[Senate Hearing 113-548]
[From the U.S. Government Publishing Office]









                                                        S. Hrg. 113-548


         FINANCIAL PRODUCTS FOR STUDENTS: ISSUES AND CHALLENGES

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

                                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

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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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

                              ----------                              

                        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

                              ----------                              


                        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.
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    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.
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     \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/.
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    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/.
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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\
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     \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.
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    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.
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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/.
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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\
---------------------------------------------------------------------------
     \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\
---------------------------------------------------------------------------
     \3\ News story, ``New Haven's Higher One Faces New Restrictions in 
Draft Federal Rules'', The New Haven Register, March 25, 2014.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \4\ News Story, ``Bank Pays $34 Bounty for New College 
Customers'', ABC News, September 5, 2013.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \6\ Issue Brief, ``Perspectives on Financial Products Marketed to 
College Students'', The Consumer Financial Protection Bureau, March 26, 
2014.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
     \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
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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\
---------------------------------------------------------------------------
     \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
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \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
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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\
---------------------------------------------------------------------------
     \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/
---------------------------------------------------------------------------
    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.
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     \12\ Federal Reserve Amendments to Regulation Z (Truth in 
Lending), July 30, 2009. http://www.federalreserve.gov/newsevents/
press/bcreg/20090730a.htm
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    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.
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     \13\ Measure One, ``Private Student Loan Report 2013''. http://
www.measureone.com/reports
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    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.
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     \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/ 
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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

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    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\
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     \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

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         STATEMENT SUBMITTED BY AMERICANS FOR FINANCIAL REFORM

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  STATEMENT SUBMITTED BY THE INSTITUTE FOR COLLEGE ACCESS AND SUCCESS

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       STATEMENT SUBMITTED BY THE CENTER FOR RESPONSIBLE LENDING


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        STATEMENT SUBMITTED BY THE AMERICAN BANKERS ASSOCIATION
        
        
        
        
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