[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
KEEPING COLLEGE WITHIN REACH:
EXAMINING OPPORTUNITIES TO STRENGTHEN
FEDERAL STUDENT LOAN PROGRAMS
=======================================================================
HEARING
before the
COMMITTEE ON EDUCATION
AND THE WORKFORCE
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, MARCH 13, 2013
__________
Serial No. 113-9
__________
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COMMITTEE ON EDUCATION AND THE WORKFORCE
JOHN KLINE, Minnesota, Chairman
Thomas E. Petri, Wisconsin George Miller, California,
Howard P. ``Buck'' McKeon, Senior Democratic Member
California Robert E. Andrews, New Jersey
Joe Wilson, South Carolina Robert C. ``Bobby'' Scott,
Virginia Foxx, North Carolina Virginia
Tom Price, Georgia Ruben Hinojosa, Texas
Kenny Marchant, Texas Carolyn McCarthy, New York
Duncan Hunter, California John F. Tierney, Massachusetts
David P. Roe, Tennessee Rush Holt, New Jersey
Glenn Thompson, Pennsylvania Susan A. Davis, California
Tim Walberg, Michigan Raul M. Grijalva, Arizona
Matt Salmon, Arizona Timothy H. Bishop, New York
Brett Guthrie, Kentucky David Loebsack, Iowa
Scott DesJarlais, Tennessee Joe Courtney, Connecticut
Todd Rokita, Indiana Marcia L. Fudge, Ohio
Larry Bucshon, Indiana Jared Polis, Colorado
Trey Gowdy, South Carolina Gregorio Kilili Camacho Sablan,
Lou Barletta, Pennsylvania Northern Mariana Islands
Martha Roby, Alabama John A. Yarmuth, Kentucky
Joseph J. Heck, Nevada Frederica S. Wilson, Florida
Susan W. Brooks, Indiana Suzanne Bonamici, Oregon
Richard Hudson, North Carolina
Luke Messer, Indiana
[Vacant], Staff Director
Jody Calemine, Minority Staff Director
C O N T E N T S
----------
Page
Hearing held on March 13, 2013................................... 1
Statement of Members:
Kline, Hon. John, Chairman, Committee on Education and the
Workforce.................................................. 1
Prepared statement of.................................... 3
Miller, Hon. George, senior Democratic member, Committee on
Education and the Workforce................................ 4
Prepared statement of.................................... 5
Statement of Witnesses:
Delisle, Jason, director, Federal Education Budget Project,
New America Foundation..................................... 13
Prepared statement of.................................... 14
Draeger, Justin S., president and CEO, National Association
of Student Financial Aid Administrators (NASFAA)........... 25
Prepared statement of.................................... 27
Lucas, Deborah, Sloan distinguished professor of finance,
Massachusetts Insititute of Technology..................... 8
Prepared statement of.................................... 9
Mercer, Charmaine N., Ph.D., vice president of policy,
Alliance for Excellent Education........................... 37
Prepared statement of.................................... 39
Additional Submissions:
Bonamici, Hon. Suzanne, a Representative in Congress from the
State of Oregon, letter, dated January 23, 2012, from
Robert D. Reischauer....................................... 71
Mr. Delisle, response to question submitted for the record... 81
Mr. Draeger:
Report, ``Reimagining Financial Aid to Improve Student
Access and Outcomes,'' Internet address to............. 78
Report, ``Report of the NASFAA Task Force on Student Loan
Indebtedness,'' Internet address to.................... 79
Report, ``Report of the NASFAA Award Notification and
Consumer Information Task Force,'' Internet address to. 79
Response to questions submitted for the record........... 79
Grijalva, Hon. Raul M., a Representative in Congress from the
State of Arizona, questions submitted for the record to Mr.
Draeger.................................................... 79
Hudson, Hon. Richard, a Representative in Congress from the
State of North Carolina, questions submitted for the record
to:
Mr. Draeger.............................................. 79
Mr. Delisle.............................................. 81
Chairman Kline:
Prepared statement of the Education Finance Council...... 77
Mr. Miller:
Memo, dated March 12, 2013, from the Associated Students
of Michigan State University........................... 47
Memo, dated March 12, 2013, from Emily Yu, president,
American University Student Government................. 48
Statement of the National Campus Leadership Council:
``Summary of Student Perspectives on Student Loans''... 48
Roby, Hon. Martha, a Representative in Congress from the
State of Alabama, questions submitted for the record to Mr.
Draeger.................................................... 79
KEEPING COLLEGE WITHIN REACH:
EXAMINING OPPORTUNITIES TO STRENGTHEN
FEDERAL STUDENT LOAN PROGRAMS
----------
Wednesday, March 13, 2013
U.S. House of Representatives
Committee on Education and the Workforce
Washington, DC
----------
The committee met, pursuant to call, at 10:03 a.m., in room
2175, Rayburn House Office Building, Hon. John Kline [chairman
of the committee] presiding.
Present: Representatives Kline, Petri, Foxx, Roe, Walberg,
Salmon, DesJarlais, Roby, Heck, Brooks, Hudson, Miller,
Andrews, Scott, Hinojosa, McCarthy, Tierney, Holt, Davis,
Grijalva, Bishop, Loebsack, Courtney, Fudge, Polis, Wilson, and
Bonamici.
Staff present: Katherine Bathgate, Deputy Press Secretary;
James Bergeron, Director of Education and Human Services
Policy; Heather Couri, Deputy Director of Education and Human
Services Policy; Amy Raaf Jones, Education Policy Counsel and
Senior Advisor; Nancy Locke, Chief Clerk/Assistant to the
General Counsel; Brian Melnyk, Professional Staff Member;
Krisann Pearce, General Counsel; Mandy Schaumburg, Education
and Human Services Oversight Counsel; Nicole Sizemore, Deputy
Press Secretary; Emily Slack, Legislative Assistant; Alex
Sollberger, Communications Director; Alissa Strawcutter, Deputy
Clerk; Aaron Albright, Minority Communications Director for
Labor; Tylease Alli, Minority Clerk/Intern and Fellow
Coordinator; Kelly Broughan, Minority Education Policy
Associate; Jody Calemine, Minority Staff Director; Jamie
Fasteau, Minority Director of Education Policy; Scott
Groginsky, Minority Education Policy Advisor; Brian Levin,
Minority Deputy Press Secretary/New Media Coordinator; Rich
Williams, Minority Education Policy Advisor; and Michael Zola,
Minority Senior Counsel.
Chairman Kline. A quorum being present, the committee will
come to order. Good morning and welcome to our hearing. This is
the third of a series we began last Congress to discuss ways
institutions, states, and leaders in Washington can work
together to help more students access an affordable college
degree.
We are fortunate to have a distinguished panel of higher
education experts here today and I would like to thank each of
you for joining us.
Last summer, debate about student loans reached a fever
pitch thanks to a scheduled increase in the interest rate for
subsidized Stafford Loans made to undergraduate students. The
President began touring college campuses, calling on Congress
to prevent the increase, frankly, that his own party set in
motion back in 2007.
As I said at the time, no one wants to see student loan
interest rates increase, particularly as young people continue
to struggle with high un- and underemployment. But we need to
move away from a system that allows Washington politicians to
use student loan interest rates as bargaining chips, creating
uncertainty and confusion for borrowers.
When Congress approved legislation to temporarily stave off
the Stafford Loan interest rate increase, my colleagues and I
lent our support with the promise that we would use this time
to work toward a long-term solution that better aligns interest
rates with the free market.
Today's hearing provides an opportunity to explore the
merits of a market-based system. As many of you are aware, such
a system was previously in place from 1992 through 2005. Had it
remained, interest rates on student loans could be less than 3
percent today.
In addition to our discussion on student loan interest
rates, we must also begin a larger conversation on the state of
federal student aid programs as a whole. Supporting higher
education remains a top priority in Washington.
Each year, taxpayers dedicate billions of dollars to help
students afford to attend the college of their choice. In the
2011-2012 school year, students received more than $237 billion
in aid, of which the federal government provided nearly $174
billion.
Given this significant investment, it is troubling to learn
students struggle to navigate the various federal student aid
programs available to help them pay for college. More work must
be done to help students and families understand the federal
student aid system and make informed choices about their higher
education options.
Congress has a responsibility to explore ways we can
strengthen and streamline federal student aid programs, making
the process simpler for students, institutions, and families.
In his fiscal year 2013 budget request, President Obama
proposed a number of initiatives affecting federal student aid
programs, including a plan to change how three campus-based aid
programs--Supplemental Education Opportunity Grants, Perkins
Loans, and Work-Study--are distributed to shift funds away from
institutions where the administration believes tuition is too
high.
While my Republican colleagues and I continue to support
the basic principles of competition and transparency to help
encourage lower costs in higher education, we remain concerned
that such policies could lead to federal price controls and
more confusion for institutions and borrowers.
Though we are still waiting for the President's delayed
fiscal year 2014 budget proposal, I hope the administration
will abandon these previous proposals and instead illustrate a
willingness to work with Congress to improve existing programs
while demanding states and institutions do their part to tamp
down college costs.
Before I yield to the senior Democratic member of the
committee, Mr. Miller, I would be remiss if I didn't note my
continued concerns with the Department of Education's
management of the Direct Loan program, which is responsible for
the implementation and repayment of all federal student loans.
Borrowers continue to report a range of problems, including
missing financial information, unexpected changes to loan
amounts, poor customer service, difficulty rehabilitating
loans, and data breeches.
The committee has been working with the Government
Accountability Office to investigate some of these issues, and
I hope we are able to solve some of these problems as we move
into the reauthorization of the Higher Education Act.
With that said, I look forward to a productive discussion
with my colleagues and our witnesses on proposals to improve
and simplify federal student loan programs.
I now recognize Mr. Miller for his opening remarks.
[The statement of Chairman Kline follows:]
Prepared Statement of Hon. John Kline, Chairman,
Committee on Education and the Workforce
Last summer, debate about student loans reached a fever pitch
thanks to a scheduled increase in the interest rate for subsidized
Stafford Loans made to undergraduate students. The president began
touring college campuses, calling on Congress to prevent the increase
that his own party set in motion back in 2007.
As I said at the time, no one wants to see student loan interest
rates increase, particularly as young people continue to struggle with
high un- and underemployment. But we need to move away from a system
that allows Washington politicians to use student loan interest rates
as bargaining chips, creating uncertainty and confusion for borrowers.
When Congress approved legislation to temporarily stave off the
Stafford Loan interest rate increase, my colleagues and I lent our
support with the promise that we would use this time to work toward a
long-term solution that better aligns interest rates with the free
market.
Today's hearing provides an opportunity to explore the merits of a
market-based system. As many of you are aware, such a system was
previously in place from 1992 through 2005. Had it remained, interest
rates on student loans could be less than 3 percent today.
In addition to our discussion on student loan interest rates, we
must also begin a larger conversation on the state of federal student
aid programs as a whole. Supporting higher education remains a top
priority in Washington. Each year, taxpayers dedicate billions of
dollars to help students afford to attend the college of their choice.
In the 2011-2012 school year, students received more than $237 billion
in aid, of which the federal government provided nearly $174 billion,
or 73 percent.
Given this significant investment, it is troubling to learn
students struggle to navigate the various federal student aid programs
available to help them pay for college. More work must be done to help
students and families understand the federal student aid system and
make informed choices about their higher education options. Congress
has a responsibility to explore ways we can strengthen and streamline
federal student aid programs, making the process simpler for students,
institutions, and families.
In his fiscal year 2013 budget request, President Obama proposed a
number of initiatives affecting federal student aid programs, including
a plan to change how three campus-based aid programs--Supplemental
Education Opportunity Grants, Perkins Loans, and Work-Study--are
distributed to shift funds away from institutions where the
administration believes tuition is too high.
While my Republican colleagues and I continue to support the basic
principles of competition and transparency to help encourage lower
costs in higher education, we remain concerned that such policies could
lead to federal price controls and more confusion for institutions and
borrowers.
Though we are still waiting for the president's delayed fiscal year
2014 budget proposal, I hope the administration will abandon these
previous proposals and instead illustrate a willingness to work with
Congress to improve existing programs while demanding states and
institutions do their part to tamp down college costs.
Before I yield to the senior Democratic member of the committee,
George Miller, I would be remiss if I didn't note my continued concerns
with the Department of Education's management of the Direct Loan
program, which is responsible for the implementation and repayment of
all federal student loans. Borrowers continue to report a range of
problems, including missing financial information, unexpected changes
to loan amounts, poor customer service, difficulty rehabilitating
loans, and data breeches.
The committee has been working with the Government Accountability
Office to investigate some of these issues, and I hope we are able to
solve some of these problems as we move into the reauthorization of the
Higher Education Act. With that said, I look forward to a productive
discussion with my colleagues and our witnesses on proposals to improve
and simplify federal student loan programs.
______
Mr. Miller. Thank you very much, Mr. Chairman, and thank
you for holding this hearing on student loans.
Today more than ever higher education is viewed as a
pathway to middle-class jobs and economic security. A college
degree plays a critical role in most American dreams.
Unfortunately, we know all too well about the rising costs
of higher education is pushing those American dreams a little
bit further out of reach for too many families.
The rising costs are due to a number of factors. States'
falling support for higher education has caused tuition to go
up well above inflation. Many of us in this committee can
remember the days when a decent higher education was well
within the reach of average working families.
But this is no longer true. Higher education costs have
been shifted increasingly to students and families. And to make
matters worse, families' incomes have not kept pace with rising
costs.
When workers incomes were growing with their productivity,
parents could afford to contribute to the education of the
children, but this too is fast becoming a thing of the past.
To make up most of this shortfall, students and parents
turn to loans in order to pay for college. As a result, the
average student now graduates $26,000 and that in the Consumer
Financial Protection Agency tells us that there is over $1
trillion in debt out of the streets. This is higher than the
nation's total credit card debt.
Just last week we had yet another report from the New York
Federal Reserve on the impact of rising student loan debt on
the economy. It found that student loan debt is almost tripled
in the last 8 years as more students need to borrow more money
to go to college and it is simply unsustainable.
Students who did everything that was asked of them are
rightly concerned about their future. They wonder whether
borrowing all of that money to get a degree is worth the
trouble. Repaying their student loans has become a tremendous
financial obstacle to making other life decisions.
It affects where they can work, whether they can ever dream
of saving enough money to purchase a home, whether they will be
able to afford to take the risk of starting a business, or
should they just get married--or whether they should get
married and start a family. In short, student debt can become a
very serious drag on the economy.
This isn't just young people borrowing, either. Those 40
and older hold 34 percent of our nation's student loan debt.
Older borrowers may be forced to delay savings for their
child's education or for their retirement.
Falling behind on monthly payments will scar borrowers'
credit ratings and open the door to wage, Social Security, and
tax-refund garnishments. This debt threatens the very upward
mobility of higher education once guaranteed.
A few years ago, Congress took significant steps forward in
helping students and families deal with these realities and to
afford an education, but those were just the first steps. There
is more that needs to be done in short and long term to make
college affordable, accessible, and to make student aid
programs work better.
Members of both sides of the aisle should work together to
develop these solutions. In the short term, while the economic
recovery remains fragile, this committee must make sure that
student loan interest rates do not double on students this
summer.
On July 1, the subsidized Stafford loan interest rates will
double to 6.8 percent for millions of undergraduate students if
Congress does nothing. With the job market still recovering, we
should not be asking students with the greatest need to be
burdened by higher loan costs.
Interest rates for banks are at a historic low. In a sense,
they are getting free money and there is no good policy reason
why to allow rates for students to double at this time.
In the longer term, we need to consider new ways to
calculate interest rates for federal student loans. There are a
number of proposals that have been put forward, and we will
hear more this morning, that we should examine.
Also, we must not ignore the problems of the private loan
market. These rates are higher. Refinancing can be next to
impossible and borrowers do not enjoy access to various
repayment options that we provided to help borrowers pay for
their loans.
We also should consider various solutions. As we do so, we
must not lose sight of the fact that the borrowers are our
nation's future.
I look forward to hearing from our witnesses on the way
Congress can work together to address the interest rate
question and reduce student loan debt.
I would also suggest that, Mr. Chairman, you and I have had
a number of conversations about we are trying to make college
more affordable, but we have to sometime get the colleges in
here to tell us how they are going to reduce the cost of
education, and there is a lot of things coming on the horizon
now with online courses and massively-sized online courses.
I see in my state legislation in California they are about
to introduce legislation that they think is going to pass that
suggests that these online courses in fact be given credit so
that students can save money by participating in that and
reduce the cost of education and money they have to borrow.
So I think there's a lot we need to have a conversation
with the colleges and universities about in this question of
the cost of college. We have dealt long and hard with the
affordability of it but we are running out of tools. Thank you.
[The statement of Mr. Miller follows:]
Prepared Statement of Hon. George Miller, Senior Democratic Member,
Committee on Education and the Workforce
Good morning, Chairman Kline. Thank you for holding this hearing on
student loans.
Today, more than ever, higher education is viewed as the pathway to
a middle class job and economic security. A college degree plays a
critical role in most American Dreams.
Unfortunately, we know all too well that the rising cost of higher
education is pushing those American Dreams a little further out of
reach for too many families. This rise in costs is due to a number of
factors.
States' falling support for higher education has caused tuition to
go up well above inflation. Many of us in this committee can remember
the days when a decent higher education was well within reach for
average working families.
Thanks to significant state support for higher education, credit
hours were affordable. A summer job could be enough to help us get
through the following year. But this is no longer true. Higher
education costs have been shifted increasingly to students and
families. And to make matters worse, families' incomes have not kept
pace with this rising cost.
When workers' incomes were growing with their productivity, parents
could afford to contribute to the education of their children. But
this, too, is fast becoming a thing of the past.
To make up for this shortfall, students and parents turn to loans
in order to pay for college. As a result, the average student now
graduates with $26,000 in debt. And that debt looks more like a
mortgage if a student goes on to attend graduate or professional
school.
Last year, the Consumer Financial Protection Bureau found that
student loan debt was more than $1 trillion. This is higher than the
nation's total credit card debt. Just last week we had yet another
report from the New York Federal Reserve on the impact of rising
student loan debt on our economy. It found that student loan debt has
almost tripled in the last eight years as more students need to borrow
more money to go to school.
This is unsustainable. Students who did everything that was asked
of them are rightly concerned about their future. They wonder whether
borrowing all that money to get a degree was worth the trouble.
Repaying their student loans has become a tremendous financial obstacle
to making other life decisions.
It affects where they can work, whether they can ever dream of
saving enough money to purchase a home, whether they can afford to take
a risk and start a business, or when they should get married or start a
family.
It isn't just young people borrowing either--those 40 and older
hold 34 percent of our nation's student loan debt. Older borrowers may
be forced to delay saving for their child's education or their
retirement. Falling behind on monthly payments will scar a borrower's
credit rating and open the door to wage, Social Security, and tax
refund garnishment. This debt threatens the very upward mobility that
higher education once guaranteed.
A few years ago, Congress took significant steps forward in helping
students and families deal with these realities and afford an
education. But those were just the first steps. There is more to be
done in the short and long term to make college affordable, accessible,
and make student aid programs work better.
Members from both sides of the aisle should work together to
develop and move those solutions. In the short-term, while the economic
recovery remains fragile, this committee must make sure student loan
interest rates do not double on students this summer.
On July 1, the subsidized Stafford loan interest rate will double
to 6.8 percent for millions of undergraduate students. With the job
market still recovering, we should not be asking students with the
greatest need to be burdened by higher loan costs. Interest rates for
banks are at historic lows. There is no good policy reason to allow
rates for students to double at this time.
In the longer term, we need to consider new ways to calculate
interest rates for federal student loans. There are a number of
proposals that have been put forward that we should examine.
Also, we must not ignore problems in the private student loan
market. There, rates are higher. Refinancing can be next to impossible.
And borrowers do not enjoy access to various repayment options that we
have provided to federal loan borrowers.
As we consider various solutions, we must not lose sight of the
fact that these borrowers are the nation's future. If they are shackled
by unmanageable debt, our economy will invariably suffer. We have a
moral and economic obligation to ensure that all qualified students who
want to attend college can afford to go.
Our ability to compete in the global marketplace depends on it. I
look forward to hearing from our witnesses on ways Congress can work
together to address the interest rate question and reduce student loan
debt.
