates and
things of this sort.
We are going to have to get all of you together, even
though you might disagree philosophically on certain parts, but
how do we keep college affordable, but also the risks that will
be taken and who is going to underwrite it, and how do we do
it? By getting kids more involved in the educational
understanding of what their responsibilities are.
And, with that, Mr. Chairman, thank you so much for your
time.
Chairman Johnson. I want to thank today's witnesses for
testifying about these important issues.
This hearing is adjourned.
[Whereupon, at 11:29 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF DAVID A. BERGERON
Vice President for Postsecondary Education Policy, Center for American
Progress
July 31, 2014
Mr. Chairman and Members of the Committee, I am David Bergeron,
Vice President for Postsecondary Education Policy at the Center for
American Progress (CAP). The Center for American Progress is an
independent nonpartisan educational institute dedicated to improving
the lives of Americans through progressive ideas and action. As
progressives, we believe America is a land of boundless opportunity,
where people can better themselves, their children, their families, and
their communities through education, hard work, and the freedom to
climb the ladder of economic mobility. Accessible, affordable, and
high-quality postsecondary education empowers people to strive for
better economic opportunities.
I am grateful to the Committee for providing me the opportunity to
appear today to discuss the financial products, in particular student
loans, that are available to students and their families to help pay
for college. In a few short weeks, our Nation's nearly 7,400 colleges,
universities, and other postsecondary education institutions \1\ will
welcome more than 21 million students to their campuses \2\; and,
unlike just a few short years ago, these campuses are both physical and
virtual with 12.5 percent of the Nation's college students enrolled
exclusively in online programs. These students will come to the campus
concerned not just about whether they can cut it academically but also
about how they will pay tuition and fees, buy books, and meet living
expenses. They have good reason to be concerned. Although funding for
Federal grants and tax benefits has increased, the net tuition and fee
costs at our Nation's colleges and universities have increased even
more rapidly. At public 4-year colleges and universities, for example,
it costs 50 percent more today in real terms than it did in 1994. \3\
---------------------------------------------------------------------------
\1\ Scott A. Ginder, Janice E. Kelly-Reid, Farrah B. Mann,
``Postsecondary Institutions and Cost of Attendance in 2013-14'';
``Degrees and Other Awards Conferred, 2012-13''; and ``12-Month
Enrollment, 2012-13'', National Center for Education Statistics, U.S.
Department of Education, July 2014, available at http://nces.ed.gov/
pubs2014/2014066.pdf.
\2\ Scott Ginder and Christina Stearns, ``Enrollment in Distance
Education Courses, by State: Fall 2012'', National Center for Education
Statistics, U.S. Department of Education, June 2014, available at
http://nces.ed.gov/pubs2014/2014023.pdf.
\3\ Sandy Baum and Jennifer Ma, ``Trends in College Pricing
2013'', College Board, 2013, available at http://
trends.collegeboard.org/sites/default/files/college-pricing-2013-full-
report-140108.pdf.
---------------------------------------------------------------------------
The Obama administration, where I served as the acting Assistant
Secretary for Postsecondary Education and the Deputy Assistant
Secretary for Policy, Planning, and Innovation until last year, has
worked with Congress to increase Federal funding for grants for college
students from low- and middle-income families, expand higher education
tax benefits that help middle-income families, and make student loans
more affordable by lowering interest rates and providing repayment
options that allow borrowers to repay those loans as a percentage of
their after-graduation income. The Obama administration has also worked
to expand consumer information tools, like the College Scorecard, to
steer prospective college students toward more affordable and
productive institutions and make it easier to apply for Federal student
aid and repay student loans.
Role of Student Loans in Financing Postsecondary Education
Most of the borrowing for postsecondary education is through one of
the Federal student loan programs authorized under title IV of the
Higher Education Act of 1965, as amended; and since July 1, 2010,
nearly all of those loans have been made directly by the Federal
Government under the William D. Ford Federal Direct Loan program. \4\
In just the last 7 years, we have seen outstanding student debt grow
from $560 billion at the end of 2006 to $1.26 trillion by March 2014.
\5\ Of the $1.26 trillion in student loans outstanding in March 2014,
approximately one trillion was under one of the Federal loan programs.
---------------------------------------------------------------------------
\4\ Perkins Loans are still being made from institutional
revolving funds. In fiscal year 2014, approximately $1 billion of the
$101 billion in new Federal student loans were made under the Perkins
Loan program. FY2015 Department of Education Justifications of
Appropriation Estimates to the Congress, U.S. Department of Education,
March 2013, available at http://www2.ed.gov/about/overview/budget/
budget15/justifications/index.html.
\5\ Consumer Credit--G.19, Federal Reserve, May 2014, available at
http://www.federalreserve.gov/releases/g19/current/.
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In the last several decades, it appears that we have optimized the
Nation's higher education financing system for debt. Despite the
increases in Federal grants and tax credits, the number of students
that borrow to meet educational expenses have increased as has the
amount that each student must borrow. Between 2007-08 and 2011-12, the
median amount borrowed by undergraduates completing:
a bachelor's degree increased from $20,000 to $26,500, or
33 percent, in just 4 years.
an associate's degree increased from $8,500 to $13,590, or
60 percent, during the same period; and
a certificate increased from $8,813 to $10,327, or 17
percent.
Borrowing among graduate students has also increased. The median
amount borrowed by graduate students completing a degree program
increased from $38,000 to $55,600, an increase of 46 percent again in
just 4 short years. \6\
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\6\ Analysis of data from the 2011-12 National Postsecondary
Student Aid Survey (NPSAS) by the Center for American Progress (CAP)
specifically for this testimony. Information about the National
Postsecondary Student Aid Survey can be found at http://nces.ed.gov/
surveys/npsas/. The CAP analysis was performed using the National
Center for Education Statistics Datalab at http://nces.ed.gov/datalab/.
---------------------------------------------------------------------------
As significant as student loan debt is for those who complete
postsecondary education, we need to be most concerned about those who
leave college with significant amounts of student loan debt but without
completing their education. While some of those leaving postsecondary
education before completing a degree do so to start a new job or remain
in their current job with enhanced skills, many leave simply because
they feel they aren't getting what they need out of postsecondary
education either because of the quality of the program they are
enrolled in or their own lack of preparation. Among apparent drop
outs--students that were enrolled between July and December 2011 but
did not earn a degree or certificate or re-enroll for the spring term
in 2012, nearly half had borrowed with median debt among those who
borrowed of $10,000 while 10 percent of borrowers had debt in excess of
$33,000. \7\
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\7\ Analysis of data from the 2011-12 National Postsecondary
Student Aid Survey (NPSAS) by the Center for American Progress (CAP)
specifically for this testimony. Information about the National
Postsecondary Student Aid Survey can be found at http://nces.ed.gov/
surveys/npsas/. The CAP analysis was performed using the National
Center for Education Statistics Datalab at http://nces.ed.gov/datalab/.
---------------------------------------------------------------------------
Private Student Loans
In addition to the Federal loan programs, many students and their
families take out private student loans. One of the issues with private
student loans is that we lack good data on the scope and condition of
the market. Today, our best data on the interaction between Federal and
private loans is the National Postsecondary Student Aid Survey (NPSAS).
This survey is only conducted every 4 years and does not provide
student level information. As a result, unlike Federal student loans
where the Government knows exactly who has student loans, how much debt
they have incurred, and the repayment status of that debt, the private
student loan market is opaque. Even estimates of the magnitude of the
amount outstanding private loans vary dramatically--from as low as $80
billion to a high as $140 billion. \8\ Better information on private
student loans is critical both for policymakers and for borrowers.
Senator Shaheen has embraced an idea we advocated in her Simplifying
Access to Student Loan Information Act, \9\ which calls for the
development of a central online portal that would allow students to
review all their public and private student loans as well as repayment
options in one place, which would in turn help students better manage,
understand and repay their debt. Such a system would also allow
policymakers to have access to transparent information into the size
and health of the private student loan market. Data on this market is
critical to understand the impact of student loans on the economy.
---------------------------------------------------------------------------
\8\ Consumer Financial Protection Bureau and U.S. Department of
Education, Private Student Loans, August 29, 2012, available at http://
files.consumerfinance.gov/f/201207_cfpb_Reports_Private-Student-
Loans.pdf.
\9\ Senator Jeanne Shaheen, ``Shaheen Introduces Bill To Help
Students Manage Debt'', March 11, 2014, available at http://
www.shaheen.senate.gov/news/press/release/?id=bbe0cf00-6d91-4678-8d03-
223d4804334f.
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The data from the NPSAS paint a troubling picture of the role that
private loans play in financing a postsecondary education by increasing
the level of debt that student ultimately hold at graduation. For
example, among students receiving a bachelor's degree in 2011-12,
graduates with both Federal and private loans borrowed an average of
$33,600, or 35 percent more than those with just Federal loans who have
an average debt of $24,800. Among students receiving a graduate degree
in 2011-12, graduates that had both Federal and private loans borrowed
an average of $68,600, or 61 percent more than those with just Federal
loans who averaged $42,500. \10\
---------------------------------------------------------------------------
\10\ Analysis of data from the 2011-12 National Postsecondary
Student Aid Survey (NPSAS) by the Center for American Progress (CAP)
specifically for this testimony. Information about the National
Postsecondary Student Aid Survey can be found at http://nces.ed.gov/
surveys/npsas/. The CAP analysis was performed using the National
Center for Education Statistics Datalab at http://nces.ed.gov/datalab/.
---------------------------------------------------------------------------
Differences in Consumer Protections
There are significant differences in the consumer protections among
Federal loans and private student loans. Private student loans
typically charge higher, often risk-adjusted, interest rates, require
cosigners, and lack many of the consumer protections standard in
Federal student loans. Federal student loan borrowers have access to an
array of repayment options that include plans that allow them to pay 10
or 15 percent of their discretionary income, which is the amount above
a subsistence budget. Private student loans often offer only one
repayment plan of fixed term and monthly payments. Federal student loan
borrowers are also entitled to deferments and forbearances and the
loans are forgiven on the death or total, permanent disability of the
borrower. While some private lenders offer borrowers the opportunity to
apply for forbearance, additional fees for setting up the forbearance
are common. Finally, most Federal loans can also be forgiven after 20
years of repayment under an income-based repayment plan, which can be
shortened to 10 years for those working in public service. Although
some State loan programs offer targeted loan cancellation for public
service, none is a sweeping as that offered by the Federal offer and no
private lender offers a formal loan forgiveness program.
What is also concerning is that some private student loans are made
directly to students without knowledge or involvement of the
institution of higher education. In order to ensure that students first
take full advantage of the Federal student financial aid available, the
institution must know if the student has applied for and will receive a
private loan. For this reason, I believe the proposal put forth by
Senator Durbin--along with Senators Harkin and Franken--for the Know
Before You Owe Private Student Loan Act of 2013 is particularly
important. \11\ This bill would require lenders to seek certification
of attendance status and cost of attendance before making a private
loan and requires that the postsecondary institutions provide this
information to the lender. Not only would the certification play an
important role when the loan is being originated but it also would
provide the opportunity for the institution to do appropriate loan
counseling.
---------------------------------------------------------------------------
\11\ Senator Richard Durbin, ``As Student Loan Debt Surpasses $1
Trillion, Senators Introduce Legislation To Address Crisis'', January
23, 2013 available at http://www.durbin.senate.gov/public/index.cfm/
pressreleases?ID=adad47a3-9b82-4c46-b971-57bb9dc11044.
---------------------------------------------------------------------------
As important as it is for the institution to know about a private
loan being made to a student, it is equally important to eliminate the
potential abuse that could occur if an institution stands to benefit
financially from the making of the private loan or the provision of
other financial products to students. The Consumer Financial Protection
Bureau has been examining the relationships between institutions of
higher education and financial products being offered to students. Last
December, Richard Cordray, Director of the Consumer Financial
Protection Bureau, expressed concerns about some financial institutions
making secret payments to institutions of higher education. He called
on the financial institutions to voluntarily make those payments
public. \12\ Senator Harkin, in his discussion draft of a bill to
extend and improve the Higher Education Act of 1965 \13\ has proposed a
similar safeguard as a code of conduct that would prohibit an
institution or an employee of an institution from profiting from the
making of a private student loan or selling other financial product.
These safeguards are clearly necessary. Some institutions of higher
education have placed their economic interest before those of their
students in entering into agreements with vendors to offer financial
services and products to them. One glaring recent example is the
growing use by institutions of prepaid debit cards to disburse Federal
student aid funds. When prepaid debit cards are issued in other
contexts, efforts have been made to ensure that consumers have a choice
of financial products to minimize the amount of their own wages or
benefits needlessly eroded by fees. The same should be true for the
students aid dollars, which may be flowing in the form of student
loans.
---------------------------------------------------------------------------
\12\ Rohit Chopra, ``Sunshine for Student Financial Products'',
Consumer Financial Protection Bureau, December 17, 2013, available at
http://www.consumerfinance.gov/blog/sunshine-for-student-financial-
products/.
\13\ Senator Tom Harkin, ``With Focus on Affordability and Access,
HELP Chairman Harkin Unveils Discussion Draft To Reauthorize Higher
Education Act'', Senate Health, Education, Labor, and Pensions (HELP)
Committee, June 25, 2014, available at http://www.help.senate.gov/
newsroom/press/release/?id=5d38939d-4dc5-4ca8-9924-5762c9bb30e7.
---------------------------------------------------------------------------
Bankruptcy Protection
Despite the differences between Federal and private loans, they do
have one thing in common: generally speaking, neither can be discharged
through bankruptcy. Since our Nation's founding, bankruptcy has been a
last resort for individuals and businesses facing severe economic
hardships in need of a fresh start. Bankruptcy is available for nearly
all types of borrowers and types of debt except for student loans and
mortgages on a primary residence.
Some members of Congress have proposed legislation that would again
permit private student loans to be discharged more readily in
bankruptcy, effectively making student loans equal to credit card debt.
Not all private loans are bad and not all Federal loans are ultimately
good for borrowers. For example, not all Federal loans have the same
borrower protections. While income-based repayment options, like Pay As
You Earn, often make it easier for borrowers to meet their living
expenses and pay off at least a portion of their student loans, parents
using PLUS loans to borrow for a child's education are generally
excluded from using the income-based repayment benefit. Making student
loans dischargeable in bankruptcy is not just an issue for young adults
but also of parents. Congress should move to make some student loans
dischargeable in bankruptcy. Last year, CAP offered a proposal to
reform the bankruptcy treatment of student loans. Specifically, we
suggested that only loans with certain characteristics should be
protected from discharge in bankruptcy--loans with reasonable interest
rates and fees; deferment and forbearance provisions similar to today's
Federal loans; access to income-based repayment; and reasonable
likelihood of repayment. \14\
---------------------------------------------------------------------------
\14\ Joe Valenti and David Bergeron, ``How Qualified Student Loans
Could Protect Borrowers and Taxpayers'', Center for American Progress,
August 20, 2013, available at http://www.americanprogress.org/issues/
higher-education/report/2013/08/20/72508/how-qualified-student-loans-
could-protect-borrowers-and-taxpayers/.
---------------------------------------------------------------------------
Impact of Student Loans on the Economy
Whether we take steps to address the bankruptcy treatment or
otherwise improve the terms and conditions under which private student
loans are offered, it appears that the record levels of student loan
debt may have hampered recovery from the recession, or even long-term
growth. \15\ As student loan debt rises, young people are more likely
to live with their families. A recent Pew Research Center analysis
found that 21.6 million young adults were living with their parents in
2012--an increase of 3.1 million since the start of the Great Recession
in 2007, which is not accounted for by increased college enrollment.
\16\ Household formation is critical for economic activity as Moody's
Analytics estimates that each new household generates an estimated
$145,000 of economic activity. \17\ As recently as May, Liberty Street
Economics wrote on the impact of student loan debt on home ownership
and auto markets. \18\ There is also some evidence that high levels of
student debt may cause borrowers to delay marriage or having children.
\19\ Others have offered evidence that the current levels of student
loan debt are impacting the creation of small businesses \20\ and,
although there is not empirical evidence, high levels of student loan
debt likely result in delayed retirement savings or lower saving levels
overall further damaging long-term financial security.
---------------------------------------------------------------------------
\15\ Dina ElBoghdady, ``Student Debt May Hurt Housing Recovery by
Hampering First-Time Buyers'', Washington Post, February 17, 2014,
available at http://www.washingtonpost.com/business/economy/student-
debt-may-hurt-housing-recovery-by-hampering-first-time-buyers/2014/02/
17/d90c7c1e-94bf-11e3-83b9-1f024193bb84_story.html.
\16\ Richard Fry, ``A Rising Share of Young Adults Live in Their
Parents' Home'', Pew Research, August 1, 2013, available at http://
www.pewsocialtrends.org/2013/08/01/a-rising-share-of-young-adults-live-
in-their-parents-home/.
\17\ Catherine Rampell, ``As New Graduates Return To Nest, Economy
Also Feels the Pain'', New York Times, November 16, 2011, available at
http://www.nytimes.com/2011/11/17/business/economy/as-graduates-move-
back-home-economy-feels-the-pain.html?--r=1&.
\18\ Meta Brown, Sydnee Caldwell, and Sarah Sutherland, ``Young
Student Loan Borrowers Remained on the Sidelines of the Housing Market
in 2013'', Liberty Street Economics, Federal Reserve Bank of New York,
May 13, 2014, available at http://
libertystreeteconomics.newyorkfed.org/2014/05/just-released-young-
student-loan-borrowers-remained-on-the-sidelines-of-the-housing-market-
in-2013.html#.U9aIuSbD-70.
\19\ William G. Gale, Benjamin H. Harris, Bryant Renaud, and
Katherine Rodihan, ``Student Loans Rising: An Overview of Causes,
Consequences, and Policy Options'', Brookings Institute, May 2014
available at http://www.brookings.edu/research/papers/2014/05/student-
loan-debt-rising-gale-harris.
\20\ Phyllis Korkki, ``The Ripple Effects of Rising Student
Debt'', New York Times, May 24, 2014, available at http://
www.nytimes.com/2014/05/25/business/the-ripple-effects-of-rising-
student-debt.html.
---------------------------------------------------------------------------
In analysis CAP did earlier this year, we found that of the $1
trillion in Federal student loans outstanding, only 60 percent of
borrowers in repayment were actually making scheduled payments. The
remaining 40 percent of borrowers were in deferment, forbearance, or
default. As noted above we do not have good data on the condition of
private student loans. However, I do not believe that those loans are
in a better condition than Federal student loans, which could mean that
there is an additional $30 to $80 billion in distressed private loans.
Most troubling for me are borrowers that have both private and
Federal student loans. The combination of private and Federal student
loans leaves borrowers caught between a rock and a hard place. The
private student loan, because it is less flexible, may be more
difficult and expensive to pay back, but the consequences for
nonpayment of Federal loans are much higher. Borrowers with both types
of loans who cannot keep up with payments must choose between falling
behind on a high-interest private loan, leading to owing more interest
and damaging one's credit, or falling behind on a Federal loan, leading
to possible wage garnishment and other penalties.