Thank you for joining us today. I yield back.
______
Chairman Kline. I thank the gentleman, and I agree with
that comment.
As the gentleman knows, we have been looking at that. We
have had a number of experts come in and talk to us. We are
going to continue that dialogue and I am confident that will be
in a bipartisan way as we explore the technology explosion that
is so impressive and there is no way that we, Washington, can
keep up with that. They are just going to move faster than we
can. But there is work to be done there----
Mr. Miller. Faster than us?
Chairman Kline. Faster than us. I know, it is shocking.
Shocking concept I know.
Pursuant to committee Rule 7C, all committee members will
be permitted to submit written statements to be included in the
permanent hearing record and without objection, the hearing
record will remain open for 14 days to allow statements,
questions for the record, and other extraneous material
referenced during the hearing to be submitted in the official
hearing record.
It is now my pleasure to introduce our distinguished panel
of witnesses. Dr. Deborah Lucas is the Sloan Distinguished
Professor of Finance at the Massachusetts Institute of
Technology's Sloan School of Management.
Mr. Jason Delisle serves as the director of the Federal
Education Budget Project at the New America Foundation.
Previously, Mr. Delisle was a senior analyst on the Republican
staff of the Senate Budget Committee and from 2000 to 2006 he
was a legislative aide in the office of Mr. Thomas Petri who
will be joining us shortly.
Mr. Justin Draeger is the President and CEO of the National
Association of Student Financial Aid Administrators. Prior to
joining NASFAA--I don't know who invents these acronyms--in
2006, Mr. Draeger served as a financial aid director at the
Douglas J. Aveda Institute in East Lansing, Michigan.
And Dr. Charmaine Mercer joined the Alliance for Excellent
Education in June 2012 as Vice President of Policy. Prior to
joining the Alliance, Dr. Mercer worked for the House Education
and Workforce Committee under Mr. George Miller on elementary
and secondary education issues.
And while this is truly a distinguished panel, I have to
say that it is especially distinguished having former key
staff.
So, before I recognize each of you to provide your
testimony, let me briefly explain our lighting system.
You will each have 5 minutes to present your testimony.
When you begin, the light in front of you will turn green. When
1 minute is left, the light will turn yellow. When your time is
expired, the light will turn red. At that point, I ask you to
please wrap up your remarks as best you are able.
After everyone has testified, members will each have 5
minutes to ask questions of the panel and I would remind my
colleagues that that 5 minutes includes the answers of our
witnesses.
I would now like to recognize Dr. Lucas for 5 minutes.
STATEMENT OF DR. DEBORAH J. LUCAS, SLOAN DISTINGUISHED
PROFESSOR OF FINANCE, MASSACHUSETTS INSITITUTE OF TECHNOLOGY
Ms. Lucas. I am happy to testify on this important issue.
I want to focus on several programmatic changes that may
seem technical in nature, but that are likely to yield
significant benefits to students and taxpayers, and the budget.
A critical issue is what the rule should be that determines
the interest rates charged to borrowers. As you know, interest
rates on student loans are set in statute. Those rules have
been changed numerous times throughout the history of the
programs including shifting between fixed interest rates and
variable interest rate formulas.
Since 2006, new Stafford loans have carried a fixed
interest rate of 6.8 percent. The rate on subsidized loans is
fixed at 3.4 percent, but that rate is scheduled to increase to
6.8 percent for loans made after the end of June.
The current practice of setting fixed interest rates that
extend many years into the future--rather than linking them by
formula to prevailing market interest rate conditions--has
adverse consequences for students, for taxpayers, and for the
stability and control of budgetary costs.
For students, the current policy creates large swings in
the value of government assistance from year-to-year; very
similar students that attend the same school but in different
years receive very different amounts of support. Subsidies are
small when interest rates are low as they are now and large
when rates are high.
As well as raising fairness concerns, this volatility makes
it more difficult for prospective students to assess the
affordability of pursuing a higher education.
At the same time, the variability in year-to-year subsidies
creates potentially large and uncertain liabilities for
taxpayers, and from a budgeting and control perspective, the
uncertain size and volatility of subsidies over time is
detrimental to budgetary planning, and it has the effect of
reducing the control that Congress exercises over the
allocation of scarce budgetary resources.
Adopting the alternative of market-indexed rates would
reduce the volatility in subsidies for borrowers and taxpayers
and also help to stabilize the budgetary costs of the programs.
Under that approach, the interest rate charged on new loans
each year would be linked to a market rate; for instance, to a
Treasury security with a similar duration to the loans. The
interest rates could still be fixed over the life of an
individual loan, but that fixed rate charged to new borrowers
would vary year-to-year.
Alternatively, borrowers could be charged a floating rate
that resets every year over the life of the loan as was the
case before 2006.
The notion that allowing interest rates to vary with market
conditions would create greater stability and fairness than
fixing interest rates by statute may at first seem unintuitive.
However, market-linked interest rates are beneficial
because they generate more stable real, or inflation-adjusted,
loan payments. High nominal interest rates generally coincide
with periods of high expected inflation rates.
Market rates increase because investors need more
compensation just to maintain the purchasing power of the loan
repayments they receive. At the same time, wages grow more
quickly during periods of higher inflation, making higher
nominal payments more affordable to borrowers.
Furthermore, low nominal interest rates tend to be a
symptom of a weak economy and job market, as is the situation
today. Fixing the interest rate by law tends to shrink
government subsidies at just those times when students would
benefit from them the most.
With market-indexed interest rates, the generosity of
subsidies could be controlled by choosing an appropriate
interest rate spread; a number which could be specified in
legislation in place of the fixed interest rates that are there
today.
Because of the way student loans are budgeted for, moving
to indexed rates would have the effect of lowering the
volatility of their budgetary costs over time.
Specifically, under the Federal Credit Reform Act of 1990
or FCRA, credit programs are budgeted for on an accrual basis
that records the lifetime cost of the loans disbursed each
year.
Specifically, the costs are calculated by discounting to
the present the expected cash flows over the life of the loan
using maturity-matched, Treasury interest rates as the discount
rates.
With interest rates on student loans that are fixed by
statute, when market Treasury rates go up, the value of the
projected future payments fall and the budgetary cost of the
loans increases; and conversely when market rates fall.
Indexing interest rates on student loans would largely
eliminate that source of budget volatility.
The move to accrual accounting for federal credit with FCRA
represented a significant improvement over the cash accounting
that preceded it in terms of accuracy and transparency.
However, the requirements use Treasury rates for discounting
fail to account for the full cost to taxpayers.
A proposal that would alleviate the understatement of cost
in the budget and increase transparency would be to replace
FCRA subsidy costs with so-called fair or market value
estimates in the budget.
That change would eliminate the artificial appearance that
the student loan programs are highly profitable for the
government, which is the case now. It would also put credit and
noncredit assistance on a more level playing field in the
budgetary process.
In particular, it would reduce the cost disadvantage of
Pell grants compared to student loans by accurately portraying
the cost of the loans.
I also have some comments in my written testimony on the
effects of moving to a more income-based repayment system, but
in the interest of time, I will end here and look forward to
your questions. Thank you.
[The statement of Ms. Lucas follows:]
Prepared Statement of Deborah Lucas, Sloan Distinguished Professor of
Finance, Massachusetts Insititute of Technology
Thank you, Chairman Kline and Congressman Miller. To all the
members of the committee, I appreciate the opportunity to testify on
opportunities to strengthen the Federal student loan programs. My focus
will be on four programmatic changes that are seemingly technical in
nature, but which are likely to yield significant benefits to students
and taxpayers, and that could increase the stability and transparency
of budgetary costs.
Market-Indexed Student Loan Rates
A critical issue is to revisit the rule for how the interest rates
on student loans are determined. Student loan interest rates are set in
statute. The statutory rules have been changed numerous times
throughout the history of the programs, including shifting between
fixed interest rates and variable interest rate formulas. Since 2006,
new Stafford loans have carried a fixed interest rate of 6.8%. The rate
on subsidized loans is fixed at 3.4%, but that rate is scheduled to
increase to 6.8% for loans made on or after July 1, 2013. The rates on
other types of loans also are fixed in legislation.
The current practice of setting fixed interest rates that extend
many years into the future--rather than linking them by formula to
prevailing market interest rate conditions--has adverse consequences
for students, for taxpayers, and for the stability and control of
budgetary costs.
For students, the current policy creates large swings in
the value of government assistance from year to year. Similar students
that attend the same school but in different years receive very
different amounts of support: Subsidies will be small when market
interest rates are low and large when rates are high. As well as
raising fairness concerns, the volatility makes it more difficult for
prospective students to assess the affordability of pursuing a higher
education.
At the same time, the variability in year-to-year
subsidies creates potentially large and uncertain liabilities for
taxpayers.
From a budgeting and control perspective, the uncertain
size and volatility of subsidies over time is detrimental to budgetary
planning, and it has the effect of reducing the control that Congress
exercises over the allocation of scarce budgetary resources.
The volatility in federal subsidies caused by fixing the interest
rates on student loans is illustrated in Table 1, which shows the
subsidy rates estimated by OMB for loans originated between 2006 and
2011. The pattern of sharply lower subsidies starting in 2009 reflects
that the rates charged to students remained constant even as Treasury
interest rates fell to historically low levels.
Adopting the alternative of market-indexed rates would reduce the
volatility of subsidies for borrowers and taxpayers, and also help to
stabilize the budgetary costs of the programs. Under that approach, the
interest rate charged on new loans each year would be linked to a
market rate, for instance, to a Treasury security with a similar
duration to the student loans. The interest rates could still be fixed
over the life of each individual loan, but that fixed rate would change
year to year.
The notion that allowing interest rates to vary with market
conditions would create greater stability and fairness than fixing
interest rates by statute may at first seem unintuitive. However,
market-linked interest rates can be beneficial because they result in
more stable real (or inflation-adjusted) loan payments. High nominal
interest rates generally coincide with periods of high expected
inflation rates. Market rates increase with inflation because investors
need more compensation just to maintain the purchasing power of the
loan repayments they receive. Wages also grow more quickly during
periods of higher inflation, making higher nominal payments more
affordable to borrowers. Furthermore, low nominal interest rates tend
to be a symptom of a weak economy and job market, as is the situation
today. Fixing the interest rate by law tends to shrink government
subsidies at just those times when students would benefit from them
most.
With market-indexed interest rates, the generosity of subsidies
could be controlled by choosing an appropriate ``interest rate
spread''--a number which could be specified in legislation in place of
a fixed interest rate. For example, Stafford borrowers could be charged
a 3 percent spread over the 10-year Treasury bond rate (which would
translate to an interest rate of 5 percent under current interest rate
conditions of 10-year rates at about 2 percent). Lower rate spreads
could be specified for subsidized loans.
If rates are indexed, policymakers may want to protect borrowers
from unusually high interest rate conditions by setting an interest
rate cap that limits the maximum rate charged. For example, the cap on
consolidation loans is currently 8.25%. However, the lower is the cap
that is chosen, the higher the cost and volatility that would be
reintroduced. It is worth noting that even without a cap, borrowers
would have some protection against unusually high interest rates
because student loans can be prepaid without penalty.
Fair Value Accounting for Costs
Because of the way student loans are budgeted for, indexing student
loan interest rates would have the effect of lowering the volatility of
their budgetary costs over time. Specifically, under the Federal Credit
Reform Act of 1990 (or FCRA), credit programs are budgeted for on an
accrual basis that records the lifetime cost of the loans disbursed
each year. Specifically, costs are calculated by discounting to the
present the expected cash flows over the life of the loan using
current, maturity-matched, Treasury interest rates as the discount
factors.
With interest rates on student loans that are fixed by statute,
when Treasury rates go up the value of projected future payments fall
and the budgetary cost of the loans increases; and conversely when
market rates fall. Indexing the interest rates on student loans would
largely eliminate that source of volatility. (Subsidies would still
vary over time with changes in projected default rates, program
participation, and other factors.)
The move to accrual accounting for federal credit represented a
significant improvement over the cash accounting that preceded it in
terms of accuracy and transparency. The use of Treasury rates as
discount factors, however, fails to account for the full costs of the
risks associated with government credit assistance. Those costs must
ultimately be borne by taxpayers, just as they must be borne by the
equity holders (owners) of private lenders that make private loans.
A consequence of that incomplete accounting for risk is that in
recent years student loans have appeared to be quite profitable for the
government. For example, OMB reported that the government earned 14
cents per dollar on student loans made in 2011, even though the rates
charged were significantly lower than those offered by private lenders,
and despite the heightened risk of defaults caused by the still weak
job market.
A policy change that could alleviate the understatement of costs in
the budget and increase transparency would be to replace FCRA subsidy
costs with so-called ``fair'' or market-based cost estimates in the
budget. That change would eliminate the artificial appearance that the
student loan programs are highly profitable for the government. To
illustrate, Table 2 reproduces CBO's 2010 estimates of the hypothetical
effect of switching from FCRA to fair-value estimates of program cost.
As well as improving transparency about program costs, moving to
fair value estimates would have the salutary effect of putting credit
and non-credit assistance to students on a more level playing field in
the budgetary process. In particular, the budgetary disadvantage of
offering Pell grants as compared to student loans would be reduced by
using a more comprehensive approach to estimating of the cost of credit
assistance.
Income-Based Repayments
Proposals have been put forward to move to a more income-based
repayment system, under which borrowers' payments would depend on their
earnings after they graduate. Such policies would benefit students in
several ways: It would help them avoid unmanageable debt levels, and it
would make it easier to pursue careers in lower paying fields such as
the military, public service, or teaching. It could be especially
beneficial to low-income students whose prospects after graduation are
less predictable and who are therefore more wary of taking on debt.
The costs and risks to the government of an income-based repayment
scheme would depend critically on the details of how the policy is
structured. In principle it would be possible to set up the system in a
way that did not increase overall program costs. However, because the
savings that would be anticipated from lower default rates are unlikely
to fully make up for the higher costs associated with reducing or
extending the payments of students who get relief but would not have
defaulted under the old system, overall costs would tend to be higher
unless the average interest rates charged were also increased.
Restructure the Consolidation Option
Finally, modifying the consolidation option to eliminate borrowers'
ability to convert a floating rate loan to a fixed rate loan with the
same interest rate could potentially save the government a significant
amount of money in the event that Congress ever decides to return to
fully floating interest rates. My academic work on the consolidation
option suggests that between 1998 and 2005, a period when student loans
carried a variable interest rate tied to 3-month Treasury rates, the
cumulative cost of consolidation to the government was about $27
billion.\1\ The greatest benefits accrue to cohorts who happen to
graduate when interest rate conditions are favorable to consolidation,
to professional students with the largest loan balances, and to
borrowers with the sophistication to manage their loans efficiently. As
such, the option is unlikely to be an efficient way to subsidize higher
education. The benefits of allowing students to combine all their loans
into a single loan could be preserved, but the costs of consolidation
reduced, by charging a rate on floating-to-fixed conversions that is
linked to a current long-term Treasury rate.
---------------------------------------------------------------------------
\1\ Deborah Lucas and Damien Moore, ``The Student Loan
Consolidation Option,'' manuscript, MIT, January 2013.
---------------------------------------------------------------------------
______
Chairman Kline. Thank you.
Mr. Delisle, you are recognized for 5 minutes.
STATEMENT OF JASON DELISLE, DIRECTOR OF THE FEDERAL EDUCATION
BUDGET PROJECT, THE NEW AMERICA FOUNDATION
Mr. Delisle. Thank you Chairman Kline, Ranking Member
Miller, and committee members. Thank you for inviting me to
testify about the need to improve the federal student loan
program.
If there is one thing recent debates about federal student
loans have demonstrated is that Congress needs to develop a
rational, long-term plan for setting interest rates.
Currently, the program charges borrowers the same fixed
interest rates no matter what happens to other interest rates
in the economy, and the rates are arbitrary.
Congress wrote them into law back in 2002, and with the
exception of an arbitrary cut to 3.4 percent on some loans,
those rates have been in law ever since.
There are a lot of problems with picking a fixed rate that
looks about right for the time being and then deciding to cut
it in half on some loans some of the time when market or
political conditions might warrant it. That approach, as you
are all aware, makes rate adjustments in either direction very
difficult to legislate.
An upward adjustment is politically unpopular and a
downward adjustment is prohibitively costly to taxpayers.
Here is what I believe is a better approach. Set a fixed
interest rate for newly issued student loans based on the rate
on the 10-year treasury notes time the loans are issued plus
three percentage points.
That formula would set rates low enough to provide a
subsidy to borrowers. That is, the terms will be better than
those in the market all the time, but the rates will be high
enough to partially offset the cost of the program. Rates would
still be fixed and borrowers would receive lower rates when
rates are low and higher rates when rates are high.
On loans issued this coming school year under this approach
would carry a fixed rate of 4.9 percent, lower than the current
6.8 percent rate on the most widely available federal student
loans. What is more, the rate would be available to all
undergraduate and graduate students, unlike an extension of the
3.4 percent rate.
Now of course, under this formula, the rate on loans issued
in subsequent years could be higher or lower than today's
rates. The Congressional Budget Office projects that long-term
interest rates will eventually rise, but this is also why the
budget office shows that the proposal I have recommended does
not score as a cost over a 10-year window; although there would
be costs in the first 5.
Now student aid advocates in some policymakers worry that a
rate-setting formula like the one I have recommended could make
loans unaffordable for borrowers should interest rates increase
significantly.
They suggest capping the rate, yet a cap would be costly
for taxpayers and it would reintroduce an arbitrary interest
rate back into the program. More importantly, a cap would be
redundant. The federal student loan program already includes a
built in interest rate cap and it is targeted only to borrowers
who need it. It is called income-based repayment, or Pay-As-
You-Earn.
Under these programs, borrowers make monthly payments based
on their incomes, not the interest rates on their loans.
Moreover, the loan terms are fixed at 10 or 20 years through
loan forgiveness so that a borrower with a high interest loan
would have his debt forgiven before the rate influences
payments provided he qualified for the assistance based on his
income.
An IBR is an even more effective interest rate cap thanks
to the large new benefits that the Obama administration has
added to the program.
Now I should note that my colleague, Alex Holt, and I have
identified some significant flaws in those new benefits. Our
ongoing analysis shows that that graduate and professional
students face a clear and obvious incentive to borrow more
rather than less.
These students can easily accumulate loan balances where
they will bear no incremental cost in borrowing an additional
dollar. The added debt and interest will be forgiven under IBR.
So using a very plausible income scenario, we find that
once a borrower takes on about $65,000 in debt, he bears none
of the incremental costs of borrowing an additional dollar
under the new IBR even if he goes on to earn over $100,000 for
most of his repayment term.
If he expects to pursue a career in the nonprofit sector,
he bears none of the incremental cost of borrowing an
additional dollar once he reaches $49,000 in debt.
In other words, the message that this program sends to
graduate students is keep borrowing. The message it sends to
schools is expand your graduate programs, start new ones, and
charge more. These are very bad messages to send.
Fortunately, Congress and the administration can address
this problem without rolling back all of the new benefits that
IBR and Pay-As-You-Earn provide and I have included those
recommendations in my written testimony.
So to wrap up today, I want to reiterate that Congress
should set student loan interest rates based on a formula like
the one I outlined and let a modified, income-based repayment
program cap the interest rate for borrowers who truly need the
assistance, but remember to address the perverse incentives and
unnecessary benefits that IBR now provides to graduate and
professional students.
Thank you. I look forward to answering any questions that
you may have.
[The statement of Mr. Delisle follows:]
Prepared Statement of Jason Delisle, Director,
Federal Education Budget Project, New America Foundation
Chairman Kline, Ranking Member Miller, and committee members, thank
you for inviting me to testify about the need to improve the federal
student loan program.
My colleagues in the New America Foundation's Education Policy
Program and I have developed a set of recommendations that we believe
will improve the federal student loan programs to the benefit of
students and taxpayers. These recommendations were first published in
two New America Foundation papers, Safety Net or Windfall? Examining
Changes to Income-Based Repayment for Federal Student Loans (October
2012) and Rebalancing Resources and Incentives in Federal Student Aid
(January 2013). Those recommendations are discussed briefly below.
At the end of this testimony is a brief explanation of the series
of events that led Congress to enact the current interest rate
structure on federal student loans. That information may be helpful to
the Committee as it considers changes to student loan interest rates.
The Case for Reforming Federal Student Loans
The federal student loan program is extremely complex,
offering students and their families a variety of choices, with each
carrying different congressionally set interest rates and borrowing
limits. Borrowers also face a baffling array of repayment options.
Benefits often overlap, which lead to unintended interactive effects.
Graduate students and the parents of undergraduates can
take out loans up to the full cost of attendance. This encourages and
enables imprudent borrowing, and also makes it easier for colleges and
universities to raise their prices with impunity.
The benefits of the loan program are poorly targeted. The
programs provide generous federal subsidies to some students based on
their incomes before they enroll in school, rather than after they
graduate, which is when they actually pay their loans back. Students
are also charged the same interest rates regardless of changes in
market interest rates, such that students are provided different levels
of subsidies from year to year for no particular reason. Recent changes
to the Income-Based Repayment plan provide the largest benefits to
those who borrow most, particularly graduate students, even if they
earn a high income.
The program does not provide enough incentives for
students to make steady progress and complete a credential on time. In
some cases, it does the opposite.
Recommended Reforms
Address Flaws in the IBR Program and Make it the Sole
Repayment Option for Borrowers
A simpler federal loan program with better targeted benefits should
offer a single repayment plan that is similar to both the Pay-As-You-
Earn plan that the U.S. Department of Education recently enacted (which
itself is meant to mimic a plan in statute set to take effect in 2014
and is referenced throughout this testimony as ``new IBR'') and the
Income-Based Repayment plan that was enacted in 2007 (referenced
throughout this testimony as ``old IBR'').\1\ This sole repayment plan
must incorporate changes to the current system to ensure that it does
not provide windfall benefits to higher income borrowers who have the
means to repay their debt or indemnify high tuitions and over-
borrowing. Those recommended changes are the following:
Recommendation #1: Maintain the lower payment calculation
(10 percent of AGI) in New IBR, but only for borrowers with AGIs at or
below 300 percent of the federal poverty guidelines ($33,510 for a
household size of one). Borrowers with AGIs above 300 percent will pay
according to the Old IBR formula (15 percent of AGI).
Justification: This change targets the benefits of lower monthly
payments under New IBR to lower-income borrowers only. Borrowers
earning more, while still eligible for IBR, must make payments based on
the Old IBR formula. Additionally, by requiring borrowers with incomes
above 300 percent of the federal poverty guidelines to make monthly
payments based on 15 percent of their AGIs, it is much less likely that
high-income borrowers will receive loan forgiveness. It also allows
borrowers with lower incomes to benefit from the 10 percent rate that
New IBR offers, but ensures that they will repay those benefits by
paying at a higher rate if their incomes increase later.
Lastly, those borrowers with AGIs above 300 percent of the poverty
guidelines will likely have total incomes that are markedly higher than
their AGIs because they are able to make pre-tax benefit payments,
contribute to retirement savings, and take larger above-the-line
deductions. Imposing a higher payment calculation (15 percent of AGI)
on these borrowers compensates for their significantly lower AGIs
relative to their total salaries.
Recommendation #2: Maintain the loan forgiveness threshold
from New IBR (20 years), but only for borrowers whose loan balances
when they entered repayment do not exceed $40,000. Borrowers with
higher initial balances would qualify for loan forgiveness after 25
years of repayment, the same as under Old IBR.
Justification: Like the first recommendation, this proposal would
maintain the more generous benefits of New IBR, but not for all
borrowers. A two-tiered loan forgiveness system based on initial debt
levels would keep the 20-year loan forgiveness targeted toward
borrowers who have debt from undergraduate studies or moderate amounts
of debt from graduate studies and who struggle to repay. By creating a
longer loan forgiveness threshold for borrowers with debt levels above
$40,000, this recommendation also reduces the tendency that New IBR has
to provide loan forgiveness to high-income, high-debt borrowers when
they are most able to make higher payments on their loans for a total
of 25 years. This two-tiered approach would discourage graduate and
professional schools that charge high tuitions and their students who
borrow federal loans from using IBR as an indemnification tool.
Recommendation #3: Eliminate the maximum payment cap.
Borrowers must always pay based on the IBR income formulas, no matter
how high their incomes are. Additionally, borrowers may not opt to
enroll in another repayment plan.\2\
Justification: The maximum payment cap targets IBR benefits to
higher-income borrowers either by reducing their monthly payments,
increasing the amount of loan forgiveness they receive, or both. It can
also increase the chances that a borrower earning a very high income
(over $200,000) would qualify for loan forgiveness. Lastly, requiring
that borrowers stay in IBR for the duration of their repayment term
will ensure that borrowers who benefited from IBR when their incomes
were low will pay commensurately higher payments should their incomes
increase--this helps offset some of the initial costs the government
incurred when the borrowers benefitted from low payments while their
incomes were lower.
Recommendation #4: The U.S. Department of Education and
policymakers should be forthcoming about the negative consequences
borrowers may face when repaying through IBR. The Department should
provide borrowers with illustrative examples of how paying off their
loans more slowly could increase what they pay and provide clear
warnings. Private companies servicing federal student loans should
clearly indicate to borrowers how much interest accrues on their loans
when they repay through IBR and how that is likely to increase the
repayment term and total interest costs they will pay.
Justification: IBR entails some financial risks for borrowers
(those risks exist for Old IBR, though New IBR entails far less
financial risk for borrowers with debt levels that exceed $20,000).
Borrowers may save little per month under IBR and end up paying more
and for longer due to the added interest costs. Borrowers do make a
trade-off in paying a minimum monthly payment under IBR over electing
to make pre-payments, and loan servicers and the U.S. Department of
Education should ensure that borrowers are informed of those trade-
offs.
Recommendation #5: IBR payments for a borrower who is
married but files a separate income tax return should be based on the
household's combined AGI. The program currently allows borrowers to
file separate income tax returns and use only the borrower's income to
calculate payments under IBR. This policy should include an exception
for cases where both spouses are making payments on federal student
loans under IBR. In that case, each borrower's loan payments should be
based on one-half of household income.
Justification: Married borrowers with low individual, but high
household incomes can still qualify for IBR (including loan
forgiveness) by filing a separate income tax return. If these borrowers
also have children, they can significantly increase the benefits they
earn under IBR by designating the children as dependents on their
annual IBR application since it increases their household size and the
poverty exemption they receive under IBR. This provision is another way
in which higher-income borrowers (based on household income) can
qualify for generous benefits under IBR. Ending this provision will
ensure that the program's benefits are targeted to borrowers who need
the most assistance. The exception for couples in which each spouse is
repaying a federal student loan will ensure that borrowers in a two-
borrower household do not each have to make payments on their loans on
their combined incomes--which would essentially be double-counting
their incomes.
Recommendation #6: Make loan forgiveness tax-free using
budgetary savings that arise from the other recommendations outlined
above.
Justification: Federal tax law treats loan forgiveness under IBR
(except when provided for public service employees) as taxable income.
Borrowers who receive loan forgiveness (under an IBR that reflects the
recommendations outlined here) will likely have experienced some degree
of financial hardship. Therefore, they are also likely to struggle with
what could be a relatively large tax bill in the year they receive loan
forgiveness. If IBR is meant to aid this type of borrower, then it
should not impose its own type of financial burden on them.
Recommendation #7: Allow all current borrowers to enroll
in an IBR that reflects these recommendations. Do not limit it to new
borrowers and new loans.
Justification: Old IBR is available to all borrowers, but Congress
and the Obama administration have limited access to New IBR to more
recent borrowers to reduce the cost of the program. The recommendations
outlined above would preserve some of the benefits of New IBR, but
target them to those borrowers with more financial need, thereby
reducing the cost. The recommendations would further reduce costs by
limiting benefits to higher-income borrowers compared to even Old IBR.
Therefore, policymakers could open the program to all borrowers at
little or no incremental cost to taxpayers, and a greater number of
borrowers would gain access to lower repayments and earlier loan
forgiveness.
Recommendation #8: Ensure that loan servicers have the
requisite income information from borrowers when they begin repaying
their loans. Require borrowers to agree in their promissory notes to
allow their loan servicers and the U.S. Department of Education to
access necessary information from their most recent federal income tax
return.
Justification: The main impediment to making IBR the automatic and
only repayment plan for all new borrowers is that borrowers must first
submit information to loan servicers before their monthly payment can
be calculated and billed. Requiring that borrowers authorize the U.S.
Department of Education to access the necessary information from their
tax returns upon signing a promissory note for a federal student loan
will ensure that the loan servicer can calculate a borrower's payment
without the borrower having to first submit information.
Repayment Tables for Two Borrowers Under Different Repayment Plans
The tables below are excerpted from Safety Net or Windfall?
Examining Changes to Income-Based Repayment for Federal Student
Loans.\3\
Figures for the recommended IBR changes reflect all proposed
changes listed in this testimony except that borrower income does not
reflect household income. All borrowers file separate federal income
tax returns and designate any children that they have as dependents.
The interest rate for all repayment plans is the rate the borrower
would pay under the consolidation plan, which is the weighted average
rate rounded to the nearest one-eighth of one percent.
End the Subsidized Stafford Interest Rate Benefit
Since the passage of the Higher Education Amendments of 1992, all
undergraduate borrowers have been able to take out federal Stafford
loans regardless of income or other need-based tests, at terms that
have been generally more favorable than those in the private market.\4\
Prior to the enactment of that policy, the federal loan program allowed
only financially needy students to borrow.\5\ These loans had always
included an interest-free benefit under which the loan would not accrue
interest while the borrower was in school. However, when policymakers
opened up the federal student loan program to borrowers of all income
backgrounds in 1992, they maintained the interest-free benefit for
borrowers who met a needs analysis test that accounted for the cost of
attendance at students' institutions, but did not provide a similar
benefit for other borrowers. That interest-free benefit remains the
distinction between the two loan types that still exist in today's
program: Subsidized Stafford loans and Unsubsidized Stafford loans.
In other words, Subsidized Stafford loans were not created to
provide benefits over and above those on Unsubsidized Stafford loans.
Rather, it is a benefit that was always provided as part of the federal
student loan program. The Subsidized and Unsubsidized Stafford loan
distinction remains current policy mainly due to historical
circumstances. That fact is made clearer by some of the policy's
shortcomings and how it interacts with the myriad changes policymakers
have made to the student loan programs in recent years.
In fact, Subsidized Stafford loans do not always provide the
greatest benefits to the lowest-income students. Subsidized Stafford
loans are awarded to borrowers in part according to the cost of
attendance of their schools. That means a borrower with a high-family
income will be eligible for the loans if he attends the most expensive
type of institution, while a similarly situated borrower who opts to
attend a low-cost institution will qualify only for Unsubsidized
Stafford loans. This is why, in spite of income and assets tests
targeting the aid to lower income families, 12 percent of borrowers who
receive Subsidized Stafford loans come from families earning over
$100,000 per year.
Furthermore, the Income-Based Repayment Plan better aligns
repayment with a borrower's ability to repay, whereas Subsidized
Stafford loans are provided to borrowers based largely on their family
income when they enter school. For example, borrowers with Unsubsidized
Stafford loans begin repayment with higher loan balances than students
with Subsidized Stafford loans (assuming everything else is equal)
because interest has accrued on the loan. Under IBR, the higher loan
balance does not necessarily mean the borrower will pay more than if he
had a lower loan balance--monthly payments are based on a borrower's
income, not loan balance. Therefore a borrower who earns a persistently
low income over his repayment term would make the same payments
regardless of the size of his initial loan balance. Only borrowers with
higher incomes in repayment stand to gain from Subsidized Stafford
loans.\6\
The Obama administration recommended in 2011 that graduate students
be eliminated from the Subsidized Stafford program going forward, and
Congress acted on that policy, redirecting the budgetary resources to
the Pell Grant program. The administration noted that, in addition to
the Income-Based Repayment option available to graduate and
professional students, ``eligibility for the interest subsidy is based
on `ability-to-pay' at the time of enrollment, but the borrower
realizes the benefit later--typically years later--in the form of lower
loan payments after leaving school.''\7\ The administration also argued
that government aid should be targeted to the highest-need students.\8\
All of those arguments apply to the case for eliminating the Subsidized
Stafford loan interest-free benefit for undergraduate students,
particularly if IBR is the only repayment option for borrowers.
Create a Fixed Formula for Setting Student Loan Interest Rates
Interest rates on federal student loans are arbitrary and
inflexible because Congress set the rates as nominal figures in law
based on what would have been a subsidized interest rate in the year
2001.\9\ They are not based on any formula, nor do they bear any
relation to changes in related interest rates in the market since then.
The rate on all newly-issued Unsubsidized Stafford loans as of 2006 is
6.8 percent, and under current law will remain so in perpetuity.
The effect of such a policy is to provide very different levels of
subsidies to borrowers depending on when they take out their loans. The
subsidy on loans issued at the 6.8 percent interest rate in 2007 when
the economy was booming and interest rates were relatively high was
much larger than the subsidy provided to students in today's low-
interest rate, slow-growth economy. That means students receive larger
subsidies when they are least needed; the policy is both inefficient
and unfair. In fact, the Congressional Budget Office estimates that the
loans issued in fiscal year 2013 will not provide any subsidies
(meaning the terms provide no value over loans in the private market)
to the vast majority of borrowers.\10\ This will be the first time that
federal student loans provide no subsidy, based on fair-value
estimates.
A better policy would be to set interest rates on all newly-issued
federal student loans at 3.0 percent, plus a markup equal to long-term
U.S. Treasury borrowing rates. The fixed rate of 3.0 percent would
ensure that the government partially covers the costs of making the
loans (i.e. administrative costs and costs associated with defaults,
collections, and delinquencies), and the markup would allow the loan
rates to adjust based on long-term interest rates. The interest rates
charged to borrowers would still be fixed for the life of the loan, but
the rate for new loans would change each year based on the market rates
for 10-year Treasury notes.
Under that formula, the interest rate for federal loans issued for
the 2012-13 school year would be about 4.9 percent, a big drop from the
6.8 percent rate that is currently charged on Unsubsidized Stafford
loans. That rate would be available on all newly issued Stafford loans
to undergraduate and graduate borrowers.
Because the rate offered on newly-issued loans would adjust
annually, it could be higher in future years. However, Income-Based
Repayment on federal student loans, coupled with loan forgiveness after
20 or 25 years in repayment, ensures that the rate a borrower pays
cannot rise to unaffordable levels regardless of the loan's nominal
rate. It also ensures that borrowers earning higher incomes, those who
are most able to pay, are the only ones who could face higher interest
rates under the policy. Income-Based Repayment is effectively an
income-based interest rate cap that provides benefits to borrowers
based on need, but it determines the cap in repayment, rather than at
the time of enrollment.
How IBR Works as an Interest Rate Cap
The following scenarios were developed using the New America
Foundation IBR calculator.\11\
Consider someone with $45,000 in debt from undergraduate and
graduate studies who works in the government/non-profit sector and
earns a starting salary of $38,000 (AGI of $34,200) with a four percent
annual raise. At an interest rate of 4.9 percent, she pays a total of
$22,281 on her loans over 10 years, and then the remaining balance is
forgiven under Public Service Loan Forgiveness. At an interest rate of
12 percent she still pays $22,281 and the remaining balance is
forgiven. Even if her interest rate were 0.0 percent, her total
payments would still be $22,281.
What if the same person worked in the for-profit sector and
therefore qualifies for loan forgiveness after 20 years of payments
instead of 10? At an interest rate of 4.9 percent, her total payments
over 20 years are $58,998, and she has some remaining debt forgiven.
Increase her interest rate to 12 percent and her total payments are
still $58,998. IBR has capped her payments--and the interest rate on
her loan--because her income is not high enough for the interest rate
to matter.
As another example, consider a borrower with undergraduate debt of
$28,000, who works in the for-profit sector, with a starting income of
$29,000 (AGI of $26,100) and an annual increase of three percent. She
would pay $27,228 on her loans over 20 years at an interest rate of 2
percent, 5 percent, or 25 percent. Her monthly payments over that time
would be no higher or lower under any of those interest rates.
Under IBR, only borrowers with higher incomes would be affected by
higher interest rates. But the program still provides a cap even for
these borrowers, albeit a higher cap. Moreover, monthly payments are
still based on income; only the length of payment is affected by the
interest rate. And high-income borrowers who work for the government or
non-profit organizations fare even better, because they qualify for 10-
year loan forgiveness.
Imagine a borrower with $40,000 in debt and a starting salary of
$50,000 (AGI $45,000), who receives an annual raise of four percent. If
she works for a non-profit employer, the interest rate on her loan is
irrelevant. She will pay $35,247 before her remaining debt is forgiven
(after 10 years of payments) whether the interest rate is 2 percent, 6
percent or 12 percent. However, if she works for a for-profit employer,
her higher income means she will pay for longer if the interest rate is
higher. But if the rate is 8 percent or higher, she won't pay all of
the extra costs. Instead, she will have much of it forgiven once she
reaches 20 years of payments.
Set One Loan Limit for All Undergraduates, Irrespective of Their
Dependency Status
Policymakers should simplify the federal loan program by
eliminating the distinction between dependent and independent
undergraduates and allowing both types of students to borrow the same
amount of loans. Under the New America Foundation proposal, the annual
limits for all undergraduates would be $6,000 for a first year student,
$7,000 for a second-year student, and $9,000 for a third-, fourth-, or
fifth-year student. The aggregate limit for undergraduates would be
$40,000.
These proposed limits are higher than dependent undergraduates can
currently borrow on their own but less than independent undergraduates
can take out. This increase is appropriate due to our proposed
elimination of Parent PLUS loans, which is outlined later in this
document, and the fact that current loan limits for independent
students can lead to excessive amounts of debt. As of now, an
independent undergraduate student who borrows the maximum in federal
loans would begin repayment with a principal and interest balance of
approximately $74,000, an amount that would require $486 monthly
payments over 30 years to repay under the currently available repayment
plans.
End Grad PLUS, but Increase Stafford Loan Limits for Graduate Students
Policymakers should end the Grad PLUS loan program. This program
allows graduate and professional students to borrow up to the full cost
of attendance at an institution of higher education, with no time or
aggregate limit. Such a policy, especially when coupled with loan
forgiveness and Income-Based Repayment, can discourage prudent pricing
on the part of institutions and prudent borrowing by students. However,
policymakers should increase the annual limit on Unsubsidized Stafford
loans for graduate students from the current $20,500 to $25,500 to
replace some of the borrowing ability graduate students will lose when
the Grad PLUS loan program is eliminated.
If institutions can no longer rely on PLUS loans to fund their
high-tuition programs and if the private market is responsive to the
ability of borrowers to repay, then graduate schools may have to set
their pricing based, in part, on students' expected earnings. Since
those in graduate school already have an undergraduate degree and are
preparing for a profession, it is more reasonable to expect that loans
above the Stafford limits be based on prospective ability to repay.
Underwriters will likely focus most intently on institutional
characteristics to determine risk. Consequently, programs that poorly
prepare students to repay their debts will find that their students
cannot access much credit in the private market, which should change
institutional behavior in terms of quality and pricing.
End Parent PLUS Loans
In addition to ending the Grad PLUS loan program, policymakers
should eliminate the Parent PLUS loan program. As the cost of attending
college has soared, so too have Parent PLUS loan disbursements.
According to a recent article in The Chronicle of Higher Education, the
government issued $10.6 billion of Parent PLUS loans to approximately
one million families last year.\12\ That is nearly double the numbers
of borrowers and an increase of $6.3 billion over the past decade
alone. Many colleges use these loans when packaging financial aid to
fill large gaps in financial aid awards.
Parents can borrow up to the cost of attendance at the schools
their children attend, which means families can easily over-borrow, and
institutions have an easy source of funds if they wish to raise
tuition. Moreover, the federal government does not track or publish the
rate at which parents default on PLUS loans at each institution.
Lastly, the loans carry a relatively high fixed interest rate of 7.9
percent and origination fee of four percent, which can pose a financial
risk to vulnerable families; and the loans are not eligible for
repayment options designed to help struggling borrowers, like Income-
Based Repayment.