CAP has strongly advocated for refinancing of student loans to the
same low interest rates that apply to other loan products in order to
make families more financially secure and stimulate the broader
economy. A number of senators have offered proposals for refinancing of
both Federal and private student loans including Senator Warren who
offered the Bank on Students Emergency Loan Refinancing Act, which is
cosponsored by the majority of this Committee. Last month, Senator
Warren's bill failed to get the 60 votes needed to advance the
legislation, with a 56-38 vote on the Senate floor. I hope that the
Senate will reconsider that important legislation again in the fall
because refinancing student loans would potentially save borrowers
billions, give them the ability to take control of their future and
become more financially stable. The money that student loan borrowers
would save could be spent and reinvested in the economy. Lowering
student loan interest rates to 5 percent would save $14 billion for
borrowers and add $21 billion to the economy in the first year alone.
\21\ Refinancing student loans would be good for young people and their
families, allowing as many as 25 million borrowers to make smaller
student loan payments.
---------------------------------------------------------------------------
\21\ David Bergeron, Elizabeth Baylor, and Joe Valenti,
``Resetting the Trillion-Dollar Student-Loan Debt Problem Center for
American Progress'', November 21, 2013, available at http://
www.americanprogress.org/issues/higher-education/report/2013/11/21/
79821/resetting-the-trillion-dollar-student-loan-debt-problem/; and
Anne Johnson and Tobin Van Ostern, ``It's Our Interest: The Need To
Reduce Student Loan Interest Rates'', Center for American Progress,
February 13. 2013, available at http://cdn.americanprogress.org/wp-
content/uploads/2013/02/StudentLoanRefinancing-5.pdf.
---------------------------------------------------------------------------
Some analysts have argued that a typical student loan borrower is
no worse off today than a generation ago. These analysts go on to
suggest that borrowers struggling with high debt loads is not new and
that the percentage of borrowers with high payment-to-income ratios has
not increased over the last 20 years and may have declined. \22\
However, the analysts discount the significance of one particularly
disturbing trend--the lengthening of the time required to repay a
student loan from 7.5 years to 13.4 years, an increase of 79 percent, a
significant change resulting from the loan consolidation activity that
occurred in the early 2000s. The lengthening of the time required to
repay a student loan should not be discounted. If it takes more than 13
years after graduating to finish repaying student loans, it certainly
impacts a borrower's ability to save for their child's education, buy a
home, start a small business, or save for retirement.
---------------------------------------------------------------------------
\22\ Beth Akers and Matthew M. Chingos, ``Is a Student Loan Crisis
on the Horizon?'', Brown Center on Education Policy at Brookings, June
2014, available at http://www.brookings.edu//media/research/files/
reports/2014/06/24%20student%20loan%20crisis%20akers%20chingos/
is%20a%20student%20loan%20crisis%20on%20the%20horizon.pdf.
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Servicing and Debt Collection
Even with good terms and conditions for the Federal student loans,
poor servicing of those loans can increase loan delinquencies and
defaults. A study of student loan servicing conducted by the Federal
Reserve Bank of New York demonstrates that there are significant gaps
in the servicing of student loans. \23\ The Federal Reserve analysis
revealed that most households, even among those with higher levels of
student loan literacy, had a poor understanding of the implications of
being delinquent on student loans. This should not be surprising as
there is significant pressure on the Federal Government and private
lenders to service as cheaply as possible. Today, the Federal
Government spends between $1.67 and $2.22 per month per account on
servicing. \24\
---------------------------------------------------------------------------
\23\ Basit Zafar, Zachary Bleemer, Meta Brown, and Wilbert van der
Klaauw, ``What Americans (Don't) Know About Student Loan Collections'',
Liberty Street Economics, Federal Reserve Bank of New York, June 5,
2014, available at http://libertystreeteconomics.newyorkfed.org/2014/
06/what-americans-dont-know-about-student-loan-
collections.html#.U9ZdWCbD-70.
\24\ The Appendix, Budget of the United States Government, Fiscal
Year 2015, Office of Management and Budget, Executive Office of the
President, March 4, 2014, available at: http://www.whitehouse.gov/omb/
budget/Appendix.
---------------------------------------------------------------------------
Additionally, the current student loan servicing system is a
product of regulations that govern the servicing of Federal Family
Education Loans (FFEL). These regulations were written in the 1970s to
reflect the then existing ``best practices'' in loan servicing. These
regulations became the de facto standard for student loan servicing not
just for FFEL but also for private loans. When the Federal Direct Loan
Program was implemented, the FFEL servicing regulations became the core
of the business rules governing servicing in the new Direct Loan
program. During my tenure with the Department of Education, we often
discussed the need to update and improve the loan servicing regulations
but the loan servicers, having built automated systems to implement
those regulations, opposed any effort to update them.
The Department moved from rule-based to performance-based servicing
for the Direct Loan Program; the hope at that time was that such a
change would improve the quality of service and lead to innovation in
the way the Federal student loans are serviced. Unfortunately, other
changes to the servicing system have limited the potential impact of
this change. When the Health Care and Education Reconciliation Act was
enacted, a provision was included that mandated awarding servicing
contracts to not-for-profit loan servicers. The not-for-profit loan
servicers were guaranteed a specific number of loan accounts to
service, which rendered the performance-based elements of the servicing
contracts ineffective.
The bottom line is that student loans need better servicing. If a
debt is appropriately serviced, the borrower is less likely to become
delinquent and default. But we need to remember that there is an entire
industry that has grown up around delinquency and default in student
loans. Currently, the Department of Education employs 22 private
contractors \25\ to collect on the more than $35 billion in defaulted
student loan debt. \26\ Private lenders, guarantee agencies, and
institutions also employ private debt collection contractors. A recent
audit by the Department of Education's Inspector General found that the
Department did not effectively monitor whether the private collection
agencies are abiding by the Federal debt collection laws. Given the
high stakes associated with Federal student loans, such a lapse is very
troubling and suggests that it may be time to fundamentally rethink our
student loan strategy. Last December, the Consumer Financial Protection
Bureau issued a rule that will allow the agency to supervise nonbank
student loan servicers for the first time. I applaud the Bureau's
action because it brings needed protections to a financial market that
has seen a rise in borrower delinquency in recent years. \27\ But what
is also necessary is for significant improvements in the servicing of
private student loans.
---------------------------------------------------------------------------
\25\ Patrick J. Howard, ``Handling of Borrower Complaints Against
Private Collection Agencies'', Office of Inspector General, U.S.
Department of Education, July 11, 2014, available at: http://
www2.ed.gov/about/offices/list/oig/auditreports/fy2014/a06m0012.pdf.
\26\ The Appendix, Budget of the United States Government, Fiscal
Year 2015, Office of Management and Budget, Executive Office of the
President, March 4, 2014, available at: http://www.whitehouse.gov/omb/
budget/Appendix.
\27\ CFPB To Oversee Nonbank Student Loan Servicers, Consumer
Financial Protection Bureau, December 3, 2013, available at http://
www.consumerfinance.gov/newsroom/cfpb-to-oversee-nonbank-student-loan-
servicers/.
---------------------------------------------------------------------------
Let me conclude by asking a fundamental question: why, with all the
repayment options available to borrowers today, do we still have
defaults in the Federal student loan programs? Likely, it is because we
have made the system too complex to navigate, we are not doing a good
enough job in counseling students before they borrow or when they leave
postsecondary education, and we are not servicing the loans well
enough.
Ultimately, we need to rethink how we are making and collecting on
Federal student loans. Perhaps it is time to consider, as some in
Congress and the community have suggested, using the wage withholding
system to collect student loans as a way to prevent delinquency and
default. Under a wage withholding based student loan collection system,
the borrower would tell her employer that she had a student loan. The
employer would withhold a student loan payment equal to, for example,
10 percent of the borrower's discretionary income. The employer would
send the student payments to the Federal Government along with the
income and other taxes withheld. At least quarterly, the employer would
provide sufficient information to the Federal Government to reconcile
the loan payments for each borrower. Once the loan is repaid, the
Federal Government would refund to the borrower any overpayment that
results from the wage withholding. Such as collection system for
student loans is not new. Australia and New Zealand have such systems.
However, in the United States we should allow the employee to opt out
of wage withholding and arrange to pay under an alternative repayment
system. This would be similar to the alternative quarterly filling
which some taxpayers use today. Implementing a wage withholding based
repayment system would result in fewer defaults and less delinquency in
the Federal loan programs. Since defaults and delinquency on Federal
student loans are extremely harmful to borrowers, and only the debt
collection contractors ultimately benefit from defaults, such a new
system should be considered. Such an approach would also significantly
reduce the cost of servicing. These savings could be passed on to
borrowers through lower interest rates or to current students through
increased Pell Grants.
Thank you again for the opportunity to appear before you today. I
am happy to respond to any questions you have.
______
PREPARED STATEMENT OF CHRISTINE LINDSTROM
Higher Education Program Director, U.S. Public Interest Research Group
July 31, 2014
Thank you Chairman Johnson, Ranking Member Crapo, and other
distinguished Senators for giving me this opportunity to speak. My name
is Chris Lindstrom, and I am the Higher Education Program Director with
the U.S. Public Interest Research Group (U.S. PIRG). U.S. PIRG is a
federation of State-based consumer protection groups, which have 75
campus chapters in 20 States across the country. On behalf of those
student chapters, our project works to promote affordable and
manageable student loan policy, to increase grant aid, and to protect
student consumers on campus.