Limit Loans to 150% of Program Length
The package of student aid reforms presented here proposes both
annual and aggregate limits for federal student loans and gives
colleges the flexibility to adopt lower limits for their students. We
also believe that policymakers should add a new program-length limit
that would apply in addition to the annual and aggregate limits. The
new limit would end loan eligibility once a borrower exceeds 150
percent of the standard time needed to complete the degree or program
that he is pursuing. For instance, a student who borrows $5,000 per
year over six years to complete a four-year degree would, under this
proposal, exhaust his eligibility for federal student loans, even
though he did not exceed the annual or aggregate borrowing limit. This
policy is meant to discourage extended and prolonged enrollments beyond
150 percent of the time the student would need to complete his or her
program.
The policy would leave in place the annual limit and aggregate
limit on borrowing for students who may begin one type of program but
switch to another. In other words, the 150 percent time limit would
start over when the student enrolls in a new program, but the overall
aggregate and annual limits would still apply. Meanwhile, time spent in
remedial education would not count toward the 150 percent program-
length limit. The proposal would also prorate annual loan limits if a
student pursues his or her program on a half-time basis.
History of Federal Student Loan Interest Rates
Why the Federal Student Loan Interest Rate Is 6.8 Percent
Since the 1960s, the federal government has supported a loan
program that helps students pay for the cost of higher education at
institutions across the country. While the program has undergone many
changes and evolved to provide loans to students from all income
backgrounds, its original purpose remains. The program ensures that
students can borrow at favorable terms without regard to their credit
histories, incomes, assets, or fields of study.\13\ In 2013, students
and parents are expected to borrow $106 billion in federal loans, and
over $800 billion in federal student loans were outstanding in
2011.\14\
From the program's inception until 1992, Congress set the interest
rate on student loans at fixed rates ranging from 6.0 percent for loans
issued in the 1960s to 10.0 percent for loans issued between 1988 and
1992.\15\ Congress enacted variable rates in 1992, seeking to better
align them with the interest rate the government paid private lenders
holding the loans and thereby reduce the government's costs.\16\ The
new variable rates reset once a year and consist of the interest rate
on short-term U.S. Treasury securities plus 3.1 percentage points (a
``markup''), capped at 9.0 percent. Congress made minor adjustments to
this formula over the subsequent six years, lowering the markup and the
cap.
Shortly after the move to variable rates, in 1993 Congress passed
the Student Loan Reform Act to establish the Direct Loan program.\17\
Congress intended this program, under which the U.S. Department of
Education makes loans directly to students, to gradually replace the
existing program that subsidized private lenders to make loans (i.e.,
the bank-based program). At the time, policymakers also sought to more
closely link the interest rates borrowers were charged to the rates the
government paid to borrow since there would be no further need to link
them to subsidies for private lenders.\18\ In response, the 1993 law
pegged borrower rates to longer-term U.S. Treasury securities that were
similar in duration to the student loans, plus a smaller markup of 1.0
percentage point would be calculated for loans issued after July 1,
1998.\19\ This formula would also be used to set the interest rate
guaranteed to lenders for any loans still made in the bank-based
program in 1998 and later.
By the mid-1990s, the Direct Loan program phase-in had not gone as
Congress had originally planned; as 1998 approached, the bank-based
program still accounted for the majority of newly issued federal loans.
However, the pending interest rate change for both borrowers and
lenders enacted in 1993 was still set to occur in 1998. As a result,
lenders in the bank-based program--who Congress assumed in 1993 would
not be playing the major role they still were in 1998--expressed
concerns that the interest rate change would increase their costs and
reduce returns to such an extent that they would no longer be willing
to make federally backed student loans.\20\
Fearing that lenders would flee the program and disrupt loan
availability, in 1998 Congress postponed the pending rate changes until
2003 (a permanent fix was too costly) and left the then-current
interest rate formulas in place with some minor adjustments (it reduced
the markup on the borrower's annual interest rate from 3.1 to 2.3
percentage points). Despite this action, lenders participating in the
bank-based loan program continued to express worries over the interest
rate structure change, now delayed until 2003. They encouraged Congress
to address it before mid-2002 to avoid disrupting student loan
availability.
As an alternative to the pending rate change, lenders and some
lawmakers proposed making permanent the then-current formulas (short-
term interest rates plus 2.3 percentage points). But student advocates
and some lawmakers opposed this approach because the formula set to
take effect in 2003 (variable rates based on longer-term U.S. Treasury
rates plus 1.0 percentage point) produced more favorable rates for
borrowers.\21\ At the time, short-term and long-term Treasury rates
were similar, meaning that the lower markup built into the pending
formula produced lower overall rates.
In late 2001, after months of negotiations, lawmakers proposed a
bipartisan compromise that would avert the pending rate change and make
permanent the then-current interest rate formula for lenders. It also
extended through 2006 the existing variable rate formula for borrowers
but established fixed interest rates at 6.8 percent for Subsidized and
Unsubsidized Stafford loans made after July 1, 2006.\22\
Lawmakers, higher education associations, and student advocate
organizations championed the bill because the fixed 6.8 percent
interest rate that would start in 2006 was lower than estimates of what
borrowers would pay if Congress had maintained the variable
formula.\23\ In selecting a fixed rate, Congress and advocacy groups
decided on 6.8 percent because it was approximately the average of the
projected interest rates set to take effect in 2003 based on longer-
term U.S. Treasury bills.\24\ Supporters also cited the certainty that
fixed rates provided over variable rates as a benefit to borrowers. The
Senate passed the bill unanimously in December 2001, the House passed
it with overwhelming support in January 2002, and the president signed
it into law.
Congress chose to delay the implementation of the fixed rates until
2006--maintaining the existing variable rate formula in the meantime--
to reduce the costs of the policy over a ten-year budget window. The
Congressional Budget Office estimated that adopting fixed rates would
reduce the rates for borrowers compared to then-current law, increasing
costs for the government by $5.2 billion from 2007-2011.\25\ It would
have cost more if Congress had chosen to implement the change
immediately.
Meanwhile, in the latter half of 2001, the U.S. Federal Reserve was
in the midst of reducing its short-term benchmark interest rate in
response to a mild economic recession and the terrorist attacks of
September 11th. By the time the ink was dry on the 2002 law that
established the fixed 6.8 percent interest rate, the Federal Reserve
had cut short-term interest rates below 2.0 percent. It had been as
high as 6.5 percent in early 2001. Two more Federal Reserve rate cuts
in 2002 and 2003 brought the rate to 1.25 percent and 1.0 percent,
respectively. Given the low-interest-rate environment that began in
2002, it appeared unlikely that a fixed 6.8 percent rate would lower
costs for borrowers as supporters had previously argued.
A 2005 Effort to Block Fixed Rates Sets Stage for Temporary Rate Cut
Despite the low interest rate environment of the mid-2000s, the
fixed rates scheduled to take effect in 2006 received little attention
until 2005, when Congress considered proposals to reduce annual budget
deficits. That year, Republican majorities in the House and Senate
began drafting legislation to cut spending and reduce budget deficits.
Both chambers made changes to federal student loans a large component
of their respective proposals, spurred by reforms outlined in the
president's budget request.
The House plan would have canceled the fixed interest rates set to
take effect in 2006, maintaining the existing variable rate formula,
which that year set rates between 3.4 and 5.3 percent.\26\ Sponsors of
the proposal argued that variable rates would be better for borrowers
and taxpayers. The Senate, however, maintained the fixed rates set to
take effect in 2006.\27\
To meet deficit reduction goals, both the House and Senate bills
made a change to the interest rate guaranteed to lenders making
federally backed student loans. The bills included a provision that
required lenders to rebate interest that borrowers paid in excess of
the rate at which the government guaranteed lenders.\28\ The provision
cut spending compared to then-current law because it reduced what
lenders could earn on the loans. However, the Senate bill had a larger
deficit-reducing effect because it left the scheduled fixed rates in
place, increasing the size of the lender rebates. The rebate provision
produced $34.4 billion in savings over ten years in the Senate bill
compared to $14.5 billion under the House's variable rate proposal.\29\
Why Interest Rates on Some Loans May Double This Year
The president signed a final version of the deficit reduction bill
into law in January 2006, which included the Senate's proposal to
maintain the fixed rate formula and impose a rebate on lenders.\30\
Even though Congress enacted the fixed rates in 2002, some observers
interpreted Congress' decision to maintain the rates as a Republican-
led Congress charging higher interest rates on student loans to reduce
the deficit.
In their 2006 campaign platform, A New Direction for America, House
Democrats claimed that ``Congressional Republicans * * * have allowed
student loan interest rates to increase, making student loans even
harder to repay.'' The platform document promised to ``slash interest
rates on college loans in half to 3.4 percent for students and to 4.25
percent for parents,'' if Democrats were elected that fall.\31\
After Democrats won majority control of both the House and Senate
in 2006, the Congressional Budget Office revealed that the proposal was
extremely costly, estimating that the rate cut proposal would cost $52
billion and $133 billion over five and ten years, respectively,
compared to then-current policy. The rate cut on PLUS loans for
graduate students and parents accounted for about two-thirds of the
cost.
The high cost of the proposal did not bode well for the Democrats'
campaign pledge because the newly elected majority had also pledged to
follow Pay-As-You-Go budgeting principles to fully offset new spending
with tax increases or other spending cuts. The Pay-As-You-Go principles
meant that lawmakers would have to enact $132 billion in spending cuts
over ten years (a substantial sum) within education or other programs,
or raise taxes to offset the new spending in the rate cut proposal. In
the end, lawmakers opted to scale back their original proposal to
reduce the cost.
Just weeks into the new session of Congress in January 2007, the
new House Democratic majority passed a bill to cut interest rates in
half, but with significant caveats.\32\ The bill cut rates in half only
for a subset of loans--Subsidized Stafford loans--which are available
only to borrowers from families with middle and lower incomes. While
both graduate and undergraduate students had been eligible for
Subsidized Stafford loans, only undergraduate students were eligible
for the rate cut. The bill left rates unchanged for the largest loan
category--Unsubsidized Stafford loans--as well as for PLUS loans for
parents and graduate students, despite their inclusion in the campaign
pledge. All new costs in the bill were offset with spending reductions
on subsidies for lenders making federally-backed student loans,
ensuring that the bill complied with Pay-As-You-Go principles.
To further reduce the cost of the proposal, the bill phased in
incremental rate cuts starting in the 2008-09 school year such that
only loans issued for the 2011-12 school year would carry rates of 3.4
percent (half of 6.8 percent). Subsidized Stafford loans issued after
that year would again carry a fixed rate of 6.8 percent. In short, the
proposed legislation ``cut interest rates in half'' for loans issued
only in one year.
The changes to the original proposal--limiting the cut to
Subsidized Stafford loans for undergraduates, phasing it in, and ending
it in 2012--reduced the cost to $7.1 billion in the ten-year budget
window, much less than the earlier estimate for the permanent cut for
all loan categories. Making the rate cut permanent for Subsidized
Stafford loans for undergraduates after 2012 would have cost an
additional $12.8 billion over ten years.\33\
In September of 2007, both the House and Senate passed a budget
bill that included the rate cut provision, and the president signed it
into law.\34\ The first rate cut went into effect for Subsidized
Stafford loans issued in the 2008-09 school year.
Loans issued for the 2012-13 school year were originally set to
carry a 6.8 percent interest rate, because the 2007 rate cuts would
have expired. However, in 2012, President Obama included in his fiscal
year 2013 budget request to Congress a proposal to extend the rate cut
under the 2007 law for one additional year.\35\ Later that year,
Congress passed and the president signed into law a one-year extension
of the 3.4 percent interest for Subsidized Stafford loans issued to
undergraduates during the 2012-13 school year.\36\ The extension was
included on a broader piece of legislation that included provisions
that the Congressional Budget Office estimated would offset the $6
billion cost of the extension.\37\ One of those provisions was a
limitation on a separate interest rate benefit available on Subsidized
Stafford loans that the president had also included in his fiscal year
2013 budget request.
As it stands today under current law, all-newly issued Subsidized
Stafford loans will be issued with a fixed interest rate of 6.8 percent
on July 1st, 2013 and thereafter.
ENDNOTES
\1\ PAYE: 77 Fed Reg. 66087, (November 1, 2012): http://
www.gpo.gov/fdsys/pkg/FR-2012-11-01/pdf/2012-26348.pdf. 2014 law: P.L.
111-152 B2213. 2007 Law: College Cost Reduction and Access Act, Public
Law 110-84 B203(c)(1), 110th Congress (September 27, 2007), Available:
U.S. Government Printing Office, http://www.gpo.gov/fdsys/pkg/PLAW-
110publ84/pdf/PLAW-110publ84.pdf. The 2007 law set the effective date
on and after which borrowers could enroll at July 1, 2009.
\2\ The recommended IBR would capitalize a borrower's accrued
unpaid interest once his payments under IBR exceed what he would be
required to pay under the standard 10-year repayment plan based on his
original loan balance. This is consistent with the practice currently
under both Old and New IBR.
\3\ Jason Delisle and Alex Holt, ``Safety Net or Windfall?
Examining Changes to Income-Based Repayment for Federal Student
Loans,'' New America Foundation (October 2012) http://newamerica.net/
publications/policy/safety--net--or--windfall
\4\ P.L. 102-325.
\5\ Cervantes, Angelica, Marlena Creusere, Robin McMillion, Carla
McQueen, Matt Short, Matt Steiner, Jeff Webster, ``Opening the Doors to
Higher Education: Perspectives on the Higher Education Act 40 Years
Later,'' TG Research and Analytical Services (November 2005): http://
www.tgslc.org/pdf/hea--history.pdf.
\6\ Delisle, Jason and Alex Holt, ``Subsidized Stafford Loans
Obsolete and Regressive Due to New Income Based Repayment,'' Ed Money
Watch (November 15, 2012): http://edmoney.newamerica.net/blogposts/
2012/subsidized--stafford--loans--obsolete--and--regressive--due--to--
new--income--based--repayment-7.
\7\ ``FY 2012 Justifications of Appropriations Estimates to
Congress: Student Loans Overview,'' U.S. Department of Education,''
(March 31, 2011): http://www2.ed.gov/about/overview/budget/budget12/
justifications/s-loansoverview.pdf, S-15.
\8\ Ibid.
\9\ Delisle, Jason, ``Federal Student Loan Interest Rates: History,
Subsidies, and Cost,'' Federal Education Budget Project (February
2012): http://edmoney.newamerica.net/sites/newamerica.net/files/
policydocs/Interest%20Rates%20Issue%20Brief%20Final--0.pdf.
\10\ ``Fair-Value Estimates of the Cost of Federal Credit Programs
in 2013,'' Congressional Budget Office (June 2012): http://www.cbo.gov/
sites/default/files/cbofiles/attachments/06-28-FairValue.pdf.
\11\ Delisle, Jason and Alex Holt, ``New America Releases Income-
Based Repayment Calculator for Forthcoming Report,'' Ed Money Watch
(October 10, 2012): http://edmoney.newamerica.net/blogposts/2012/new--
america--releases--income--based--repayment--calculator--for--
forthcoming--report-72603.
\12\ Wang, Marian, Beckie Supiano, and Andrea Fuller, ``The Parent
Loan Trap,'' The Chronicle of Higher Education (October 4, 2012):
http://chronicle.com/article/The-Parent-Plus-Trap/134844.
\13\ White House Office of Management and Budget. Analytical
Perspectives: FY2012 Budget, Page 369. http://www.whitehouse. gov/
sites/ default/files/omb/budget/ fy2012/assets/topics.pdf.
\14\ White House Office of Management and Budget. Analytical
Perspectives: FY2013 Budget. http://www.whitehouse.gov/sites/default/
files/omb/budget/fy2013/assets/topics.pdf; Congressional Budget Office.
CBO February 2013 Baseline Projections for the Student Loan Program.
http://www.cbo.gov/sites/default/files/cbofiles/attachments/43913--
StudentLoans.pdf.
\15\ Senate Budget Committee. ``2002 Student Loan Law Takes Effect,
Lowers Interest Rates.'' Budget Bulletin, August 4, 2006.
\16\ Until the early 1990s when Congress created the Direct Loan
program, private lenders made and held all federal student loans. The
government guaranteed the loans against default losses and guaranteed
lenders a minimum interest rate each financial quarter that was based
on short-term U.S. Treasury securities (plus a markup) if the rate the
borrower paid fell below this formula in any given financial quarter.
Congress terminated the guaranteed loan program in 2010 and no new
loans have been through the program since July of that year.
\17\ Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, Title
IV.
\18\ U.S. Department of Education. ``The Financial Viability of the
Government-Guaranteed Student Loan Program,'' Page 2, February 1998.
http://www2.ed.gov/PDFDocs/stuloan9.pdf.
\19\ Policymakers may also have chosen the new formula because
longer-term interest rates are less volatile than the short-term rates
used to set student loan rates at the time.
\20\ U.S. Department of Education. ``The Financial Viability of the
Government-Guaranteed Student Loan Program,'' Page 2, February 1998.
http://www2.ed.gov/PDFDocs/stuloan9.pdf; Burd, Stephen. ``Bill Provides
Fix for Dispute Over Interest Rates on Student Loans,'' Chronicle of
Higher Education, June 5, 1998.
\21\ Stoll, Adam. ``Memorandum: Student Loans: Replacing the
Interest Rate Structure Scheduled to Take Effect in 2003,''
Congressional Research Service, June 14, 2001.
\22\ The law also set a fixed rate of 7.9 percent for PLUS loans
made to parents of undergraduates. P.L. 107-139. http://www.gpo.gov/
fdsys/pkg/PLAW-107publ139/pdf/PLAW-107publ139.pdf.
\23\ Bannon, Ellynne. ``Student Loan Interest Rate Legislation (S.
1762) Will Make College More Affordable for Millions.'' The State
PIRGs' Higher Education Project, January 24, 2002. http://www.pirg.org/
highered/media/1--24--02.html.
\24\ Burd, Stephen. ``Lenders and Student Advocates Seek a Deal on
Interest Rates.'' Chronicle of Higher Education, October 12, 2001.
\25\ 25 Congressional Budget Office. ``Pay-As-You-Go Estimate: S.
1762,'' January 30, 2002. http://www.cbo.gov/ftpdocs /32xx/doc3282/
s1762.pdf.
\26\ U.S. Congress. House. College Access and Opportunity Act of
2006, H.R. 609. February 8, 2005. http://www.gpo. gov/fdsys/pkg/BILLS-
109hr609eh/pdf/BILLS-109hr609eh.pdf.
\27\ The law also increased the interest rate charged on Parent
PLUS loans made under the bank-based program and created a new category
of loans that allowed graduate students to borrower Parent PLUS loans
for themselves up to the full cost of attendance.
\28\ This would have ended an existing policy that allowed lenders
to keep the excess interest--sometimes called ``floor income'' or
``windfall profits.''
\29\ Congressional Budget Office. ``Cost Estimate: S. 1932,''
January 27, 2006. http://www.cbo.gov/ftpdocs/70xx/doc7028/
s1932conf.pdf; Congressional Budget Office. ``Cost Estimate: H.R.
609,'' September 16, 2005. http://www.cbo.gov/ftpdocs/66xx/doc6648/
hr609.pdf. The Senate proposal also increased the fixed rates on PLUS
loans for parents and graduates students to 8.5 percent from 7.9
percent for loans issued under the bank-based loan program and was
included in the final law. This change also increased the deficit
reduction compared to the House proposal.
\30\ Deficit Reduction Act of 2005. P.L. 109-171. http://
www.gpo.gov/fdsys/pkg/PLAW-109publ171/pdf/PLAW-109publ171.pdf.
\31\ ``A New Direction for America,'' Office of House Democratic
Leader Nancy Pelosi. http://www.democraticleader.gov/pdf/thebook.pdf.
\32\ ``Estimated Impact on Direct Spending of H.R. 2669 with
Possible Extensions.'' Congressional Budget Office, July 10, 2007.
http://www.cbo.gov/ftpdocs/83xx/doc8303/hr2669Ryanltr.pdf.
\33\ While lawmakers needed to offset all the new spending
provisions in the bill with spending reductions to comply with Pay-As-
You-Go principles, they also needed to meet a similar requirement to
pass the bill under budget reconciliation procedures which require that
new spending in a bill be budget-neutral in the latter-years of a
budget window. Legislation passed using budget reconciliation
procedures cannot be filibustered in the Senate and therefore needs
only a simple majority to pass.