The topic of today's hearing is broad, so I will focus my remarks
on issues that U.S. PIRG has been actively tracking and promoting
related to the role of financial institutions on campus. Our top
priority over the past 2 years has been the debit cards and bank
accounts that millions of students are exposed to on campus each term.
I will also briefly touch on the private and institutional loans that
students may take up to pay for college.
Since 2007, we've worked to ensure that students are protected from
the tricks and traps layered into high-cost products like campus credit
cards, private student loans, and campus bank accounts and debit cards.
Right now, students are being hit with high fees that are hard to avoid
as they try to access their Federal aid refunds through campus-
sponsored bank accounts and prepaid debit cards. The lowest income
students, who receive the most in financial aid, are the prime targets
for these products and are the hardest hit. Paying extra fees to access
financial aid through a campus-sponsored account, combined with a high
student debt burden and other pressing financial concerns such as child
care and transportation costs, can overwhelm low income students and
cause them to withdraw from post-secondary programs.
We found in our 2012 report, ``The Campus Debit Card Trap'', that
two in five college students in the country are exposed to debit cards
on campus that may drive up their costs. Students at some campuses are
charged steep and unusual fees to get to their Federal financial aid,
including PIN transaction fees at the point of sale and overdraft fees
at $37 or more. On the whole, these accounts are not necessarily a
better deal for students than what they might find through a bank not
affiliated with campus. \1\
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\1\ Report, ``The Campus Debit Card Trap'', U.S. Public Interest
Research Group Education Fund, May 30, 2012.
---------------------------------------------------------------------------
Still, industry leading banks and financial firms can see 40 to 75
percent of students on a campus using the campus based products after a
few years of marketing. \2\ How do they do it? How do they get such
high uptake into accounts that are not any better, and in many cases,
worse, than what they would get in accounts off campus? How are they
profiting?
---------------------------------------------------------------------------
\2\ Issue Brief, ``Perspectives on Financial Products Marketed to
College Students'', The Consumer Financial Protection Bureau, March 26,
2014.
---------------------------------------------------------------------------
First, banks and financial firms behind these products often rely
on revenue-sharing agreements with campus administrations to gain
dominant access to students on campus. Contracts disclosed to the
Consumer Financial Protection Bureau, as part of its investigation
launched last year include receiving direct payment to use the school's
logo, providing bonuses for recruiting students, and discounted pricing
in exchange for marketing access.
Second, they use push marketing and other strategies to steer
students into opening up these new accounts over using their existing
accounts. Higher One, a prominent financial firm in this market,
premails a card to every student on campus, before they have opted in
or out. The cards are cobranded with the college logo, giving the
impression that the student must open the account. \3\
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\3\ News story, ``New Haven's Higher One Faces New Restrictions in
Draft Federal Rules'', The New Haven Register, March 25, 2014.
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Once the student logs online to opt in or opt out, Higher One
steers folks into their accounts by slowing down their aid
disbursements if they make a choice other than Higher One. This makes
it unfairly onerous to set up direct deposit to an existing bank
account to receive funds.
At another college, bank representatives actually set up tables
right outside the student ID office, and pitch students as they apply
for their IDs to sign up for a bank account right then and there. These
bank accounts can be accessed right through the student ID card.
Students can get freebies like bags and tee shirts for signing up. \4\
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\4\ News Story, ``Bank Pays $34 Bounty for New College
Customers'', ABC News, September 5, 2013.
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Finally, the fees can be high, and unusual. Fees on university-
sponsored cards include a variety of PIN swipe fees, inactivity fees,
overdraft fees, ATM fees and fees to reload prepaid cards. These fees
can be hard to avoid--for example, if a merchant only accepts PIN
debit, or there is no fee-free ATM available. Additionally, if these
fees are being paid out of Federal loan funds, then students are paying
interest on these fees for at least a decade.
All campus bank accounts and prepaid card services charge
overdrafts. Overdraft coverage is a form of credit, since the financial
institution covers the consumer's shortfall and subsequently is repaid
the amount extended plus a fee. Some banks engage in the abusive
practice of purposefully ``reordering'' transactions to maximize
overdraft fees. In 2012, the FDIC settled a case with Higher One for
$11 million dollars over similar claims. \5\ Overdraft fees are
inconsistent with the Department of Education's existing rules on
school-sponsored accounts, which state that schools, and the financial
institutions handling financial aid refunds on the school's behalf,
cannot market a card or account as credit or convert it to a credit
instrument.
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\5\ Press Release, ``FDIC Announces Settlements With Higher One,
Inc., New Haven, Connecticut, and the Bancorp Bank, Wilmington,
Delaware, for Unfair and Deceptive Practices'', Federal Deposit
Insurance Commission, August 8, 2012.
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Department of Education rules also require that students be
provided `convenient' fee-free ATM access. In practice, such access can
be limited. At many community colleges, there is a run on the campus
ATM machines on the day that financial aid is disbursed. The machines
are cleaned out of cash early so students at the back of the line must
go to a foreign ATM machine to access their aid, where they incur fees.
Also, machines on campus may be closed for maintenance for days at a
time, or be located in buildings that are locked at nights and on
weekends.
One argument that is being made in defense of these campus banking
products is that too many low income students are not able to acquire a
bank account other than on campus, and by controlling their access to
campus bank accounts, their access to other beneficial products
available in the mainstream financial marketplace is blocked. The CFPB
laid this argument to rest at a recent presentation to the U.S.
Department of Education. The agency analyzed data from the Federal
Deposit Insurance Commission and the Current Population Survey. It
found that very few students--less than half a percent--are
legitimately unable to secure a bank account. What that means is that a
new student on campus doesn't have a bank account because she has
chosen not to have one, or hasn't gotten one yet. \6\ So, put simply,
students do not need campus sponsored bank accounts.
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\6\ Issue Brief, ``Perspectives on Financial Products Marketed to
College Students'', The Consumer Financial Protection Bureau, March 26,
2014.
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There is a steady drumbeat of evidence that campus-sponsored
accounts are a bad deal for students. In the past 2 years, at the
request of Senator Dick Durbin (D-IL) and Representative George Miller
(D-CA), the CFPB has undertaken an investigation; \7\ so has the
Department of Education's Inspector General which resulted in a recent
report, \8\ and finally, the General Accounting Office has recommended
policy changes that would benefit students. \9\ There is also a class
action lawsuit pending in Connecticut \10\ and two major enforcement
actions by the FDIC \11\ and the Federal Reserve Board \12\ with
another still in development. The Department of Education is also in
the process of updating its rules to address similar concerns.
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\7\ Press Release, ``CFPB Launches Inquiry on Campus Financial
Products'', January 31, 2013.
\8\ Report, ``Third-Party Servicer Use of Debit Cards To Deliver
Title IV Fund'', Department of Education Office of the Inspector
General, March 10, 2014.
\9\ Report, ``College Debit Cards: Actions Needed To Address ATM
Access, Student Choice, and Transparency'', General Accounting Office,
February 13, 2014.
\10\ Press Release, ``Higher One Agrees To Settle Class Action
Regarding OneAccount Fees'', Tycko and Zavareei, July 23, 2014.
\11\ Press Release, ``FDIC Announces Settlements With Higher One,
Inc., New Haven, Connecticut, and the Bancorp Bank, Wilmington,
Delaware, for Unfair and Deceptive Practices'', Federal Deposit
Insurance Commission, August 8, 2012.
\12\ Press Release, Board of Governors of the Federal Reserve
System, July 1, 2014.
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While these actions are encouraging, I urge you to promote
solutions from this chamber as well. Our elected leaders in the Senate
can act directly on behalf of students and families shouldering high
costs associated with higher education.
I urge you to consider legislation that bans revenue-sharing
agreements between colleges and banks or financial firms crafted
specifically to offer bank accounts and related banking products to
students on campus. The conflict of interest inherent in these
agreements is problematic for the student consumer. We've seen this
conflict of interest before in the campus marketplace around private
student loans and campus credit cards. In fact, both Congress and the
Department of Education have acted decisively in recent years to limit
push-marketing tactics, revenue sharing, and unfavorable terms on
private student loans and credit cards offered on campus. Now is the
time to extend similar solutions to campus bank accounts and related
products. Such a solution would remove any financial incentive for a
college to ``monetize'' its relationship with a bank in a way that
harms students. Specifically, effective legislation would ban banks and
financial firms from offering compensation to schools for assisting in
the marketing of financial products; and would further require that any
financial products recommended by the college to students be in the
students' best interests.
Private student loans are another financial product targeting
students. While these loans only accounted for seven percent of all
educational loans made last year, they are very risky. Private student
loans, like credit cards, generally offer variable interest rates that
are higher for those borrowers with the least means. Repayment options
are also severely limited. While the market for private student loans
shrunk due to the financial crisis, it is expanding once again. \13\
According to the CFPB, the majority of private student loan borrowers
have not maximized their Federal student loans before turning to
private loans. I encourage you to consider legislation that will add
more checks and balances into the private student loan market,
specifically by requiring that all private student loan products must
be certified by the student's financial aid office before approval.
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\13\ Report, ``Private Loans, Public Complaints: The CFPB's
Consumer Complaints Database Gets Real Results for Student Borrowers'',
U.S. Public Interest Research Group Education Fund, October 24, 2014.
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In a similar vein, institutional private loans deserve scrutiny. A
Senate HELP committee investigation found that half a million students
leave their for-profit college without a degree, shouldering high debt
levels that are more challenging to manage without credentials. \14\
Before the financial crisis, for-profit colleges played the role of
financial institution, offering institutional private loans to student
recruits on top of their Federal loans. While many of these
institutional loan programs have been discontinued, borrowers who are
in repayment now carrying these loans are dealing with high costs and
little recourse. We urge you to consider offering restitution for these
borrowers who are ensnared in these bad loan deals.
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\14\ Report, ``For Profit Higher Education: The Failure To
Safeguard the Federal Investment and Ensure Student Success'', Senate
Health Education, Labor, and Pensions Committee, July 30, 2012.
---------------------------------------------------------------------------
______
PREPARED STATEMENT OF KENNETH KOCER
Director of Financial Assistance, Mount Marty College, Yankton, South
Dakota, and President, South Dakota Association of Student Financial
Aid Administrators
July 31, 2014
Chairman Johnson, Ranking Member Crapo, and Members of the
Committee, thank you for inviting me to testify this morning on the
important topic of private education loans. For the past 23 years I
have served as Director of Financial Assistance at Mount Marty College
in Yankton, South Dakota. I am also the current president of the South
Dakota Association of Student Financial Aid Administrators (SDASFAA).
In addition, my institution is also a member of the National
Association of Student Financial Aid Administrators (NASFAA), the
national association representing financial aid administrators at the
Federal level.
At Mount Marty College, we actively promote the Federal student
loan programs for students as their first and best option when
considering a loan to assist with educational costs, as do many of my
colleagues throughout South Dakota. In particular, financial aid
administrators counsel students on the many benefits of the Federal
student loan program, including the availability of subsidized interest
for certain borrowers, options for loan forgiveness, and the multiple
generous repayment plans. Beyond these benefits, the Federal Direct
Loan program additionally offers: deferment and forbearance options,
Federal consolidation opportunities, and in many instances lower
interest rates.
Even with students being counseled to utilize (and exhaust) the
Federal student loans available to them, some still find that they need
additional resources. Private loans can fill the gap in certain cases,
by funding a student's educational costs when Federal resources fall
short. Institutions in South Dakota generally have a lower tuition rate
when compared to other States, yet even we find that some students will
need to utilize private education loans. In surveying my colleagues
throughout the State, as many as one third of students on some campuses
receive private education loans.
I'd like to share with you an example of the ``gap'' that I
described above, that may cause a student to utilize a private student
loan in order cover educational costs. Let's say an institution costs
$18,000 for tuition, fees, room and board, setting aside for now any
indirect costs like books, transportation, and personal costs.
If the student is not Pell Grant eligible, the only guaranteed
Federal eligibility the student has as a first year dependent
undergraduate student is a direct loan for the amount of $5,500. Using
the aforementioned example of our $18,000 school, this leaves over
$12,000 which the student would need to find a way to fund. Lacking
parental support, this shortfall in Federal loan eligibility leaves the
student looking to other options. For this reason private student
loans, with proper consumer protections, do fill an important need for
some students.
I'd like now to briefly walk you through the processing procedure
for private student loans. It begins with the student selecting a
private lender they feel best suits their needs. In South Dakota a
number of schools provide a site where students can access a
``historical'' list of private loans that students at that institution
have utilized in the past. Importantly, providing a ``historical list''
of private education loans is different than providing a ``preferred
lender list,'' in which case the schools recommend specific private
loans to students. A historical list displays features of the different
private loan programs, enabling students to make comparisons that
hopefully lead to an informed decision. Once a student selects the
private loan they wish to borrow, they apply for the loan directly
through the private lender, the lender approves the loan, and a
certification request is sent to the school. The school reviews the
student's educational cost of attendance and the financial aid
resources that the student has already received (for example, Federal
loans and grants) to determine the amount of the private loan for which
the student is eligible.
By involving the school in the private loan certification process,
it allows the school to track all borrowing a student is incurring, and
counsel the student on the overall amount of their loan debt. From an
institutional perspective, we consider this a good practice as it
provides us with more information to assist in preventing students from
over-borrowing. Through the process of certifying the private loan the
school can ensure the student has not borrowed beyond the calculated
cost of attendance.
There are quite a few private lending institutions that currently
utilize school certification as a prerequisite in determining whether
the student is eligible for their private education loan, but lenders
are not required to do so.
Having provided some context on private education loans, I'd like
to offer the following recommendations to improve the private loan
process for all borrowers.
Recommendation 1
Require School Certification for All Private Education Loans
The current private education loan application process should be
revised to continue to counter the impact of lender marketing, and to
assist in managing student over-borrowing. Replacing student self-
certification with full school certification would give institutions
the opportunity to ensure that a student is aware of the benefits of
Federal loans before the student commits to a potentially less
favorable private loan. Additionally, by requiring that an aid
administrator review the student's remaining eligibility under cost of
attendance limits, we can help reduce unnecessary or inappropriate
student borrowing.
Recommendation 2
Provide One Single Web Site Where Students Can See All Their Education
Borrowing From Federal, Institutional, and Private Sources
SDASFAA supports NASFAA's recommendation to create a universal loan
portal for students.
Congress should mandate the creation of a single web portal where
students can easily access information about all of their student
loans. This would allow all educational loans from the Federal
Government, private lenders, and colleges and universities to be
reported to one central database. The creation of such a resource could
result from the expansion of the data collected by the National Student
Loan Data System (NSLDS).
Students need an accessible ``one-stop shop'' where they can manage
their student loans. Many borrowers have multiple loans with different
loan holders that may be in various stages of repayment. Having a
central Web site where borrowers could access information about all of
their loans would significantly help students as they manage their
borrowing and repayment. Under such a scenario, all students would have
access to their entire debt portfolio in real time, enabling them to
calculate a more accurate monthly repayment amount based on a variety
of potential circumstances.
It is critical that students be able to obtain and monitor all of
their loan information in one central database, regardless of their
loan's origination, rather than having to pull information together in
a piecemeal fashion, which may cause important information to fall
through the cracks. Currently NSLDS only partially serves this purpose
as it includes only some Federal loans, and it does not include health
professions loans made through the Department of Health and Human
Services (HHS), private loans, or institutional loans. A universal loan
portal would capture all of these loans.
Appendix: Example of Certifying a Private Loan Under Calculated Cost of
Attendance
The U.S. Department of Education provides schools with ``allowable
costs'' which may be included in a students' educational ``cost of
attendance.'' This ``cost of attendance'' amount is very important as
it determines the maximum amount of aid a student may receive and
assists in controlling over-borrowing by the student.
The ``cost of attendance'' includes direct costs the student may
incur such as:
Tuition and Fees
Room and Board (if on-campus)
But the cost of attendance also includes ``indirect costs'' a
student may incur such as:
Books and supplies
Transportation
Personal expenses
Financial aid offices can also take into account other student
costs such as disability expenses, child care and a computer used for
the students program of study.
A typical 9 month budget could look something like this:
Tuition/Fees $10,000
Room & Board $6,000
Transportation $2,000
Personal $2,000
Books $1,000
Loan Fees $100
Total $21,100
If the student were receiving the following financial aid for this
period:
Pell Grant $5,000
SEOG Grant $1,000
Scholarship $4,000
Perkins Loan $1,000
TEACH Grant $3,000
Direct Sub. $3,500
Direct Unsub. $2,000
Total $19,500
The school is able to determine that the student still has $1,600
of eligibility remaining toward allowable educational costs: $21,100
minus $19,500. If a private loan request for $10,000 comes to the
school for certification, the school would only allow $1,600 of that
request for the students cost. If, however, the private loan request
did not come to the school for certification and instead went directly
to the student, the student is in essence borrowing $8,400 above their
educational costs. School certification would prevent this.
A SDASFAA member institution recently described a student
requesting a $20,000 private student loan. This private loan required
school certification. The school denied the private loan, as the
student was already receiving financial aid to cover their full
educational cost of attendance. As it turned out, the student wanted to
buy a car. If this loan had not been certified through the financial
aid office, it would have added another $20,000 in student loan debt
for an item which was not education related.
Simply put, a private lender that does not require school
certification, is awarding the student based on credit-worthiness, but
is not taking into account the actual cost of attendance for the
student or the resources the student may have already received to meet
their cost of attendance.
______
PREPARED STATEMENT OF RICHARD HUNT
President and Chief Executive Officer, Consumer Bankers Association
July 31, 2014
Chairman Johnson, Ranking Member Crapo, and Members of the
Committee, thank you for convening today's hearing on financial
products for college students. The timing of this hearing could not be
better. Families across the country are preparing to send students off
to school over the next few weeks and, while most will have their
financing squared away ahead of time, many will make important
decisions about how and where to bank once they arrive on campus,
therefore the need for safe, regulated, transparent products will never
be more important.
The Consumer Bankers Association (CBA) is the trade association for
today's leaders in retail banking--financial services geared toward
consumers and small businesses. Our mission is to preserve and promote
the retail banking industry as it strives to fulfill the financial
needs of the American consumer and small businesses. CBA's corporate
members (the Nation's largest financial institutions, as well as many
regional banks) collectively hold two-thirds of the industry's total
assets. Our associate members represent the premier providers of
technology and services to banks.
Several CBA members provide student loans and banking services for
the 21 million students enrolled in U.S. colleges, as well as their
families. \1\ We appreciate the opportunity to offer the insights of
our consumer-focused banks on these products, services, and their
associated marketplaces.