\34\ College Cost Reduction and Access Act. P.L. 110-84. http://
www.gpo.gov/fdsys/pkg/PLAW-110publ84/pdf/PLAW-110publ84.pdf.
\35\ White House Office of Management and Budget. FY2013 Budget,
Page 97. http://www.whitehouse.gov/sites/default/files/omb/budget/
fy2013/assets/budget.pdf.
\36\ Moving Ahead for Progress in the 21st Century Act. P.L. 112-
557. http://www.gpo.gov/fdsys/pkg/PLAW-112publ141/pdf/PLAW-
112publ141.pdf.
\37\ Congressional Budget Office. ``Cost Estimate: H.R. 4348, MAP-
21,'' June 29, 2012. http://www.cbo.gov/publication/43368.
______
Chairman Kline. Thank you.
Mr. Draeger, you are recognized.
STATEMENT OF JUSTIN DRAEGER, PRESIDENT AND CEO, NATIONAL
ASSOCIATION OF STUDENT FINANCIAL AID ADMINISTRATORS
Mr. Draeger. Thank you, Chairman Kline, Ranking Member
Miller, and members of the committee for this invitation to
testify.
The National Association of Student Financial Aid
Administrators represents 3,000 colleges and universities from
across the nation. Collectively, our financial aid
administrators serve 97 percent of all federal student aid
recipients and today I would like to share some of the
practical implications of our current student loan policies
that aren't working for students.
Today, it is estimated that nearly 40 million Americans
have outstanding student loan debt and at current projections,
the number of people with federal student loans will soon
exceed the number of people receiving Social Security or food
stamps.
In other words, federal student loans could soon be the
United States' largest federal assistance program. That puts
added pressure on us to make sure that we get these policies
right and keep federal loans accessible, affordable,
predictable, and fiscally sustainable.
The current structure of federal student loan interest
rates is out of step with current market rates and is confusing
for students and parents. The current interest rate on federal
unsubsidized Stafford loans is near 7 percent. The current
interest rate on federal PLUS loans for graduate students and
parents is nearly 8 percent, and this is after a 4 percent off
the top origination fee.
These rates make it nearly impossible for financial aid
administrators to stress the benefits and safeguards of the
federal loan programs compared to private loans. The federal
loan programs help students avoid default through safeguards
such as deferment, forbearance, loan forgiveness, income-based
repayment, and discharge for disability and death. All of this
is overshadowed when private market loans are currently offered
at much lower rates.
Yes, the interest rate on subsidized Stafford loans is
currently at 3.4 percent, much closer to market rates, but the
subsidized Stafford loan program only serves a fraction of all
federal loan borrowers and half of them, half of the subsidized
Stafford loan borrowers, are also borrowing unsubsidized
Stafford loans at double the rate.
If financial aid weren't confusing enough, we have created
a situation essentially where 4 million students have one loan
with two different interest rates.
We recognize that to you as lawmakers must find the right
balance between benefits to students and risk to taxpayers for
the source of this funding.
Within that effort, NASFAA is advocating for a long-term,
market-based solution by returning to a variable interest rate
that is determined based on cost of government capital and
origination, cost of proper loan servicing, and future market
risk.
Moving to a rate based on the market with cost built in
ensures students and parents have access to safe loans at a
competitive rate all while creating stability in the loan
programs.
Federal student loans could further be strengthened through
some additional policy changes unrelated to interest rates and
this is the second area I would like to address today.
First, institutions need more flexibility in providing
counseling and limiting borrowing to ensure students are
academically prepared, understand their loan obligations, and
are able to keep loan borrowing in check.
Currently, federal student loans are considered entitlement
aid and schools are not permitted in any practical way to limit
part-time students from borrowing at full-time rates or to
deter students enrolled in 2-year programs from borrowing up to
4-year levels.
Schools aren't even able to require additional loan
counseling over and above minimal federal requirements for
students enrolled in programs that statistically produce a
disproportionate share of defaulters.
Financial aid administrators need an expansion of
professional judgment which is already granted in law to limit
or at least slow borrowing for specific groups of identifiable
students with discretion to allow borrowing up to the full load
limits on a case-by-case basis.
Second, to prevent over borrowing delinquency and default,
we must streamline consumer tests and pare down the amount of
information we heap on students in the name of a good consumer
disclosure.
With the help of one of our member institutions we have
compiled this three-ring binder, which I won't lift for you,
that contains all consumer disclosure required under Title IV
of the higher education act.
In the last year, we have counted no less than eight
additional proposals from the administration and members of
Congress to add to this binder. The path forward on better
consumer disclosure will not be found in more paperwork, but
instead finding what works for students.
Third, make the repayment process and deferment process as
easy as possible, possibly through employer withholding, and by
implementing ways to automatically enroll students in income
based repayment before they enter default.
Whether one likes the direct loan program or not, the fact
remains that with one holder of all federal loans, who is the
federal government, we have an opportunity to take a giant step
forward in essentially eliminating loan default as we know it.
Of course, the best way to strengthen loan programs is to
ensure that low income families have adequate grant funding and
that includes at the institutional, state, and federal levels
and were very grateful for the bipartisan support we have seen
over the last few years in supporting programs like the Pell
grant that keeps many low income students from having to borrow
at all.
For those families that need to fall back on loans, the
strongest program will be one where interest rates are fair and
understandable. There are additional safeguards in place to
deter over borrowing and where consumer information is
streamlined. Thank you.
[The statement of Mr. Draeger follows:]
Prepared Statement of Justin S. Draeger, President and CEO,
National Association of Student Financial Aid Administrators (NASFAA)
Chairman Kline, Ranking Member Miller, and members of the
Committee: Thank you for inviting me to testify today. The National
Association of Student Financial Aid Administrators, known as NASFAA,
represents more than 17,000 financial aid administrators who serve more
than 16 million postsecondary students each year. Our membership spans
more than 3,000 colleges and universities from across the nation.
Collectively, NASFAA schools serve 97 percent of all federal student
aid recipients.
The job of the financial aid administrator has evolved over the
last five decades as more students rely on federal, state, and
institutional aid and programs have become more complicated, however
the core mission remains the same: to ensure that no qualified student
is denied access to postsecondary education due to a lack of financial
resources. We have been pleased to work with legislators on both sides
of the aisle, including many of you, to ensure continued funding for
Federal Pell Grants and other vital forms of federal student aid, and
we look forward to working with you to strengthen the federal student
loan programs.
Almost 40 million Americans--both parents and students--have
outstanding student loan debt (Lee, 2013). Based on current
projections, in just a few short years, more Americans in this country
will have outstanding student loans than receive Social Security
(Social Security, 2013) or food stamps (Food Research and Action
Center, 2012). And with federal loans making up 90 percent of the total
student loan market (College Board, 2012), federal student loans will
soon be the largest U.S. federal assistance program. Given these
numbers, it's imperative that we get federal student loan policies
right. We have a collective interest in ensuring that federal loans
remain accessible, affordable, predictable, and fiscally sustainable.
Today I want to give you some of the practical insights on what
financial aid administrators experience when working directly with
students and parents on student loan issues. These insights will
demonstrate why our current student loan policies--and how we handle
interest rates in particular--aren't working well for students and
families. I'll divide my comments into two parts, first focusing on
student loan interest rates and second focusing on the loan programs in
general.
The current structure of federal student loan interest rates is out
of step with market rates and thereby confuses students and families.
Students and parents often question why federal student loan interest
rates are higher than nearly all other installment loans, particularly
for families with good credit. And the truth is, there is no good,
reasonable answer to that question.
The Federal Stafford Loan program is divided into two parts:
subsidized Stafford loans where the government pays the interest on the
loans during periods of enrollment and deferment and unsubsidized
loans, where interest accumulates while the student is enrolled in
college. Federal PLUS loans may be taken by graduate students or
parents of undergraduate students if they have no adverse credit
history.
The current interest rate on federal unsubsidized Stafford Loans is
near 7 percent. The current interest rate on federal PLUS loans for
graduate students and parents is worse, at nearly 8 percent (and this
is after a 4 percent off-the-top origination fee). Families ask, how
can this be? Mortgage rates are currently below 4 percent and interest
rates on private education loans for borrowers with good credit are
also much lower. In fact, one major lender just announced a private
education loan for graduate students with no origination fees, no
prepayment penalties, and interest rates between 2.25 and 7.5 percent
(Sallie Mae, 2013)--all of which are better than the current terms for
federal PLUS loans.
While it is true that the interest rate on subsidized Stafford
loans is currently at 3.4 percent--much closer to market rates--it is
equally important to understand that overall, the subsidized Stafford
loan program serves only a fraction of all federal loan borrowers. In
fact, half of all subsidized Stafford loan borrowers also borrow
unsubsidized Stafford loans, which results in students having an annual
Stafford loan debt with a portion of their loans at 3.4 percent and
another portion at 6.8 percent. If financial aid weren't confusing
enough, we've essentially created a situation where roughly 4 million
students have basically one loan with two different interest rates
(U.S. Department of Education, National Center for Education
Statistics, 2007-08 National Postsecondary Student Aid Study).
The point is that few students are benefiting exclusively from the
current 3.4 percent interest rate and, even after last year's temporary
extension by Congress, the 3.4 percent interest rate is set to double
to 6.8 percent this July.
From a public policy standpoint, it is generally better for
students to borrow within the safety of the federal loan programs
before using capital from private markets. The federal loan programs
offer safeguards to help students avoid the dire consequences of
delinquency and loan default. They contain deferment rights and
mandatory forbearance options, loan forgiveness options, income-based
repayment, and safeguards to protect students, parents, and co-signers
against the collateral financial damage of total and permanent
disability or death. And most importantly, federal student loans
represent a public investment in students who otherwise wouldn't
qualify for private market loans due to credit restrictions. They
create opportunity.
Unfortunately, the current interest rate disparities between
federal loans and private loans overshadow all of the benefits of
federal student loans. This is naturally confusing to families, since
financial aid administrators--not to mention required Truth in Lending
Act (1968, as amended) disclosures--counsel families to use federal
loans as their first option.
This interest rate discrepancy will continue to be a problem as
long as we have fixed federal student loan interest rates. Prior to
2006, federal student loan interest rates were variable and changed
annually based partially on the cost of government borrowing. (Interest
rates were determined annually by adding on some additional basis
points above the 91-day T-bill auctioned each May.) The numbers show
that had we stayed with a variable interest rate in 2006, all student
borrowers in the Stafford and PLUS loan programs would actually have
fared better than they have under the fixed interest rates of the last
six years (See Appendix).
Based on Congressional Budget Office projections (2013), returning
to a variable interest rate would also save students money into the
foreseeable future, since the 91-day T-bill is projected to stay at or
below 1 percent through 2017. Of course we acknowledge that making a
change back to a 91-day T-bill could be costly.
One of the unintended consequences of our current interest rate
policy is the unexpected revenue being returned to the federal
government. In Fiscal Year 2013, the government is expected to earn 64
cents for each dollar lent to graduate students in the federal PLUS
loan program, according to the Congressional Budget Office (2013).
While we certainly want these programs to be fiscally sustainable, it
is equally important to remember that the intent of the federal loan
programs is to provide affordable and safe financing options for
students who otherwise would not have had the opportunity to receive
postsecondary education, and who go on to become productive taxpaying
members of our society.
Unfortunately, our current student loan interest rate policy has
undermined the very feature fixed interest rates were supposed to
provide: predictability. For the last two years we've run up against
harsh budget realities that have called into question the
sustainability of fixed interest rates and made them anything but
predictable.
This is the second year in a row policymakers have been left
scrambling to keep interest rates down for subsidized Stafford Loan
borrowers. Last year we kept interest rates from doubling from 3.4
percent to 6.8 percent for these borrowers at a cost of roughly $6
billion. To partially offset that expense, Congress reduced eligibility
for subsidized Stafford loans. As has become accepted business
practice, we made another piecemeal patch that took funding away from
some students to provide it to others, except in this instance we
provided one benefit and took away another from the same students. In
effect, we robbed Peter to pay Peter!
NASFAA continues to advocate for a long-term, market-based solution
to these problems by returning to a variable interest rate, where the
rate is determined based on the following: the cost of government
capital and origination (without any reliance on origination fees), the
cost of proper servicing and loan counseling, and future market risk.
This should all be underscored by the idea that at no time should
federal student loans turn into a profit- making venture for the
federal government. We recognize that you as lawmakers must find the
right balance between benefits to students and risks to taxpayers, who
are the source of this student loan funding.
Several proposals have called for a variable fixed interest rate,
or an annual fixed interest rate, where the interest rate would change
for new loans originated each year, but would then remain fixed for the
future life of the loan. Such a policy would ensure that federal loan
rates are closer to market rates while simultaneously providing some
degree of predictability for current borrowers.
Of course, interest rates are only one issue--albeit an immediate
one--that needs to be addressed to strengthen the student loan
programs. Federal student loans could further be strengthened through
some additional practical policy changes. This is the second area I
would like to address today.
Despite many anecdotes in the mainstream press about the student
loan bubble and runaway student debt, the majority of student loan
borrowers are leaving schools with a manageable amount of loan
indebtedness. Unlike the horror stories we often read, only 2 percent
of students who first enrolled at a postsecondary institution in 2003
had borrowed more than $50,000 by 2009. Over 40 percent of that cohort
did not borrow at all and another 25 percent borrowed less than $10,000
(College Board, 2012). Unfortunately, the hyper-focus on statistical
outliers--those students who have racked up $100,000 in loans--
diminishes our ability to focus on those students who find themselves
most economically harmed by student loan debt.
Who are these students? If we were to build a statistical profile
of the average federal student loan defaulter, he or she would likely
be a student who went to school for a very short period of time,
usually less than one year, accumulated a small amount of loan debt,
had a low GPA, and attended either a community college or proprietary
institution. Two out of every three borrowers who enroll in college for
one year or less will fall delinquent or default outright on their
student loans, many on less than $10,000 in total loan debt. Of all
student loan defaulters, 70 percent dropped out of college (Loonin &
McLaughlin, 2012).
Given these statistics, we need to examine policies that give
institutions more flexibility in providing counseling and safeguards to
ensure students are academically prepared, understand their loan
obligations, and are able to keep loan borrowing in check.
Under current federal regulations, federal student loans are
considered entitlement aid. Schools are prohibited from requiring
additional loan counseling for students who appear to be over-borrowing
or who are most at risk of defaulting. In addition, schools are not
permitted, in any practical way, to limit part-time students from
borrowing at full-time rates, or to deter students enrolled in two-year
programs from borrowing up to four-year levels. Likewise, schools
cannot halt or even slow over-borrowing by students enrolled in
academic programs that produce a disproportionate share of loan
defaults. In other words, students are currently entitled to borrow the
maximum loan limits, and can only be deterred from over-borrowing on an
individual, case-by-case basis.
Financial aid administrators, particularly at the community college
level, need additional authority to limit or at least slow borrowing
for specific groups of students, with discretion to allow borrowing up
to the full federal loan limits on a case-by-case basis (NASFAA,
2013.). That would flip the current approach, to instead allow across-
the-board reductions in loan eligibility for identifiable categories of
students with expanded borrowing permitted on a case-by-case basis.
Additionally, more can be done to protect parent borrowers from
over-borrowing. Since the recession, more schools are reporting
instances of parents objecting to their own Federal PLUS loan approvals
because they their income is insufficient to repay the debt. Current
PLUS loan underwriting standards simply examine whether a parent has
any ``adverse credit,'' without considering whether a parent is
financially able to repay the loan.
We would not want to mirror or duplicate commercial underwriting
standards in the federal programs, since the purpose of the loan
programs is to provide a public investment in college-ready students
who otherwise would be unable to obtain credit. However, a simple debt-
to-income ratio on parent loans would at least take into consideration
a parent's ability to repay the loan based on their current income.
Under the Federal Family Education Loan Program (FFELP), which has
since been phased out in favor of the Direct Loan Program, some lenders
utilized debt-to-income ratios as part of their parent PLUS loan
underwriting standards. In the Direct Loan program that simple
financial stress test is not conducted. The result is that parents with
no adverse credit, or even no credit, can be approved for tens of
thousands of dollars of loans without any evaluation of their true
ability to repay. If the mortgage meltdown taught us anything, it is
that basic and proper underwriting not only protects lenders, it also
protects borrowers.
Another factor in preventing over-borrowing and loan default is
loan counseling. Current loan counseling requirements seem to be based
on the principle that more is better. But anyone who has ever signed a
home mortgage loan knows that receiving mountains of consumer
information does not necessarily improve understanding--it often has
the opposite result. We must streamline, consumer test, and pare down
the amount of information we heap on students and parents in the name
of good consumer disclosure. With the help of one of our member
institutions, we have compiled this three ring binder that contains all
of the consumer disclosures currently required under Title IV of the
Higher Education Act (1965, as amended). Within the last year, we've
counted no less than eight additional proposals from the Administration
and members of Congress for even more consumer disclosures. The path to
smarter decisions on student loans and college costs will not be found
in even more paperwork; it will be found through customized,
streamlined, and consumer-tested information that gives students a
complete picture of their student loan responsibilities and loan costs.
In many cases, averting student loan default can be as simple as
making the repayment process as easy and safe as possible for students
and parents. Automatic enrollment in income-based repayment would
ensure that no borrower's repayment amount will ever exceed their
ability to repay. NASFAA has worked with Congressman Petri to explore
whether this can be accomplished through the current federal loan
programs using payroll withdrawal and federal withholding. We believe
we're closer than ever to being able to institute repayment pathways
that ensure student loans are repaid on time and remain affordable.
Whether one agrees or even likes the Federal Direct Loan program, the
fact of the matter is that with one originator and holder of federal
loans--the U.S. government--we have an opportunity to take a giant step
forward in nearly eliminating student loan default.
Finally, the best way to strengthen the loan programs is to ensure
adequate grant funding at the institutional, local, state, and federal
levels. Our federal student aid programs are founded on the idea that
grants, not loans, are the best way for qualified, low-income students
to obtain access to higher education. Polls show time and again that
the public supports continued funding of higher education and we're
grateful for bipartisan support for programs like the Pell Grant. For
those families that need to fall back on loans, the strongest program
will be one where interest rates are fair and understandable,
additional safeguards are in place to deter over-borrowing, consumer
information is streamlined and delivered in a way that is easy for
students and parents to understand, and loan repayment is simple and
affordable.
Thank you for your time. I am happy to answer any questions.
REFERENCES
College Board (2012). Trends in student aid, 2012. Retrieved from
http://trends.collegeboard.org/student--aid
Congressional Budget Office (2013, February). The budget and economic
outlook: Fiscal years 2013 to 2023. Retrieved from http://
www.cbo.gov/sites/default/files/cbofiles/attachments/43907--
BudgetOutlook.pdf
Food Research and Action Center (2012). SNAP participation increases in
November 2012. Retrieved from http://frac.org/reports--and--
resources/snapfood--stamp--monthly--participation--data/#2nov
Higher Education Act of 1965, Pub. L. No. 89-329 Sec. 111, U.S.C Sec.
1001 (1965) (enacted).
Lee, D. (2013). Household debt and credit: Student Debt. Retrieved from
http://www.newyorkfed.org/newsevents/mediaadvisory/2013/
Lee022813.pdf
Loonin, D., & McLaughlin, J. (2012). The student loan default trap: Why
borrowers default and what can be done. Boston: National
Consumer Law Center. Retrieved from http://
www.studentloanborrowerassistance.org/blogs/wp--content/
www.studentloanborrowerassistance.org/uploads/File/student--
loan--default--trap--report.pdf
NASFAA (2013). Report of the NASFAA Task Force on Student Loan
Indebtedness. Washington, DC: NASFAA. Retrieved from http://
www.nasfaa.org/indebtedness--report.aspx
SallieMae (2013, March). Sallie Mae announces lower interest rates for
graduate students, effective April 1. Retrieved from https://
www.salliemae.com/about/news--info/newsreleases/2013/Lower--
Int--Rate--Grad--Loans.aspx
Social Security (2013, February). Monthly statistical snapshot, January
2013. Retrieved from
http://www.ssa.gov/policy/docs/quickfacts/stat--snapshot/2013--01.pdf
Truth in Lending Act of 1968, Pub. L. No. 90-321, Sec. 82, 12 Stat.
146.
U.S. Department of Education, National Center for Education Statistics,
2007--08 National Postsecondary Student Aid Study. (2013).
Chart showing share of Stafford loan borrowers. NPSAS:2008
Undergraduate Students. Retrieved from http://nces.ed.gov/
datalab/powerstats/output.aspx
______
Chairman Kline. Thank you.
Dr. Mercer?
STATEMENT OF DR. CHARMAINE MERCER, VICE PRESIDENT OF POLICY,
ALLIANCE FOR EXCELLENT EDUCATION
Ms. Mercer. Good morning. Chairman Kline, Ranking Member
Miller, and members of the committee, good morning and thank
you for this opportunity to testify today.
The title of this hearing, ``Keeping College Within
Reach,'' is both timely and appropriate for discussing various
aspects of federal support for higher education, including
student aid and loans.
The federal student aid system, as initially designed, was
intended to ensure access to college for students who would
otherwise be unable to attend. Federal aid has helped countless
numbers of students pursue their higher education aspirations
since 1965, when the Higher Education Act was signed into law.
The last decade has witnessed many changes to the student
aid system including eliminating subsidized loans for graduate
and professional students, mandatory funding for Pell, and
decreasing the number of semesters for which students are Pell
eligible, to name a few.
Each of these changes occurred outside of the full HEA
reauthorization and, although they are seemingly small, they
have had a significant impact on the cost of the program, did
little to stem the rising college costs, and in some instances,
negatively changed the composition of the recipient population.
Worse yet, many of these changes have done little to halt
the ever increasing and dangerous amount of debt that students
assume. In fact, student loan debt is fast approaching $1
trillion, and the number of borrowers and the average amount of
debt have increased by 70 percent in just 8 years.
Incremental changes in some instances are necessary and
unavoidable, but by their very definition they fail to address
the student aid system in its entirety.
These incremental changes have done little to respond to
skyrocketing college costs and often, due to the rush to pass
them, their unintended consequences are not fully explored.
The time has come for Congress to reauthorize the HEA so
that it responds to the 21st century needs of students,
institutions of higher education, and our nation.
A thoughtful reauthorization of this critical piece of
legislation will require time, deliberation, and compromise. In
the interim, other exigencies such as the pending interest rate
increase on subsidized loans will require legislative action
prior to a full reauthorization.
However, to the extent practicable, these types of changes
should be addressed with consideration for the broader context
in which they exist. For example, if the current interest rate
on subsidized student loans were to double, this would have a
disproportionate impact on the neediest students since they are
the recipient of these types of loans.
A recent report by the Pew Research Center notes that
student loan debt is 24 percent of household incomes for
families in the lowest income quintile. The report states, and
I quote--``The relative burden of student loan debt is greatest
for households in the bottom fifth of the income spectrum, even
though members of such households are less likely than those in
other groups to attend college in the first place.''
The nation needs a comprehensive plan to promote access,
completion, and affordability for these and other students.
Today, more than any other time in recent history,
postsecondary educational attainment is critical for
individuals and the nation as a whole.
The United States' ability to maintain its international
position as an economic powerhouse requires the country to have
a highly educated and skilled workforce.
The 21st century requires individuals to possess knowledge
and skills that prepare them for college, a meaningful career,
and economic security. Absent these skills, many Americans will
remain un- or underemployed, and the nation's economy will
stagnate or decline.
The federal student aid system has previously focused on
access exclusively, but access alone is not enough; completion
must also be a goal. Although very well-intentioned, the
federal student aid system is complex and poorly aimed at
getting students to finish.
Each year, there is a significant federal investment made
in students at the K-12 and postsecondary education levels.
However, the investment at both levels sees little return
unless students complete what they start.
Failing to complete college means there is little to no
return realized other than often times unmanageable amounts of
debt without a degree. Changes to the HEA should be directed at
the twin goals of access and completion. The reality is that
all students are not equally financially equipped to take
advantage of postsecondary opportunities.
It is critical that public policy maintain the focus on
making higher education affordable and accessible for the
lowest income and neediest students that the market might
otherwise leave behind.
The Alliance for Excellent Education recently released a
report based on a comprehensive examination of the federal
student aid system. The paper includes recommendations for how
to change many of the existing programs to create a system
whose components are purposeful towards promoting access to
college as well as completion.
These recommendations are a part of a broader package and
resulted from thinking about the system in its entirety rather
than a single aspect or individual programs.
The alliance respectfully encourages Congress and this
committee to approach these issues in a similar fashion.
Undeniably, these are difficult fiscal times. However,
there are no quick fixes to the nation's unacceptably low
postsecondary completion rates, rising college costs, and
student loan debt.
What our nation needs now is a thoughtful and purposeful
consideration of postsecondary education policies. Students
must continue to have access to college and be appropriately
incentivized and supported to complete in order to achieve
individual prosperity and to become an integral part of the
nation's economy.
I thank the committee for taking on this important issue in
focusing attention on keeping college within reach. Thank you.
[The statement of Ms. Mercer follows:]
Prepared Statement of Charmaine N. Mercer, Ph.D.,
Vice President of Policy, Alliance for Excellent Education
Chairman Kline, Ranking Member Miller, and members of the
Committee, good morning and thank you for this opportunity to testify
today. The title of this hearing, ``Keeping College Within Reach,'' is
both timely and appropriate for discussing various aspects of federal
support for higher education, including student aid and loans.
The federal student aid system, as initially designed, was intended
to ensure access to college for students who would otherwise be unable
to attend. In fact, in his 1965 speech to Southwest Texas State
College, after the signing of the Higher Education Act, President
Lyndon Johnson said,
``To thousands of young men and women, this act means the path of
knowledge is open to all that have the determination to walk it. It
means a way to deeper personal fulfillment, greater personal
productivity, and increased personal reward * * * an incentive to stay
in school.''
President Johnson's remarks suggest that the federal student aid
system would function to keep college within reach for those who
desired to attend. Since 1965, federal aid, consisting of grants,
loans, work opportunities, and tax credits, has helped countless
numbers of students pursue higher education aspirations.
In the nearly 50 years since the passage of the 1965 Higher
Education Act, it has been fully reauthorized eight times and each
reauthorization has attempted to balance Congressional and
Administration priorities; mounting budget deficits; and demands from
students, families, and the general public, with changes in
postsecondary education, workforce demands, and the economy. Outside of
the comprehensive reauthorizations of HEA, there have been numerous
incremental changes, primarily directed at eligibility requirements,
the need-analysis formula, and increased aid limits.
The last decade has witnessed many changes to the student aid
system, including several changes to the loan programs, such as
elimination of subsidized loans for graduate and professional students;
mandatory funding for Pell Grants; and decreasing the number of
semesters for which students are Pell eligible, to name a few. Each of
these changes occurred outside of a comprehensive reauthorization, and
although they are seemingly small, they have had a profound impact on
the costs of the student aid programs, done little to stem the rise in
college costs and associated debt, and in some instances, negatively
changed the composition of the recipient population.
Arguably, many of the changes that have occurred outside of a
comprehensive reauthorization have been beneficial yet short sighted.
For example, eliminating year-round Pell Grants allowed the maximum
award of $5,550 to be maintained, but reportedly, it also significantly
reduced the number of students taking additional courses during the
summer--which typically leads to increased completion rates.
Worse yet, many of these changes have done little to halt the ever
increasing and dangerous amount of debt that students rack up due to
increasing college costs, among other things. In fact, student loan
debt is fast approaching a trillion dollars, and the number of
borrowers and the average amount of debt have increased by seventy
percent in just eight years. Incremental changes in some instances are
necessary and unavoidable, but by their very definition, they fail to
address the student aid system in its entirety. These changes have done
little to respond to skyrocketing college costs and often due to the
rush to pass them, their unintended consequences are not fully
explored.
Congress, starting with this Committee, is now positioned to
thoroughly examine the Higher Education Act, including federal student
aid programs, and to consider both the known and unintended
consequences, and to produce legislation that continues the federal
commitments to ensuring access, tackling college costs and soaring
debt, and promoting completion.
Focusing exclusively on student loans--or more specifically, the
interest rates on subsidized loans for undergraduate students--fails to
notice the forest for the trees.
The complexities of the federal student aid system require that it
be examined in its entirety. Looking solely at loans doesn't address
the shortfalls of grants. Addressing the shortfalls of grants doesn't
consider weaknesses in higher education tax credits. Fixing higher
education tax credits doesn't, in turn, remedy the challenges and
limitation of the campus-based programs. Addressing any one aspect of
this system is necessary but individually, each is not sufficient for
true reform of postsecondary aid programs and promoting student success
and completion.
The time has come for Congress to reauthorize the HEA so that it
responds to the 21st-century needs of students, institutions of higher
education, and our nation. A thoughtful reauthorization of this
critical piece of legislation will require time, compromise, and
deliberation. In the interim, other exigencies such as the pending
interest rate increase on subsidized loans will require legislative
action prior to a full reauthorization. However, to the extent
practicable, these types of changes should be addressed with
consideration for the broader context in which they exist. For example,
if the current interest rate on subsidized loans were to double, this
would have a disproportionate impact on the neediest students, since
they are the recipients of these types of loans. A recent report by the
Pew Research Center notes that student loan debt is twenty four percent
of household income for families in the lowest income quintile. The
report states, ``The relative burden of student loan debt is greatest
for households in the bottom fifth of the income spectrum, even though
members of such households are less likely than those in other groups
to attend college in the first place.'' The nation needs a
comprehensive plan to promote access, completion, and affordability for
these and other students.
Today, more than any other time in recent history, postsecondary
education attainment is critical for individuals, communities, and the
nation as a whole. The United States' ability to maintain its
international position as an economic powerhouse requires the country
to have a highly educated and skilled workforce.
The 21st century ushered in a technology-driven and globally
connected era that requires individuals to possess knowledge and skills
that prepare them for college, a meaningful career, and economic
security. Absent these skills, many Americans will remain unemployed or
underemployed, and the nation's economy will stagnate or decline. In
fact, Anthony Carnevale of Georgetown University estimates that 2012
marked the year when more than 60 percent of all jobs required some
form of postsecondary education; further, approximately 20 million new
jobs now require a bachelor's degree or higher. The federal student aid
system must help the United States meet this increased demand, while
continuing to ensure access.
Traditionally, the federal student aid system exclusively focused
on access, but access alone is not enough, completion must also be a
goal. Although very well intentioned, the federal student aid system is
complex, interrelated, and poorly aimed toward the goal of finishing a
postsecondary program of study.
Each year there are significant federal investments made in
students at the K--12 and postsecondary education levels. However, the
investment at the K--12 level sees little return unless students
complete a program of study at the postsecondary level. Similarly, at
the postsecondary level, if students fail to complete a program of
study, there is little to no return realized other than often times
unmanageable amounts of debt without a degree.
Changes to HEA should all be directed at the twin goals of access
and completion. Higher education for students is an advantage that
society at large benefits from. However, the reality is that all
students are not equally financially equipped to take advantage of
postsecondary opportunities.
It is critical that public policy remain capable of making higher
education affordable for the lowest-income and most-at-need students
that the market might otherwise leave behind. Increased educational
attainment helps individuals achieve their personal goals, improves
their surrounding community, and aids the recovery and growth of the
economy.
The entire federal student aid system should be thoroughly examined
with these twin goals--access and completion--in mind. This examination
must come by recognizing the evolving demands of our global society and
our nation's current economic status.
The Alliance for Excellent Education recently released a paper
based on a comprehensive examination of the federal student aid system.
The paper includes recommendations for how to change many of the
existing programs to create a system whose components are purposeful
toward promoting college completion. The recommendations are arranged
according to four tenets:
1. creating institutional supports and accountability;
2. simplifying the federal student aid system;
3. focusing aid on the highest need students; and
4. providing support for middle class families.
In the paper, the Alliance makes specific proposals in each of
these areas, but ultimately the goal of these objectives is to ensure
that students get from high school commencement to postsecondary
completion.
The Alliance believes that students and institutions have a mutual
commitment to each other for success, with the federal student aid
system helping to frame and support this relationship. Being admitted
by an institution of higher education is not enough; colleges and
universities must do their part to provide the ancillary supports and
services that promote student success from the day they arrive on
campus to the day they leave with a certificate or degree. At the same
time, students must be committed to their own personal success.
Students must work to be prepared, stay enrolled, and receive the
postsecondary credential that they committed to pursue and were
supported to receive. These two parties--institutions and students--owe
it to each other to work collaboratively to cross the finish line.
The Alliance sought to change the existing student aid landscape
and focus funding in a way that benefits the most students. For
example, the Perkins Loan and Supplemental Education Opportunity Grant
programs currently support a deserving, but ultimately narrow, student
population. If these funds were redirected toward postsecondary
programs that better address retention and completion and produce best
practices for other higher education programs, a larger student
population could be better served. Similarly, if the current $5 per
Pell Grant recipient that goes to institutions were redirected toward
student aid, more grant aid could be provided to the neediest students,
thereby reducing the need to borrow or at least decrease the amount of
borrowing.
It's important to note that these recommended changes are a part of
a broader package and resulted from thinking about the system in its
entirety, rather than a single aspect or individual program. The
Alliance respectfully encourages Congress and this Committee to
approach these issues in a similar fashion.
These are undeniably difficult fiscal times. However, there are no
quick fixes to the nation's unacceptably low postsecondary completion
rates, soaring borrowing levels, and debt.
How and why funds are spent deserve careful consideration toward
what ultimately produces better results, that is, continued access to
and increased completion of postsecondary education.
What our nation needs now is a thoughtful and purposeful
consideration of postsecondary education policies. Students must
continue to have access to postsecondary education and be provided with
the necessary incentives to complete higher education, achieve
individual prosperity, and become an integral part of the nation's
economy.
As I have mentioned, students and institutions are equally
important stakeholders and there is room for appropriate balance
between accountability and incentives for both groups to change
behavior for the benefit of the nation.
I thank the Committee for taking on this important issue and
focusing attention on keeping college within reach.
______
Chairman Kline. Thank you.
I think all of the witnesses for excellent testimony and
observing our sophisticated lighting system.
Mr. Delisle, you were very clear in what you thought about
caps in light of the various repayment options, income-based
repayment options and so forth. You were pretty clear.
I would like to hear from the other three of you, or just
sort of quickly, the pros and cons of putting an interest rate
cap.
Dr. Lucas?
Ms. Lucas. Okay. Well, I believe--I agree with Mr. Delisle
that putting on a tight cap is both expensive and a move back
to fixed rates.
However, I think that setting a cap at a relatively higher
level could be useful in protecting students from periods where
interest rates are unusually high and they have trouble getting
out of those loans in other ways.
So I would say that I would be happy to see no cap. I would
also be happy to see a cap set at a fairly high rate, say 9 or
10 percent. I would not endorse a tight interest rate cap.
Chairman Kline. Okay, thank you.
Mr. Draeger?
Mr. Draeger. When we look at an interest rate cap, the last
time that we had a cap on interest rates when they were
variable, we were living in a time when we didn't have
widespread availability of income-based repayment.
So to us, this gets at basically keeping the cost of the
loan down and there is a lot of different ways we can do that.
Whether it is through cap or an upfront subsidy, or whether it
is by capping the total amount of interest that could ever
accrue on a loan as has been done in another proposal from a
member of this committee, there is a lot of different ways we
can keep the cost of the loan down, and we are open to engaging
the conversation about any of those ways. It doesn't have to be
just an interest rate cap.
Chairman Kline. Dr. Mercer?
Ms. Mercer. I would say that, first and foremost, it is
most important that you start from kind of what your policy
goals are in terms of access and completion. So to the extent
that a cap would not preclude students from being able to
enroll in school and complete, if that serves that goal well,
then that is at least where we should start. I am not sure if
it is appropriate not to have a cap because I think a safeguard
in the system needs to be present.
Chairman Kline. And Mr. Delisle, your thought was that,
with the income base repayment plan, you were in effect
addressing the issue of a cap without actually putting interest
rate cap in? Is that correct?
Mr. Delisle. Sure, there are about five or six examples in
my written testimony that people can look at but I just, I will
give you one for example.
Consider somebody with $45,000 in debt from undergraduate
and graduate studies who works in the government or nonprofit
sector and earns a starting salary of $38,000 with a 4 percent
annual raise.
At an interest rate of 4.9 percent on the loan, she pays a
total of $22,000 on her loan over 10 years and then the
remaining balance is forgiven under public service loan
forgiveness.
At an interest rate of 12 percent she still pays $22,000 on
her loan. If her interest rate is zero she still pays $22,000
on her loan.
Chairman Kline. Thank you. Wow. Somehow it doesn't seem
possible.
Going to you Mr. Draeger, you addressed something that I
hear all the time from institutions where you have advisors who
say we can't advise the student not to take this maximum loan.
We know they shouldn't, but we can't do it. Do you think we can
put into policy here, in a statute, a policy that would allow
that and still avoid the discrimination?
Mr. Draeger. Sir, I think we would have to be very careful
in instituting a policy where schools could limit or at least
slow borrowing for groups of identifiable students.
Certainly we wouldn't do that based on any prohibited
characteristics or classes; race, sex, religion, national
origin, those things have to be specifically prohibited. But
there are concrete examples, I think, where schools and
particularly low cost institutions would very much like the
ability to at least introduce additional counseling over and
above the minimum federal requirements or prohibit borrowing,
perhaps for all students at an institution, for part-time
students, for students in specific academic programs where we
know the outcomes may not support the level of debt that they
are taking on.
Schools would welcome that authority so that they could
perhaps be a check and a balance for students to make sure that
they are not getting in over their head.
In sort of a conflict, schools are held responsible for the
number of students that default on their loans and they are
also held responsible at least in public and in the press by
how much debt to their students take on, yet they have very few
if any tools at their ready to address that in any meaningful
way.
Chairman Kline. Thank you.
Mr. Miller?
Mr. Miller. To continue on that line of question, Mr.
Draeger, so you would counsel them how? I mean your institution
is offering this course of study for this credential or this
degree and you would counsel them, don't do that?
Mr. Draeger. So, for example, right now, if we look at the
statistics, the average statistic of a borrower who has
defaulted, it is not normally what you hear in the press. The
stories in the press usually revolve on a statistical outlier,
someone who has racked up tens of thousands of dollars of debt
and we know the average amount of debt is much less.
If you look at the defaulted borrower, people in student
loan default, 70 percent of them have dropped out of school
normally in the first or second year and it doesn't seem fair
for students that may not be academically prepared to load them
up with debt without some additional counseling over and above
current, minimal federal requirements.
Right now if an institution tries to institute additional
counseling over and above what the----
Mr. Miller. I understand that, but you had suggested also
that you may not want them to engage in some courses or
curriculums because they have a high default rate.
Mr. Draeger. What we would say is----
Mr. Miller. Why are you offering those?
Mr. Draeger. If there is a program, for example, where we
know--let's use teacher education or childcare. In some states
that is a license requirement that they have to get a
certification, but the amount of loan debt that they are taking
on isn't going to be supported by their wages.
If they could provide some additional counseling----
Mr. Miller. So it is not a question of whether they pursue
that occupation or credential, it is a question of what is the
appropriate loan--or they should certainly be advised of the
chances of repaying this loan or for getting into trouble given
the low pay of childcare workers if you will.
Mr. Draeger. That is correct.
Mr. Miller. Okay. It is not that you have curriculums out
there and you don't jettison but you don't think people should
take them. I wasn't quite sure----
Mr. Draeger. No. The other example, Mr. Miller, is examples
of part-time students who may be running up their loan amounts
at a full-time rate which schools right now can't stop and so
they run out of loan eligibility.
Mr. Miller. Why is that happening? Because they are
working? Because they are doing what?
Mr. Draeger. It could be because of work. It could be
because they don't recognize the amount of loan debt that they
are taking on despite minimal warnings, but right now, those
students--or it could be because they are transferring in from
another school where they have taken on a significant amount of
debt.
Mr. Miller. I think again, in my state, I think the
community colleges are getting much more specific about what
you need to do to complete and what you need to do to complete
essentially in 2 years. Now whether courses are available or
not we all know is a problem.