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\1\ U.S. Department of Education, National Center for Education
Statistics. (2013). Digest of Education Statistics, 2012 (NCES 2014-
015), Chapter 3. http://nces.ed.gov/fastfacts/display.asp?id=98
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Before addressing the specific issues you asked me to discuss, I
think it is critical to acknowledge the real crisis we face today--the
rising cost of higher education. Since 1978, tuition and fees at
institutions of higher education have grown at more than four times the
rate of inflation and even twice the rate of health care costs. \2\ If
policymakers fail to find ways to make college more affordable, then we
are simply addressing the symptoms of a much bigger problem and
allowing it to snowball, to the detriment of our Nation's youngest
citizens. CBA members strongly believe in the pursuit of higher
education, a term which can mean anything from vocational training to
graduate work, depending on the student's plans. Continued learning is
absolutely critical for economic mobility and the success of our
Nation's economy. Despite the rising cost of a diploma, study upon
study has shown the return on the college investment remains
unparalleled. \3\ CBA's members are committed to helping their
customers invest in themselves, their families, and ultimately their
futures.
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\2\ Bloomberg, ``Cost of College Degree in U.S. Soars 12-Fold'',
August 15, 2012. http://www.bloomberg.com/news/2012-08-15/cost-of-
college-degree-in-u-s-soars-12-fold-chart-of-the-day.html
\3\ New York Federal Reserve Board, Current Issues in Economics,
``Do Benefits of Colleges Still Outweigh the Costs?'' May 2014. http://
www.ny.frb.org/research/current_issues/ci20-3.pdf
---------------------------------------------------------------------------
Deciding where to attend and how to pay for college are among the
most important financial decisions an individual will make. Financial
institutions can play a role in this process by offering products to
help finance college and by working with students and their families on
planning for their futures. Before many students take their first
college tour, their families have already benefited from a multitude of
services provided by financial institutions as they manage their
savings. Increasingly, families obtain important advice on paying for
college tailored to their needs. We think it is never too early to
begin this planning process. Financial institutions, particularly
retail banks, want to help their customers with this pivotal
opportunity, but the role of financial institutions in higher education
lending today is quite limited. I would like to provide you an update
on student lending by the private sector.
Today, the Federal Government Dominates the Student-Lending Marketplace
The Department of Education (DOE) disburses roughly $100-110
billion per year through the Federal Stafford and PLUS programs, 92
percent of student and parent loans, \4\ compared to $6.5-7.5 billion
dispersed by private lenders. \5\ Of the more than $1 trillion in
outstanding student loan debt, less than 8 percent are private loans.
According to the data analysis firm MeasureOne, which surveyed the
seven largest private student lenders accounting for 90-95 percent of
the private loan market, only $90 billion of the $1.2 trillion in
outstanding student loan debt consists of private loans. \6\
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\4\ College Board, ``Trends in Student Aid 2013''. https://
trends.collegeboard.org/student-aid/figures-tables/growth-federal-and-
nonfederal-loans-over-time
\5\ Measure One, ``Private Student Loan Report 2013''. http://
www.measureone.com/reports
\6\ Measure One, ``Private Student Loan Report 2013''. http://
www.measureone.com/reports
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In the wake of the financial crisis, many private student lenders
strengthened their underwriting standards, while others continued their
long-standing practice of conservative underwriting, and the
performance of private student loans has responded accordingly with
delinquency and default rates dropping markedly. Private student loans
carry no Government guaranty, so if they are not repaid, the lender
loses.
As Beth Akers of the Brookings Institute recently wrote, ``[The
evidence] does not indicate that aggressive regulation of the private
lending industry is necessary. As discussed, financial institutions
have little incentive to provide loans they do not expect the borrower
to repay. In this sense, the industry is self-regulating by design.''
\7\
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\7\ Center for Higher Education Reform, ``How Much Is Too Much:
Evidence on Financial Well Being and Student Loan Debt'', May 2014.
http://www.aei.org/files/2014/05/14/-how-much-is-too-
much_100837569045.pdf
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For a lender to offer a sound private loan product, as required by
prudential regulators, applications must be put through a robust
underwriting process, where a determination is made whether the
potential borrower is likely to repay their loans. Lenders encourage
the use of cosigners, who often have more extensive credit histories
and better credit scores than students, in order to offer the lowest
possible interest rates for consumers. Unlike with Federal Direct
Loans, origination fees are not charged.
Data compiled in the MeasureOne 2013 survey of private student
lenders, and reflected once again in the second Report issued two days
ago (July 29th), clearly demonstrates the value of sound underwriting
that responsibly assesses a borrower's ability to repay--delinquencies
and defaults are declining and are at the lowest level since the credit
crisis. Continuing strong private loan performance shows:
Early stage delinquencies (30 to 89 days past due) declined
17 percent from Q1 2013 to Q1 2014 from 3.59 percent to 2.97
percent.
Serious delinquencies (90+ days past due) declined 13
percent from Q1 2013 to Q1 2014 from 2.92 percent to 2.55
percent.
Charge off rates also declined to post credit-crisis lows
with rates dropping from 3.5 percent in Q1 2013 to 3.16 percent
in Q1 2014.
Nearly three out of four private student loans are in active
repayment status, as opposed to deferment or forbearance, a high rate
which again illustrates that private student loan borrowers are
successfully managing their repayment obligations.
By way of comparison, the Federal student loan program carries a 3-
year cohort default rate of more than 14 percent. \8\ Further, much of
the Federal loan portfolio is not in an active repayment status. Of
those loans in active repayment, multiple reports have estimated more
than 40 percent will default or become at least 90 days delinquent. \9\
This is in spite of generous income-based repayment plans. Data
available from the Consumer Financial Protection Bureau (CFPB) and
others shows the average balance of income-driven repayment plans
stands at more than $45,000, with an average defaulted Federal loan
balance of $14,000. \10\ This suggests income based repayment plans are
helping certain types of borrowers, but may not be a ``silver bullet''
in terms of eliminating all Federal loan defaults.
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\8\ U.S. Department of Education, Office of Federal Student Aid,
National Default Rate Briefings for FY2011 2-Year Rates and FY2010 3-
Year Rates. http://www.ifap.ed.gov/eannouncements/
093013CDRNationalBriefings2YRand3YR.html
\9\ Institute for Higher Education Policy, ``Delinquency: The
Untold Story of Student Loan Borrowing'', March 2011. http://
www.ihep.org/assets/files/publications/a-f/delinquency-
the_untold_story_final_march_2011.pdf
\10\ Consumer Financial Protection Bureau Blog, ``A Closer Look at
the Trillion'', April 2013. http://www.consumerfinance.gov/blog/a-
closer-look-at-the-trillion/
---------------------------------------------------------------------------
Though Both Federal and Private Student Loans Support the Attainment of
Higher Education, These Products Are Quite Different in
Structure and Design
As has been well-chronicled, there are numerous repayment options
on Federal student loans, including monthly payment plans tied to
income, as well as easily available deferments and forbearances for
times of economic hardship. Repayment flexibility is particularly
necessary on Federal student loans because Federal student loans lack a
robust assessment of a borrower's ability to repay. As then-CFPB
Associate Director Raj Date has said, ``If you are going to lend money,
you should probably care about getting paid back. And if you care about
getting paid back, you should probably inquire about, and evaluate, a
borrower's ability to pay you back.'' \11\
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\11\ Remarks of Raj Date, American Bankers Association Conference,
Orlando, FL, June 2012. http://www.consumerfinance.gov/newsroom/
remarks-by-raj-date-to-the-american-bankers-association-conference/
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However, the unique nature of the Federal student loan program
means traditional measures of ability to repay may not be useful for a
large portion of these programs. The Federal loan programs are designed
to foster access to higher education, and the loans are meant to be
repaid with future earnings. Annual and cumulative loan limits are
somewhat helpful in preventing undergraduate Federal Stafford Loan
borrowers from over-borrowing. However, the PLUS Loan Program for
parents and graduate students is designed to supplement the Federal
Stafford Programs. These loans are available up to the full cost of
attendance, including living expenses, and only include a high-level
check for major adverse credit events--they do not include a
prospective assessment of the borrower's ability to repay.
By contrast, private student lenders are required to provide
comprehensive disclosures of terms, conditions, and full life-loan
borrowing costs at multiple times throughout the origination process--
i.e., at application, approval, and consummation--and to tell students
and families about Federal aid programs' terms as well. \12\ Private
education loans are critical to helping families fund the gap between
other available financial aid and the total cost of attendance. Through
multiple disclosures and ongoing communications, private education
lenders assure students and families are well informed about the cost
and terms of their loans.
---------------------------------------------------------------------------
\12\ Federal Reserve Amendments to Regulation Z (Truth in
Lending), July 30, 2009. http://www.federalreserve.gov/newsevents/
press/bcreg/20090730a.htm
---------------------------------------------------------------------------
Private lenders must carefully assess ability to repay, and usually
cosigners are required or encouraged, because the borrower often lacks
credit history. In addition, private student loans are school-certified
to prevent students from over-borrowing. Though only self-certification
from the borrower is required under law, 96 percent of today's private
student loans are also school-certified to ensure students are not
borrowing beyond their need. \13\ The remaining four percent of private
loans which are noncertified are loan refinancing for students no
longer enrolled, or are designed specifically for professional school
graduates no longer affiliated with their institution, such as loans
for law graduates preparing for the bar exam or medical school
graduates in a residency program.
---------------------------------------------------------------------------
\13\ Measure One, ``Private Student Loan Report 2013''. http://
www.measureone.com/reports
---------------------------------------------------------------------------
More than simply recouping their funds on the loan, banks involved
in private student lending have the added incentive to provide
excellent service to student loan borrowers because they are
prospective customers for future products and services they will need
when they leave school. Banks seek to develop trust and loyalty by
providing quality products and services.
The combination of current and future economic incentives results
in good customer service for private student loans. Analyzing data from
a recent report by the CFPB, only 0.03 percent of private student loans
received a complaint from consumers. \14\ CBA's members adhere to the
``one complaint is too many'' philosophy but this incredibly low
complaint rate suggests a high degree of customer satisfaction.
---------------------------------------------------------------------------
\14\ CFPB ``Mid-Year Update on Student Loan Complaints''. April
2014. http://www.consumerfinance.gov/newsroom/cfpb-finds-private-
student-loan-borrowers-face-auto-default-when-co-signer-dies-or-goes-
bankrupt/
---------------------------------------------------------------------------
In Spite of Its Relatively Small Size, the Private Student Loan Market
Continues To Respond to Consumer Demand
Private student lenders continue to respond to the needs of their
customers. Lenders now offer private student loans with both fixed and
variable rates, and most carry no origination fees, unlike Federal
loans. Private lenders continue to meet current refinancing needs,
while also increasing their refinance offerings to accommodate customer
demand. As far as refinancing existing private student loans, lenders
are equipped to handle current demand. Several CBA members have offered
a refinance product for some time, and others are beginning to launch
new programs or are developing them. We expect demand for private loan
refinance products to continue to grow, but the largest potential win/
win for consumers and financial institutions may lie in the private
refinancing of Federal student loans.
Ironically, the CFPB may significantly inhibit the development of
products to refinance Federal student loans due to uncertainty over how
the Bureau and the courts are defining ``UDAAP'' (Unfair, Deceptive,
and Abusive Acts of Practices). Even though they may be able to provide
a lower rate, most private lenders are reluctant to refinance Federal
loans until it is clear they will not be liable for a UDAAP violation,
because the loans are not eligible for Federal income based repayment
programs. CBA urges the CFPB, with the support of Congress, to clarify
financial institutions will not be penalized for offering their
customers well-informed choices to refinance their Federal student
loans.
While 98 percent of private loans demonstrate ongoing successful
repayment, banks remain committed to providing robust options to the
very small subset of private loan customers experiencing sustained
financial distress. For the most distressed borrowers, banks continue
to work with the prudential regulators to develop short and long term
loan modification programs to provide borrowers with more flexibility,
particularly in the early stages of their career. Some banks already
have launched loan modification programs, while others are piloting
programs in advance of a broader roll-out. These programs are designed
to address the unique nature of student loan borrowers within the
confines of safety and soundness principles.
Two major options are available for families to ``fill the gap'' in
paying for college: the Parent PLUS loan or a private education loan.
Parent PLUS: The Federal Government disbursed $10 billion
to parents of undergraduate students last year at a fixed rate
of 6.41 percent with no ability-to-repay assessment, only a
review of serious previous credit problems. The Government is
also currently charging origination fees of 4.288 percent on
all PLUS loans, a fee that budget sequestration is increasing
every year. \15\ Parent PLUS loans have no debt-to-income ratio
test and, because the parent is not the beneficiary of the
education, the loan does not offer income based repayment. A
private education lender would never make this type of loan.
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\15\ U.S. Department of Education, Office of Federal Student Aid:
https://studentaid.ed.gov/announcements/sequestration.
Private Education Loan: A private education loan protects
families from over borrowing through sound underwriting,
including a thorough review of ability to pay. Over 90 percent
of undergraduate loans have cosigners--most of these loans are
provided to the student, who benefits from the education, with
a parent as a cosigner. Unlike the PLUS loan, parents who do
not have the income to afford the debt are protected from
taking out a loan they cannot pay. This is the ultimate
consumer protection--ensuring a family does not undertake an
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obligation they cannot afford.
The benefit of the cosigner for the student cannot be overstated. A
cosigner not only lowers credit risk to the point where a young person
can get a loan, but he or she also helps the borrower secure a lower
rate, and establish credit.
Banks Take Every Possible Step To Ensure Servicemembers and Veterans
Receive the Benefits Afforded to Them
CBA members place compliance with the Servicemembers Civil Relief
Act (SCRA) as a top priority. The SCRA caps the interest rate on loans
taken out before military service at 6 percent and provides for
deferments and forbearances of payments and other benefits during the
service period. It is much easier for our members to ensure SCRA
compliance on their private student loans than on their remaining FFELP
loans due to conflicting statutes and regulatory guidance from Federal
agencies. CBA and others involved in the student lending community have
asked the DOE for new guidance, which we have been told to expect soon,
to clarify the regulations and allow loan holders and servicers to
streamline the process of providing SCRA benefits to their eligible
customers. We look forward to its release so servicemembers can have
maximum flexibility in obtaining the benefits they deserve. \16\
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\16\ CBA/EFC/SLSA letter to Secretary Duncan on SCRA, May 2014.
http://www.cbanet.org/documents/2014%20Comment%20Letters/2014-05-
21%20CBA-SLSA-EFC%20Letter%20to%20Secretary%20Duncan.pdf
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In addition to providing a small but critical component of the
education funding process, financial institutions play an important
role on campuses by offering banking services such as checking and
savings accounts designed specifically to meet students' unique needs
and help establish their credit history.
Banks Provide Valuable Financial Services and Products to Millions of
Students
Some CBA members have entered into agreements with institutions of
higher education to provide useful services, such as campus ID cards
that can be linked, at the option of students, faculty, staff, and
others associated with the university, to a standard deposit account.
These financial institutions also provide important services, such as
on campus financial literacy programs and assistance with financial aid
systems to colleges and universities. According to a GAO report, ``Most
of the college card fees we reviewed generally were not higher, or in
some cases were lower, than those associated with a selection of basic
or student checking accounts at national banks. In particular, college
card accounts generally did not have monthly maintenance fees, while
the basic checking accounts we reviewed typically did.'' \17\
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\17\ ``College Debit Cards: Actions Needed To Address ATM Access,
Student Choice, and Transparency'' (February 2014). http://www.gao.gov/
assets/670/660919.pdf
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Recently, the DOE entered into a negotiated rulemaking with a
variety of stakeholders, including students, school representatives,
banks, credit unions, consumer groups, and others, on the topic of
``cash management,'' which includes the disbursement of student aid
refunds, Federal aid in excess of what is needed to pay school charges.
Despite significant progress among nonfederal negotiators and the
offering of good-faith proposals by the bank and credit union
negotiators, consensus proved elusive. This leaves the Department
unbound by any agreements worked out during the negotiations, and free
to write whatever changes to the regulations it wishes to propose.
CBA shares the DOE's goal of promoting students' understanding and
management of financial products while ensuring they have meaningful
choices. However, we have serious concerns about and objections to the
expansiveness of the draft regulation related to disbursement of
Federal student aid credit balances, particularly with regard to
nondisbursement accounts (i.e., accounts opened outside of the Title IV
credit balance disbursement process), as well as sponsored disbursement
accounts. Similar apprehensions relating to the scope of the DOE's
rulemaking have been expressed by members of both parties and houses of
Congress.
With regards to nondisbursement accounts, though the language in
the draft regulation presented by the DOE during the negotiated
rulemaking is not clear, it would certainly classify as ``sponsored
accounts'' any traditional bank deposit account linked to a ``campus
card,'' such as a college identification card, even though the
depository institution offering the account does not facilitate the
delivery of Federal student aid credit balances for the school--which
is the true subject of the rulemaking. In addition, the draft
regulation could cover any deposit account that could receive Federal
student aid credit balance disbursements held by a financial
institution that happens to have other types of arrangements with
colleges or universities (educational institutions). As sponsored
accounts, these accounts would be subject to various requirements and
significant restrictions under the proposed regulation, impacting
relationships that have nothing whatsoever to do with the disbursement
of Federal student aid credit balances.
While the DOE has authority to write rules concerning Title IV
financial aid disbursement and the methods under which disbursements
are made, the proposed rule would go beyond that scope and regulate the
availability and terms of deposit accounts, including debit cards and
prepaid cards, available to students from depository institutions--
separate and apart from the financial aid disbursement process. We can
identify no authority for DOE's overreach to regulate deposit accounts
that have, at best, only a tangential relationship with those accounts.
Moreover, and more importantly, this broad scope would have a
chilling effect on the offering of accounts designed for students and
would deprive students of choice and access to valuable, low-cost, and
convenient access to bank services, accounts that can be especially
useful to those students who arrive on campus without a bank account.
For these reasons, we have urged the DOE to reconsider its draft
regulation so it does not cover these traditional bank products and
services to the extent they are offered outside of disbursement
services (i.e., to the extent the deposit account opening process is
not integrated within the Federal student aid credit balance
disbursement process).
In addition to our concerns regarding non-Title IV disbursement
accounts and services, we are concerned the proposed regulation will
effectively eliminate Federal student aid credit balance disbursement
accounts--that is, accounts specifically designed to disburse Federal
student aid credit balances--to the detriment of students and
educational institutions.