And the question is, are people borrowing money to follow
this track to get the lower division requirements taking care
of so that they can transfer or get a credential or get a badge
or whatever it is they are pursuing, and are they on track, and
is this loan amount appropriate.
Because it goes to what Mr. Mercer raised, this question of
completion, and I don't think we should punish part-time
students. I don't think you are suggesting that, but we know
that some students have to struggle whether they are borrowing
money or not because they may be supporting themselves, working
and the rest of that.
So Mr. Delisle says well if they knew--if they could see--
if they knew more about loan forgiveness up front, they might
make a different decision. Is that what you are--is that
correct?
Mr. Delisle. Yes, and I don't think they need to have very
optimistic--they can have even very optimistic assumptions
about their future earnings and still be fairly comfortable in
borrowing a lot of money and ensure that it will be forgiven.
I should point out, though, this is only for graduate
students because there are no limits on how much they cannot
borrow on the federal student loan program.
Mr. Miller. We are not going to weave this all in my
question here, but I think the three of you are hitting
essentially on the same points. And I am going to start with
the idea of completion because absent completion then we do
have a problem. We have high debt and nothing, essentially
nothing to show for it.
But the question of then how do you make that flexible
enough for those students--we will continue to pursue this, but
you know, I also think the colleges, certainly community
colleges, have to put more as to what is it that you are doing
here and what do you want to accomplish.
Because I think having people wander around and continue to
borrow money without some sense of a goal--I understand people
change their majors, their ideas. I did 100 times--of course if
have any major you can come to Congress, so it worked out well.
This is how I get myself into trouble. Okay, let's start
over again. But I think the institutions have to play a role
here too in terms of guidance about what really happens at the
end of this process and are you on track or not.
Are you now borrowing your third--what would be your third-
year scholarship money and you are still about a year--you
know, you are still 6 months away from completing your second
year. Is that the kind of counseling are talking about?
Mr. Delisle. I think that kind of counseling is needed and
hopefully is occurring on most campuses. What we are talking
about is saying could we stop somebody from borrowing so that
they would end up running out of loan funds before they reach
the end so at least they would have some mandatory additional
counseling or at least recognize. Right now a school can send
out a disclosure but that doesn't necessarily mean the student
has read it.
Mr. Miller. Okay, thank you.
Chairman Kline. Thank you.
Mr. Petri?
Mr. Petri. Thank you, Mr. Chairman. I would like to commend
you for scheduling a hearing on this important and pressing
issue for an awful lot of people in our country.
We all have far too many constituents, particularly young
people, struggling with student loans and I am glad that you
are taking the time to take a look at this important issue.
As almost everyone is aware, the default rate on federal
student loans is very high. According to recent statistics,
roughly 13 percent of borrowers will default within 3 years of
entering repayment. Default can be financially ruinous for
anyone, but particularly young people just getting started.
Mr. Draeger, I was struck by the portion of your testimony
that was just referred to recently that described the typical
characteristics of students who default. Though much of the
media attention is focused on the level of student borrowing,
no doubt an important issue, it is striking how many students
default on manageable levels of debt.
And when one looks at our current student loan system, it
is easy to see how so many students could fall through the
cracks. We have rightfully recognized that student loan
borrowers face many ups and downs during their career. We have
added a wide array of protections, numerous deferments,
forbearances, repayment options, and so on in recognition of
that.
But in doing so, we have created a system that is so
complex that it can be baffling even for the policymakers who
work with it every day, let alone students trying to navigate
it for the first time.
While certainly not a solution to all of the problems we
face with student loans, I have always felt that simple,
universal income-based repayment has the potential to
accomplish the goals of the various protections we have created
but in a way that is intuitive and automatic for borrowers and
doesn't force them to navigate our current labyrinth of
paperwork and bureaucracy.
Many students who will fail to navigate the current
bureaucracy and fall into default despite the fact that they
could have repaid their loan under a system that was more
responsive.
So Mr. Draeger and Mr. Delisle, in your respective
organizations, recent reports about reimagining federal student
aid, each of you recommended making some form of income-based
repayment as the sole or automatic method of repayment for
federal student loans. Could you elaborate on the thinking
behind your respective recommendations and what you think the
benefits of income-based repayment would be?
Mr. Delisle. I will go first here. Well we know that
borrowers currently have a wide range of options that they can
choose to repay their loans. They can choose consolidation,
which extends the repayment term all the way up to 30 years.
There is income-based repayment, income contingent repayment.
There is 3 years of forbearance for everybody.
But, when you look at the data of what percentage of people
are in what repayment plans and they are all repaying their
loans under this standard 10-year repayment plan which is a
pretty good signal that people aren't availing themselves of
all of the benefits of these programs.
And to the extent that default or difficulty in repaying is
a function of they don't have the money to pay because of their
income, then getting people enrolled in income-based repayment
should address that problem.
Now I should point out--and that is why we recommended that
students, everybody be put into income-based repayment and one
of the reasons why we propose this is that if 10 percent or 15
percent of income is the right percentage of somebody's income,
if they are low income, for paying their student loan, then it
has got to be the right percentage for people who have a high
income.
And right now, it is the people who have high incomes who
don't use income-based repayment because we have other
repayment plans that are more generous for them. So we have got
essentially a regressive student loan repayment plan.
Mr. Draeger. I would say from an institutional perspective,
it is extremely frustrating is that Congress has put into place
so many protections to keep students out of default, yet we
have so many students that default.
The current national average of defaults in this country is
around 13 percent, higher if you took the entire portfolio, and
nearly every one of those students that went into default could
have avoided it if they had utilized the deferment,
forbearance, and income contingent options available to them.
What automatic IBR, income-based repayment, does is place
students in a situation where their loan payments will always
be reasonable, they will always be protected from the dire
consequences that come with student loan default.
Chairman Kline. Thank you--yes?
Mr. Miller. May I ask for unanimous consent to include in
the record of the comments by students from the Association of
Michigan State University, from American University, and from
the National Campus Leadership Council?
[The information follows:]
MEMO
Date: March 12, 2013
To: Andy MacCracken, Executive Director, National Campus Leadership
Council
From: Evan Martinak, Chairperson ASMSU
RE: Student Loans and Debts
Student debt is harmful students in a number of ways. Current
undergraduate students who are borrowing are faced with annual tuition
increases and rising costs associated with living expenses. These costs
can ultimately lead to the accruement of more debt for those who are
unable to have the full cost of tuition and related expenses covered by
federal loans.
Nationally, student debt levels have eclipsed $1 trillion dollars,
surpassing credit card debt and all other forms of private liabilities.
As with most schools in the current higher education system, many
Michigan State University students rely on Stafford loans to carry them
through their degree attainment. As of 2011, 45% of college graduates
from Michigan State University have, on average, accumulated $23,725
worth of college related debt. Such high debt levels can severely
hinder a student's ability to attend a post-graduate institution or to
complete any unpaid internship. High levels of unpaid debt also serve
as a liability in the event of personal bankruptcy, as individual
college debt is incredibly difficult to reduce in such an instance.
When parents cannot afford to accept PLUS loans, the standard
federal loan for parents with dependant children attending college,
Stafford loans make it possible for thousands of students to attend
MSU. In FY 2010-2011 and academic year, MSU lost about 40 million in
funding from the state government. This forced MSU to increase tuition
by 6.9% to cover the cost of lost funds. With state and federal aid
decreasing, the availability of loans makes an integral difference to
overall affordability of an MSU degree.
All of Michigan State University's current Stafford Loans are
disbursed with fixed interest rates. Had Congress not acted in 2012,
interest rates on such loans would have doubled. Yet these interest
rates and types of loans are not applicable to every student debtor,
and thus more action would be welcomed in reducing individual student
debt on an even larger scale. Low and fixed interest rates for student
loans are better borrowing options than private loans, and with
interest rates only fluctuating from 1-3% on average, it does seems
rational to request a continuation of these low, fixed rates.
The Associated Students of Michigan State University (ASMSU) has
several initiatives to try and lower costs for MSU students. Currently,
ASMSU is pursuing legislation that would allow local businesses of East
Lansing to have no sales tax on textbooks during the beginning of
semesters, in order to encourage local commerce and lower costs for
students. ASMSU also offers interest free loans of up to $300, free
blue books, free iClicker rentals, and free legal services to help
settle some of the financial burdens associated with college. With
students being dependent on these services and Stafford loans, it is
imperative that the student government continues to emphasize the
importance of low interest rates to provide every student with the best
educational opportunity and experience.
______
Office of the President
Memorandum
To: Education and the Workforce Committee
From: Emily Yu, President, American University Student Government
Date: 12 March 2013
Subject: Student Loan Interest Rates
College affordability has been an increasing concern for students
at American University, and all campuses across the country, since the
recession. My peers and I all realize that student debt has accumulated
at unprecedented and uncontrollable rates. This not only poses a
significant burden on us while we are in school and for our foreseeable
young adult lives, but it also restricts the opportunities we are able
to take in our careers, as we must think about finding jobs that will
support us enough to may our loan repayments.
Students spoke out last year to keep interest rates from doubling
for a multitude of reasons: because we realize the growing costs of
higher education are not sustainable and that the federal government
should have a key role in providing affordable and accessible
education. The doubling of the rate would have set an uncertain
precedent for us and future generations of college students, as we
would no longer have the option of low interest rate Stafford Loans to
help us get over financial barriers to our institutions. Additionally,
students depend on the fixed rate federal loans to make long-term plans
for their finances. Whereas private loans have shown to contribute much
more to harmful borrowing for students, this makes fixed rate federal
loans even more critical in being a financially feasible and healthy
borrowing option for students.
Student debt is an issue we must all tackle together; the federal
government, private institutions, and students alike need to all take
action because we share the responsibility. American University is one
such private actor making the hard decisions in order to ensure
affordable education for our students. This year, the university
administration, aware of growing national trends and the criticism its
received in the past of being ranked a high debt school, took serious
action to correct this wrong and to prevent future accumulation of debt
on its students parts. The university administration engaged students
in its budget process for the creation of the FY 2014- 2015 budget. In
the end, we achieved the lowest tuition rate increase in 40 years and a
$1.46 million increase in financial aid. When legislators and decision
makers work with students, we can all achieve our shared goals.
There are so many reasons as to why ensuring that student loan
interest rates stay low is important to all parties. For students, loan
interest rates determine our ability to afford to attend our
institutions, they impact the quality of our lives after graduation,
and they affect our abilities to pursue certain careers and other life
goals for years to come. For institutions of higher learning, their
efforts to reduce costs, such as those demonstrated by American
University, need to be matched by federal government action in order to
have the largest impact possible for its students. And for you, our
nation's legislators, it is crucial that we invest in opportunities for
us, the nation's youth, so that we are able to keep moving our country
forward.
______
Summary of Student Perspectives on Student Loans
Prepared by the National Campus Leadership Council for the
House Committee on Education and the Workforce
INTRODUCTION
With student debt skyrocketing, student leaders around the country
have consistently put college affordability at the top of their campus
agenda. The National Campus Leadership Council (NCLC) works with 300
student body presidents, who collectively represent 4.5 million
students and every state. Over the last year, NCLC has sought to better
understand prevalent perspectives among campus leaders and help share
those views to inform policymakers and opinion leaders as they shape
the national discourse.
On May 1, 2012, NCLC released a letter drafted by two student body
presidents and signed by 280 of their peers around the country urging
action to prevent student loan interest rates from doubling. To our
knowledge, no other issue has sparked such united action among so many
student governments nationally. It is important to note that the
letter's signatories urged the freeze on Stafford loan interest rates
as a ``first of many steps in a real effort to address the level of
student debt and reduce the excessive need for borrowing.''\i\
Our team hopes that the any actions or recommendations by the
Committee on Education and the Workforce are next steps toward student-
driven, comprehensive improvements to the federal financial aid system.
Students are particularly interested in helping create a more permanent
solution to ensure student loans are affordable and open access to
higher education for more young Americans. Student perspectives on
student loan reform are summarized below.
Campus Perspectives
The following are prevalent ideas among student leaders around the
country, which should be considered as Congress identifies a more
comprehensive solution to keeping student loans affordable and college
financially accessible.
I. The federal financial aid program, including loans, must
be student-driven
Students leaders have experiences and perspectives that are
critical to identifying practical steps forward. Most student body
presidents are working with their university administrations and state
legislators to keep costs down and public investment high. These
efforts are important to consider when shaping federal policy. Whenever
possible, young voices need to be a part of the conversation.
At public and private institutions alike, high student engagement
yields decisions that better serve student needs. Emily Yu, student
body president at American University worked closely with
administrators this year to achieve the lowest tuition rate increase at
the school in 40 years and a $1.46 million increase in financial aid.
She said, ``When legislators and decision makers work with students, we
can all achieve our shared goals.''\ii\ If these efforts can be
successful at the campus level, the federal government should work with
student leaders to make sure programs reflect modern student needs.
II. Debt burden and repayment options must be clear and
predictable
A frequent observation among students is that financing college is
complicated and at times overwhelming. The fixed rates of the Stafford
loan program have been important to helping students better understand
their long term finances, while variable rates often offered by private
lenders are difficult to understand and present significant financial
challenges to young Americans as they graduate and start repaying
loans.
Xavier Johnson, student body president at University of Texas San
Antonio said, ``Fixed interest rates present an option that is easier
to plan for, so in the long run, fixed rates will be the most effective
in keeping the costs to students low.''\iii\ These sentiments are
echoed around the country among student leaders. Predictability helps
students plan for repayment long term, which is why private loans,
which typically have variable rates, result in higher default rates.
III. Low interest rates make a difference
When interest rates were scheduled to double in 2012, students were
at risk to owe an extra $1000 for the same loan and education. The
intensity of student response demonstrates what $1000 means for a
college student or recent graduate. As default rates rise and high
youth unemployment rates linger, the financial aid system should do all
it can to minimize debt burden and make sure graduates' discretionary
income is going into the economy instead of repaying loans. Making
federal loans more attractive than private, sometimes predatory lending
through low interest rates should be a goal of the Stafford loan
program, offering safe, viable options for student borrowers.
At the University of Iowa, where the class of 2012 graduate with an
average of $26,296, student body president Nic Pottebaum asserts that
higher interest rates result in reduced graduation rates as students
take on more debt.\iv\ Indeed, this holds with national data that
indicate about thirty percent of student borrowers drop out of college.
As the need for a college education grows with tuition, students are
forced to work through school.
The sequester will cut up to 70,000 Federal Work Study positions,
adding financial stress and creating a greater need for student
borrowing for lower income students.\v\
IV. Student debt is not just a student issue
Student debt negatively affects companies trying to sell goods and
employers trying to fill jobs. The economy already sees the effects of
overwhelming debt burden as recent graduates have to pay of loans
instead of make major life decisions to buy a home or start a
family.\vi\ A recent Wall Street Journal article described a relatively
new aversion among young people to any type of debt, including
liabilities from credit cards, mortgages, and car loans.\vii\
Additionally, homeownership among young people is at a thirty year low,
largely driven by burdensome student debt.\viii\
Nic Pottebaum, University of Iowa, noted that ``[High debt] can
permanently destroy these hapless student's credit scores or
permanently sentence students to a life of disappointment if they
cannot graduate for financial purposes.''\ix\ These problems, when
concentrated on our generation, present significant challenges to our
generation as consumers and affects the rest of the economy. Xavier
Johnson from UT San Antonio said ``Debt levels can persist well into
and beyond the time a graduates reaches the age of thirty. This means
that money that could be going into investments, savings, or
consumption is instead going to repay debts; which in turn creates a
lower standard of living for graduates.''\x\
Conclusion
Student debt is an overwhelming problem for students around the
country and threatens important aspects of our economy. Accordingly,
the federal student loan program should reflect student needs, promote
predictability, and remain affordable. As student leaders noted in the
2012 open letter urging a freeze on Stafford student loan interest
rates, ``There has long been a promise that, if a student goes to
college, works hard, and does well, they will have a more prosperous
future ahead of them. Student loan debt is severely undermining that
prospect.'' As young people we need our elected leaders to take steps
necessary to secure our future prosperity and the long term health of
the American workforce.
ACKNOWLEDGEMENTS
Several student body presidents sent NCLC memos detailing their
campuses experiences with student loans. They include Emily Yu from
American University, Jeanne Wilkes from Delta State University, Evan
Martinak from Michigan State University, Ryan Beck from Missouri
University of Science and Technology, Nic Pottebaum from University of
Iowa, Ashley Mudd from University of Louisiana, and Xavier Johnson from
University of Texas San Antonio. Their contributions, in addition to
countless interviews over the last 10 months, shaped this summary.
ENDNOTES
\i\ ``Student Loan Interest Rates.'' 2012. http://
www.nationalcampusleaders.org/student-loan-interest-rates
\ii\ Yu, Emily. ``Memorandum: Student Loan Interest Rates.''
American University Student Government. 12 March 2013.
\iii\ Johnson, Xavier. ``Memorandum: Student Loan Interest Rates.''
University of Texas San Antonio Student Government. 12 March 2013.
\iv\ Pottebaum, Nicholas. ``Student Loan Interest Rates: University
of Iowa.'' University of Iowa Student Government. 12 March 2012.
\v\ O'Sullivan, Rory and Brian Burnell. ``Millennial Unemployment:
Drops to 12.5% but Sequestration Could Increase It.'' Young
Invincibles. 8 March 2012. http://younginvincibles.org/2013/03/
millennial- unemployment-drops-to-12-5-but-sequestration-could-
increase-it/
\vi\ Shellenbarger, Sue. ``To Pay Off Loans, Grads Put Off
Marriage, Children.'' Wall Street Journal. 17 August 2012. http://
online.wsj.com/article/SB10001424052702304818404577350030559887086.html
\vii\ Shah, Neil. ``Young Adults Retreat from Piling Up Debt.''
Wall Street Journal. 6 March 2013. http://online.wsj.com/article/
SB10001424127887323293704578334761823150672.html
\viii\ Thompson, Derek. ``The End of Ownership: Why Aren't Young
People Buying More Houses?'' The Atlantic. 29 February 2012. http://
www.theatlantic.com/business/archive/2012/02/the-end-of-ownership- why-
arent-young-people-buying-more-houses/253750/
\ix\ Pottebaum, Nicholas. ``Student Loan Interest Rates: University
of Iowa.'' University of Iowa Student Government. 12 March 2012.
\x\ Johnson, Xavier. ``Memorandum: Student Loan Interest Rates.''
University of Texas San Antonio Student Government. 12 March 2013.
______
Chairman Kline. Without objection.
Mr. Miller. Thank you.
Chairman Kline. Mr. Andrews?
Mr. Andrews. Thank you, Mr. Chairman. One comment I would
make about the discussion of income contingent repayment is we
have two federal policies working at cross purposes.
We claim we want students to take advantage of income
contingent repayment, but the gainful employment rule that was
proposed does not give institutions credit for a loan being in
repayment if the student chooses that option which is I think a
pretty contradictory view.
Dr. Lucas, I want to ask you about your proposal to switch
to a different accounting method for student loans, for direct
student loans at least, and this is a very abstruse,
theoretical debate that has enormous consequences in the real
world in which we live.
I looked at the chart that you put at the bottom of page
four. If we stuck to the present system, in the 10-year window
between 2010 and 2020 the loan program is scored as raising $96
billion, reducing the deficit by $96 billion.
If we switch to your method, it would be scored as adding
$140 billion to the deficit. So this is a very big deal. It is
a quarter of a trillion dollar difference over a 10-year
period, which has profound policy implications for how much we
charge students and families and what impact it has on
taxpayers. So I wanted to get into and understand the
theoretical underpinnings of this.
You say that the present system fails to account for the
full cost of the risks associated with government credit
assistance. That is the core of your argument. So in a sense, I
think you are arguing that the projections that we make based
upon present discount rates and default rates and whatnot
understate the cost and overstate the benefit which therefore
makes them inaccurate.
But we don't really have to have a theoretical argument
about this. Since 1993, at least a third of the loans in the
system have been direct student loans. What has that 20 years
of history actually produced on a cash basis with respect to
direct student loans?
In other words, if we added up the defaults that the
taxpayers had to cover, the administrative costs the taxpayers
have borne, and then subtracted from that or I guess subtracted
from that, the revenues that have been collected on direct
student loans and also the interest cost--we have to subtract
that out--what is the cash scoreboard over the 20-year basis?