Federal student aid is disbursed directly to colleges and
universities, which use the funds to satisfy a student's tuition
expenses and then disburse the remaining funds to the student to be
available for other appropriately related purposes. The DOE has issued
a series of student aid credit balance disbursement regulations, which
have increased the operational complexity of disbursing these funds to
students. Financial service providers have partnered with educational
institutions to help these educational institutions satisfy the DOE
disbursement requirements. These arrangements enable colleges and
universities to reduce the costs of disbursing Federal student aid
credit balances by utilizing direct deposit, rather than mailing paper
checks, thereby decreasing costs for students and schools and provides
to students, safe, quick, and convenient access to funds. In some of
these arrangements, financial institutions may offer students a deposit
account within the credit balance disbursement process itself or, when
instructed by the educational institutions, provide them with a prepaid
card to access Federal student aid credit balances, particularly where
a student does not have a preexisting account to accept a direct
deposit of funds. Most importantly, these products and services are
always offered as options and are never a requirement. As evidenced by
the chart below, institutions of higher education offer students a
variety of options for receiving excess student aid funds. Paper checks
along with ETFs to a bank account of the student's choosing are the
most prevalent methods for disbursing these funds. \18\
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\18\ ``NACUBO Response to CFPB Request for Information on Campus
Products and Services'', March 2013. http://www.nacua.org/Documents/
NACUBO_LetterToGarryReeder.pdf
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
For those students who do not have, or cannot easily access, an
existing bank account, a letter from the National Association of
College and University Business Officers (NACUBO) notes, ``campus
banking relationships can streamline the process of establishing a new
account or a prepaid card option provides an alternative to a check.''
\19\
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\19\ ``NACUBO Response to CFPB Request for Information on Campus
Products and Services'', March 2013. http://www.nacua.org/Documents/
NACUBO_LetterToGarryReeder.pdf
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The draft regulation presented by the DOE during the aforementioned
negotiated rulemaking would effectively deprive students and
educational institutions of these services by compelling financial
institutions currently providing such ``sponsored accounts''--including
those in no way opened in connection with the credit balance refund
process--to stop providing them to tens of thousands of students on
multiple campuses. Draft regulation would restrict nearly all income
sources associated with the maintenance and use of these products. With
limited or no means to support the cost of providing the services,
providers may have no choice but to exit the business and close
existing accounts.
The result would be thousands of students losing a convenient,
safe, and quick option to access their Federal student aid credit
balances, and the convenience of a single card that--at the election of
the student--can combine financial and school functionality. Payments
to students via checks would be more prevalent, especially for those
without bank accounts, delaying the students' access to the funds and
potentially causing them to incur off-campus check cashing fees. In
addition, it is worth noting the CFPB found that requiring disbursement
through electronic fund transfer can reduce fraud and costs. \20\
---------------------------------------------------------------------------
\20\ ``Perspectives on Financial Products Marketed to College
Students'', Presentation to the Department of Education Negotiated
Rulemaking Session. March, 26, 2014 (pp. 3, 7).
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CBA is hopeful all involved in this process come to understand how
banking relationships on campus provide students access to a range of
financial products and options to meet their needs. It is especially
important that the function of providing general financial services is
not adversely affected by concerns over the separate issue of making
Federal aid funds available to students who wish to have funds
deposited directly into a bank account, instead of being given cash or
a check.
Conclusion
CBA Members remain proud of the work they do to provide products
and services for college students. Whether it is a private student loan
or a student checking account, CBA Members want to offer these products
in a way which best serves their consumers. As students continue to
better themselves and their economic prospects by earning high
education degrees, the Nation's retail banks will continue to develop
services that allow them to prove themselves worthy of these
prospective customers.
Thank you for the opportunity to testify on behalf of CBA's
Membership. CBA looks forward to the opportunity to work with Congress
to ensure millions of Americans can pursue education that meets their
needs and aspirations.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM DAVID A. BERGERON
Q.1. We have seen student loan debt rise dramatically over the
last 10 years. Right now borrowers and the Federal Government
bear all of the risk with these loans.
I have proposed the Protect Student Borrowers Act to ensure
that institutions have skin in the game when it comes to
student loans. In other words, colleges and universities would
be on the hook for a percentage of the loans that go into
default. How would you ensure that institutions have a stake in
ensuring students can repay their loans?
A.1. In a report which I wrote for the Center for American
Progress earlier this year, ``What Does Value Look Like in
Higher Education?'', I made a specific proposal for risk-
sharing that would require all but the top performing
institutions to buy a special class of 10-year Treasury notes
with yields equal to the most recent cohort's default rate
multiplied by prior-year loan volume. The base yield would be
the same as regular 10-year Treasury notes. However, under my
proposal, institutions with better-than-expected graduation and
repayment rates would receive a bonus, while institutions with
poorer-than-expected graduation and repayment rates would
receive a lower yield.
On August 22, the yield on the current 10-year Treasury
notes was 2.4 percent. Under this proposal, an institution that
had a graduation rate that was 10 percent better than expected
might receive a yield of 2.65 percent on the notes that they
were required to buy, while an institution that had a
graduation rate that was 10 percent lower than expected might
receive a yield of 2.15 percent.
Such an approach would address two problems in higher
education funding. First, it would provide a financial
incentive to not just enroll students but also to ensure that
they graduate. Second, it would provide an alternative funding
stream that could help bridge the ``feast and famine'' cycle
under which institutions see revenues fall as enrollments grow
during economic downturns.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM KENNETH KOCER
Q.1. We have seen student loan debt rise dramatically over the
last 10 years. Right now borrowers and the Federal Government
bear all of the risk with these loans.
I have proposed the Protect Student Borrowers Act to ensure
that institutions have skin in the game when it comes to
student loans. In other words, colleges and universities would
be on the hook for a percentage of the loans that go into
default. How would you ensure that institutions have a stake in
ensuring students can repay their loans?
A.1. Schools currently do have ``skin in the game.'' If
institutions do not maintain default rates below U.S.
Department of Education guidelines, future Federal aid will be
suspended to those institutions. This is a powerful incentive
and for this reason it is to the benefit of schools to maintain
low default rates. The current Federal regulations state ``if a
schools cohort default rate equals or exceeds 30 percent for
the three most recent fiscal years or if the most recent cohort
default rate is greater than 40 percent, the school is
considered not administratively capable and may become
ineligible to participate in the Federal Direct Loan, Federal
Pell Grant, or Federal Perkins Loan Programs.''
In addition, the Federal Government gives institutions no
leeway or authority to reduce or deny Federal Direct Loans to
students, which could assist in lowering their loan debt.
Asking the institutions to be responsible for loans, for which
they have no control to deny, would not be a proper approach.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM RICHARD HUNT
Q.1. We have seen student loan debt rise dramatically over the
last 10 years. Right now borrowers and the Federal Government
bear all of the risk with these loans.
I have proposed the Protect Student Borrowers Act to ensure
that institutions have skin in the game when it comes to
student loans. In other words, colleges and universities would
be on the hook for a percentage of the loans that go into
default. How would you ensure that institutions have a stake in
ensuring students can repay their loans?
A.1. Banks are quite experienced with having skin in the game
when they make loans. For private loans made today, banks are
on the hook for the entire amount loaned since there is no
Government guaranty or other recourse if the loan is not
repaid. For that reason, banks have to be careful in the
lending process to make sure there is a strong chance the loan
will be repaid. Banks also have experience with risk sharing
with the Federal Government, a model used in the Federal Family
Education Loan Program since about 1994, where banks are only
insured for 95 to 98 percent of the balance of a defaulted
loan. The concept of risk sharing is a good one, I believe, and
could serve to reduce Federal default costs in the Direct Loan
Program while also encouraging schools to emphasize job
placement services for their graduates as well as to do
everything they can to help their students complete their
course of study.
Q.2. In your testimony, you discuss the strong underwriting and
strong performance of the private loan portfolio. You also say
that the private sector is responding sufficiently to the
demand for refinancing of student loans.
A.2. The private student loan marketplace was relatively new
during the past decade, so underwriting standards were not as
well developed as they are today and the structure of the
market has changed. Loans made during the 2002-2008 period were
made according to the underwriting standards set by a private
student loan insurer. Many were also sold into the secondary
market, especially loans made by nonbanks. After 2008, as
illustrated by the contraction of the market, underwriting
standards tightened considerably. Banks made some loans that
failed to perform as expected during the 2002-2008, period, but
since most defaults occur during the first 2 to 3 years of
repayment, the loans that have not already been charged off
from that period are performing well today.
As I stated in my testimony, refinancing options are widely
available today for private student loans, regardless of when
the loan was originated. Another product is about to be
announced by a major bank, and more banks have plans underway
for refinancing. In addition, there are numerous loan
modification opportunities featuring interest rate reductions
and loan-term extensions for borrowers who are struggling with
repayment.
CBA and our member banks have been working with bank
regulators since 2010 to be permitted to offer more options to
borrowers who need help. The regulators now allow lenders the
option to provide borrowers an additional 6-month grace period
if needed after repayment is supposed to begin. Two to three
month payment extension (hardship forbearance) options are
available on an annual basis for borrowers who are struggling
with repayment. Banks also offer interest rate reductions to
borrowers utilizing automated payments.
Additionally, all of CBA's member banks who originate
private student loans forgive a loan in the event of the death
of a student. Since 2008, CBA members have forgiven over 3,200
loans, totaling over $38.5 million. The death of a student is
very rare, but when it does occur CBA's members do not want
families to have to shoulder a financial burden on top of their
heartbreak. In other circumstances where students or their
families have a hardship, CBA's members are working one-on-one
with them to assist through short- or long-term loan
modifications, refinancing, payment extensions, or other
payment options. We are committed to working with students and
their families to manage their loans through the unexpectedness
of life, and this is why the private student loan market has an
incredibly low default rate of 2.79 percent.
Additional Material Supplied for the Record
LETTER FROM KANSAS STATE UNIVERSITIES SUBMITTED BY SENATOR JERRY MORAN
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY AMERICANS FOR FINANCIAL REFORM
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY THE INSTITUTE FOR COLLEGE ACCESS AND SUCCESS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY THE CENTER FOR RESPONSIBLE LENDING
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY THE AMERICAN BANKERS ASSOCIATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]