Ms. Lucas. Okay. So to address the general issue, I just
want to say a word about the concept----
Mr. Andrews. If I may though----
Ms. Lucas. Okay, on the cash basis I can't give you the
number. It is certainly true that the cash payments have
probably covered the cash outflows from those programs.
Mr. Andrews. Well, if we just go back to that than for a
minute. If you have that information, if any of you have that
information, it would be great if you could supplement it for
the record.
I truly appreciate the fact that there is a theoretical
difference between cash and an accrual basic counting. I don't
quite understand it, but I know there's a theoretical
difference.
But I think I just heard you say that if you add up over
the 20-year period, the revenues that came into the federal
treasury on direct student loans and subtracted from that the
loan defaults the taxpayers had to cover, the administrative
costs we had to cover, and the interest we paid to acquire the
funds to make the loans, that we are running a surplus on that.
Is that right?
Ms. Lucas. When the government makes a loan, they are
incurring a liability to taxpayers and that liability has a
cost today. That is the logic of the accrual accounting.
Mr. Andrews. If I may, I get the theory, but my narrow
question here was on a cash basis, I think I just heard you say
that the direct loan program has produced more dollars in
income than it sent out in spending. Is that correct?
Ms. Lucas. I don't have those numbers before me. I believe
that if you were to account for credit on a cash basis, which I
think would be a bad idea and it is not the law you would come
to a different conclusion, but that accrual is the right way to
think of it.
Mr. Andrews. I understand--no, I appreciate the theoretical
difference. Just for those of us who are not economics
professors, one way I would look at this is that the core of
your position as I understand it is that it costs us really
more to run this program then the present accounting method
reflects.
Well, I would like to look at what the actual facts are in
that over a 20-year period. And it is my understanding--and I--
again, please supplement the record, but it is my understanding
if you add up the loan payments received and you subtract from
that the cost of acquiring the capital, the administrative
costs of running the program, and the defaults taxpayers had to
cover, the treasury has come out ahead on that. Is that true?
Ms. Lucas. The fact is that the government gives students
loans on terms that are far more favorable than what the
private sector is willing to offer them, but at the same time,
the government books those loans as showing a significant
profit. And so there is a disconnect between thinking that the
market price of the loan is one thing and the cost to the
taxpayer is another thing.
If we were to buy a tank for $50 instead of $1 million we
can't set the price of tanks--we can't set the price of loans.
Mr. Andrews. I will say I know the Defense Department is
glad that we don't use that in accounting. I am not sure we
should use it on students either.
Chairman Kline. Dr. Foxx?
Ms. Foxx. Thank you, Mr. Chairman.
Mr. Draeger, what is the most important benefit for
students in the federal student loan programs? A low interest
rate on the front end, or repayment options and other
assistance on the backend?
Mr. Draeger. Unfortunately, we would have to go off of
anecdotal information on this because we don't have any
statistical studies that show what is most important to
students beyond the fact of the availability of the dollars.
That is what is covering the cost of their education. So
there is little evidence to prove that interest rates,
particularly since half of our subsidized Stafford loan
borrowers are also borrowing unsubsidized Stafford loans at
double the rate, or that interest subsidies in and of
themselves up front are really driving college access.
More it seems to be that it is the availability of the
dollars which is, that is what is most important to them up
front and then our job is to figure out how we implement some
sort of safeguards to make sure that those students stay on the
straight and narrow path of repayment.
Ms. Foxx. Thank you very much.
Mr. Delisle, you look like you wanted to make some comment
after Mr. Andrews' comments and I wondered, did you want to
respond?
Mr. Delisle. I did and I now have the distinct advantage of
making those comments now that he has left the room.
What Congressman Andrews was essentially purporting is that
we should measure risk looking backwards when we know what
already happened. That is a ridiculous concept. Most of the
cost to the federal student loan is the risk of that they might
not be repaid or we might not know how much they will be
repaid.
And by saying, well, can't you just look at what happened
and then value it? That is essentially--you wouldn't value the
cost of insurance going forward based on essentially that
happened--something that did or did not happen in the past.
This is another example for--you can look at a well-known
program, the troubled asset relief program. So going forward,
we know when we made those loans, when Congress made those
loans to investment banks, we knew that we were subsidizing
them. We were making rates at half the going rate in the market
at a time of incredible market turmoil.
When looking backward, we got all the money back. So was it
a cost or was it not cost? I would imagine most people here
would say making loans to investment banks at half the going
market rate is definitely a cost even if you collect everything
they said they would pay you.
Ms. Foxx. Thank you very much.
Now I would like to ask each witness if you would answer
this question: as the committee begins to reauthorize the
Higher Education Act, what are some key principles that should
guide how we review and reform federal student aid programs?
Please keep in mind we probably have about 3 minutes and
there are four of you. So if you could do about 40 seconds,
maybe we could get to everyone and we will start with Dr. Lucas
and go down.
Ms. Lucas. Thank you. I will say very briefly that I think
what is important is to maintain the broadest of access to
higher education and affordability.
In the interest of maintaining affordability, it is
important to rethink student loans as well as other assistance.
I think we have to think about controlling costs in a way that
is not so prescriptive as it diminishes the high quality of
higher education in the United States, which has really been an
engine of mobility and growth in this country.
Ms. Foxx. Thank you.
Mr. Delisle. I will be very brief. I would say do not allow
graduate and professional students to borrow an unlimited
amount of money with the option for loan forgiveness on the
backend.
Ms. Foxx. Very good. Thank you.
Mr. Draeger?
Mr. Draeger. The principal that we adhere to when examining
the student financial aid programs is that no qualified student
be denied access to higher education due to lack of financial
resources.
It may not mean choice to every school, that we will pay
for every school, but basic access to postsecondary education.
Ms. Foxx. Thank you.
Dr. Mercer?
Ms. Mercer. Thank you. I would say the twin principles are
both access and completion; focusing on one without the other
doesn't serve us well. Students reap the biggest benefits, the
nation reaps the biggest benefits when students enroll and
complete college.
Ms. Foxx. Thank you, Mr. Chairman. I yield back.
Chairman Kline. Thank you.
Mr. Scott?
Mr. Scott. Thank you, Mr. Chairman.
I would warn the witnesses that there is a monitor in the
back so that somebody who has left may still be able to hear
what is being said.
Mr. Draeger, following up on your statement about denying
access, what portion of students now do you think cannot attend
college because they can't afford it?
Mr. Draeger. The number one cited reason in study after
study of why students don't go to college, whether I think both
perceived and real, is lack of funding to attend.
So students either feel that they don't have enough money
to attend, they come from a background that won't allow them to
attend, and even if they are academically prepared, the number
one obstacle that is cited over and over again is the cost.
And so whatever we can do to let students know about the
availability of funds like the Pell grant program, student
loans, Federal work-study, supplemental grants, I think we will
continue to make strides in college going rates.
Mr. Scott. What portion of students would like to be on the
work-study program that can't get on because of insufficient
funding?
Mr. Draeger. The work-study program is a very popular
program on college campus. And a couple of years ago we saw an
increase in work-study dollars. Schools were very excited to be
able to put that to work.
Work-study has the added benefit of helping students
complete because it actually integrates them into the campus.
So it is one of the more popular programs that schools like to
administer.
Mr. Scott. And are Pell grants at a sufficient level to
guarantee access?
Mr. Draeger. Our supposition is that we have appreciated
the bipartisan support for the Pell grant funding. We think
Pell grants could always see an increase. They have not kept
pace with the cost of college and in the past have not kept
pace with basic costs of inflation; recognizing that you all
have to balance understanding balancing of budgets along with
that.
Mr. Scott. Several months ago, there was a change in the
PLUS Loan Program. Can you tell me the effect that had on
student financial aid administrators?
Mr. Draeger. In the fall, we understand that the Department
of Education introduced an additional underwriting criteria
that looked back approximately 60 days to see if there were any
delinquencies in a parent's credit or if they were delinquent
on any other federal loan payment.
That resulted in denials of PLUS Loans for students who
were already admitted and enrolled, and I think this gets to
the point if we want to continue to not disrupt students and
their ability to attend college, any changes, dramatic changes
we make in the availability of financial aid ought to be done
in the future for new students who are getting aid or new
borrowers.
Mr. Scott. What portion of students were adversely affected
by that change?
Mr. Draeger. I don't have those numbers at my disposal, but
I can look to submit them for the record.
Mr. Scott. Thank you.
There are a number of proposals on the table. Do any of
them allow you like a mortgage to midstream lock-in a set flat
rate, a fixed rate, like you can a mortgage rather than a
variable rate that fluctuates with the market? And would that
be a good idea?
Ms. Lucas. I believe that the proposals for introducing
market-based rates would preserve the fixed rate. Many of those
proposals would preserve the fixed rate nature of the loans so
if the student had 20 years to pay it would be at a fixed rate
that was determined in the year they took out the loan.
The change would be that loans that were originated in
different years would bear different interest rates that moved
along with market interest rates.
Mr. Scott. But there would not be a variable interest rate
on the individual loan? It wouldn't go up and down with the
market?
Ms. Lucas. No, just like you said, as with a mortgage,
students would get a fixed rate and they would have the option
to prepay it. So if they had the opportunity to refund at a
lower rate----
Mr. Scott. How do mortgages reset their interest rate every
couple of years?
Mr. Delisle, if you don't have a discharge at the end of
income based repayment, wouldn't some people be paying
virtually for the rest of their lives?
Mr. Delisle. Oh, sure, and we haven't recommended that you
do away with loan forgiveness. We said it's the combination of
unlimited borrowing authority for graduate students plus three
limits on repayment.
One of them is loan forgiveness at 20 years or 10 years.
Another is between zero and 10 percent of their adjusted gross
income, and the other limit is another limit for high income
earners that the payment stops going up.
If you have unlimited borrowing up front, three separate
limits on the back, that is essentially a great big moral
hazard and a message to students to borrow away.
Mr. Scott. Thank you, Mr. Chairman.
Chairman Kline. Thank you.
Dr. Roe?
Mr. Roe. Thank the Chairman for having this and the members
for being here.
I am gonna--there are some of us that are the same vintage
that I am here and I want to go back in time a little bit and
just express to you I came from a family that, my father worked
in a factory, my mother was a bank teller. I was able to go to
college. I worked. Remember the time when you worked your way
through college? I was able to go to college and medical school
and graduate in 7 years from both of those with no debt.
Now think about that today. I have served as a foundation
board member of two colleges where I attended--the one where I
attended and was president of the foundation board to help
students make it more affordable and I continue to serve on the
foundation board now.
And I think it is one of the greatest challenges we face in
America today are the student loans and the cost of college and
I don't know what is causing it to go up at seven, eight, and
10 percent per year, but it is unsustainable. I can tell you
that.
You cannot go out and see young people--I see students
graduate from graduate school and law school and medical school
with $200,000, $250,000, $300,000 in debt. It is unbelievable
and they will be 50 years old or older paying that off.
Where we live in Tennessee you can certainly buy a very
nice house for what the cost of many student loans are today
and these--and I see them in people who are teachers that are
going out with $50,000 and $60,000 and $70,000 loans. I don't
know how they ever get out of that and I think your point about
no--on the other end--I think you made your point very, very
well.
I am going to ask a couple questions. One, we have got a
trillion or so--y'all have told us approximately $1 trillion
which now exceeds credit card debt in student loan debt. Is the
bubble out there? And the number I read, 35 percent of students
who are paying those, or loan recipients it says here, are
paying those back are 90 days and above in arrears now.
Is that bubble real? And what happens when it collapses to
the taxpayers? Any of you can take that.
Mr. Delisle. Well, I will point out of that trillion
dollars that is outstanding, the median monthly payment is
$190. That is from the Federal Reserve Bank. The median monthly
payments on student loans is $190, monthly payment $190.
But, I also want to point out that you talked about
somebody with $200,000 in debt paying for 30 years. Not under
current policy. That person wouldn't pay for longer than 20
years under the income-based repayment plan.
They could choose to pay for 30 years by not enrolling in
income-based repayment, but I think that the program is set up
now where you can even earn a very high income and have that
debt forgiven.
So our proposal was to essentially move the loan
forgiveness for people who borrow more than $40,000 from 20
years to 25 years. It doesn't sound like a big change, but it
is a really big change for people who go to graduate school and
it essentially requires them to pay a little bit more because
they borrowed a little bit more.
Mr. Roe. I guess the problem I have with that is to--here
you are at 50 years old paying off a student loan that you
acquired and I think certainly from the standpoint of the
counselors at the school is to let the students know what you
are getting into, what you are going to pay off later.
There is a cost out there and I certainly think you need to
do a better job of allowing an 18-year-old, a 19-year-old, or a
20-year-old say, hey, look, this money is going to have to be
repaid and that colleges are going to have to do a better job
in controlling the cost because as I said, no one, including
Bill Gates, is not going to be able to go to college if it
keeps going up like this.
Mr. Draeger. I think one of the concerns that is often
overlooked in the whole college debt conversation as Jason
pointed out, is the loan payments seem manageable for most
graduates who graduate with an average of $25,000 in loan debt.
There is a whole another part of this which is the amount
of debt that parents take on to send their students. So when
you talk about those who are in their 40s, 50s, these are folks
who are also probably parents who took on a substantial amount
of loan debt.
One of the things that is missing in terms of safeguards,
particularly on parent PLUS loans, is a simple assessment of
their ability to repay the loan based on their current income.
So there is no, for example, debt to income ratio on parent
PLUS loans. Again, we don't want to disrupt current
enrollments, but for new borrowers or students down the road I
think it makes sense to examine additional safeguards.
If the mortgage bubble taught us anything, it is that
appropriate underwriting not only protects lenders, it also can
protect borrowers.
Mr. Roe. Mr. Draeger, one of the things that happened too,
I think, is the economy hasn't done well. It has encouraged
students to stay in college longer and acquire more debt.
I thought for a minute, Mr. Draeger, you brought the health
care bill with you when you have had that stack of papers out
front of you when you first brought that here. I thank you for
your testimony and I certainly appreciate the concern and I
think we certainly can work on this.
I yield back.
Chairman Kline. Thank the gentleman.
Mrs. McCarthy, you are recognized.
Mrs. McCarthy. Thank you, Mr. Chairman. I appreciate the
hearing.
Dr. Mercer, I want to follow up with something that you
have talked about in your testimony. You mentioned in your
testimony that there have been a number of changes in the last
decade to student aid that have occurred outside of
reauthorization. Can you identify one or two of the changes
that you believe has done the least amount to help stem costs
of college for the average student?
Ms. Mercer. I am sorry, you said that has done the least to
help stem the cost of----
Mrs. McCarthy. Right.
Ms. Mercer. I am--well I would say probably limiting the
number of semesters that a student can actually use their
Pell--they can have--receive Pell to go to college. If
anything, that is a policy that was actually intended to help
students expedite the time that it took for them to complete
their degree, and thereby controlling for costs both at the
institutional level but more from the student perspective, for
them to be able to move through the system.
So undoing that, in effect, leads to increased costs more
so on the student perspective and it had no impact on the
institution for them to change their policies in terms to
helping advance students and move them through the system.
Mrs. McCarthy. One of the things I wanted to follow up on
as we talk about these loans and it was just talked about as
far as parents being able to carry that loan. We are talking
about one student. What happens when there are two or three
students in college? They might be stepped, but there is still
three students.
I mean, you know, unless you are extremely wealthy, that is
a little bit steep for a parent and certainly the goal is to
have their children go to college if that is what they want to
do. So I mean, technically, the parents are looking for
everything they can, obviously the children are doing what they
need to do, but I don't know whether anybody has actually
really thought about that on what the loan is on for the
parents.
I know things are better today. Grandparents can help
technically. I guess that is what I am supposed to be doing,
but I mean, when you think about it, it is mind boggling as far
as that goes. Just to follow up on you, Mr. Draeger. When I
hear everybody talking about also that these loans that are
being taken out, Mr. Hinojosa and I, for years, we have been
pushing financial literacy.
Now you said that the colleges can't give certain
information to the student or to the parent. Would they be able
to work it under the--a way of financial literacy to have them
understand what they are actually getting into?
Mr. Draeger. So schools aren't prohibited from delivering
information. The real problem is that we have a lot of
information that we give them.
Mrs. McCarthy. Right.
Mr. Draeger. The issue is really that the school is
prohibited from requiring any additional steps that is not
mandated in legislation before a student gets their loans. So
to require a student, for example, to build out a budget to say
why is it if you are, for example, a part-time student
borrowing at a full-time rate, let's walk through this and make
sure that you understand why you need this money before we
approve the loan.
Right now, schools aren't able to introduce or mandate
those types of steps. So I think financial literacy is a huge
part. In fact, many schools are partnering with former state-
based agencies that operated in the Federal Family Education
Loan Program that were part of the state or part of another
nonprofit to try to develop and deliver more meaningful and
engaging financial literacy to students, but again, unless it
has teeth, I think we are always--it appears we are just
delivering more information that they might not pay attention
to.
Mrs. McCarthy. So let me ask you, why do you think the
language is in there that the college can't give more
information?
Mr. Draeger. I think at the time, when student loans were
developed, this was viewed as entitlement aid and that the
school should not come between a student and the total amount
of financial aid that they are entitled to, and that includes
loans.
But as demonstrated by this hearing and a lot of the things
we see in the press, there is rising concern about the amount
of family debt as you talked about the parents--the family debt
that is being taken on and I think from the school perspective,
we are questioning can we play a better and a more significant
role with some teeth to be able to stop and ask students do you
really need this much, this money in loan debt. Let's think
through this together.
Mrs. McCarthy. Because one of the things I know--and this
committee certainly worked on that--is educating especially new
college students on when they went to register on all the
credit cards that were available for them.
It was a big debate here because a lot of them were not
prepared to pay those particular debts down. So it is
complicated, but thank you.
I yield back.
Chairman Kline. Thank you.
Mr. Walberg?
Mr. Walberg. Thank you, Mr. Chairman. It is a bit surreal
to be sitting here on a committee talking about student loan
debts and trying to come to a solution when we are having a
great deal of difficulty in dealing with $16.5 trillion debt
that we have the with no real activity that we see in the
pipeline to accept proposals that would reduce that debt and
balance, but that is another point.
Right now in my home state of Michigan we are facing an
unemployment rate of just below 9 percent, and though I
represent Hillsdale College, that really doesn't find any
involvement in our topic today. Yet I do represent some of the
students from the some of world's greatest research
universities like the University of Michigan, Michigan State,
private religious-based institutions like Spring Arbor and
Siena Heights University, Adrian Olivet Colleges, and community
college systems in Lansing, Jackson, and Monroe that are models
of academic and employer cooperation. I am pleased with that.
But right now, we are working with all hands on deck to
keep our graduates in the state employed and primarily because
of student debt and limited job opportunities.
The federal student loan program was created to help
students pay for the high cost of tuition, but over the last 20
years, students in Michigan have seen their federal government
gradually move to overtake all aspects of the student loans
which has gotten us into a mess where we find ourselves now. It
is my opinion.
We know that the student loan interest rates are not the
sole issue facing Michigan students and other state students;
however, as college tuition continues to skyrocket and students
face staggering amounts of debt, we must enact comprehensive
solutions that put our schools and our parents and our
communities and next-generation on a path to prosperity.
So following in Mrs. Foxx's questioning, just briefly, I
ask of all of you, if any of you know of any state or any--
excuse me--any study showing the relation between the ever
increasing higher education costs and the lack of any real
present disincentive to student debt. Any studies that show any
comparison, any relation of high cost of education versus the
student debt?
Mr. Draeger. I would be happy to submit some of these
studies to the record. The ones that we have looked at have
shown that that even in periods where financial aid wasn't
increased, grants or you kept the annual and aggregate loan
limits steady college costs have continued to go up and so the
function between financial aid and debt which is a function of
cost just doesn't seem to correlate.
We haven't seen that corollary function. So I would be
happy to submit that, those studies, for the record.
Mr. Walberg. Well, I would appreciate that.
Mr. Delisle. I mean this is a pretty difficult thing to pin
down but I think that there is a couple things we should keep
into context. You know, an undergraduate, a dependent
undergraduate in their freshman year can borrow $5,500 through
the federal student loan program.
It is hard to imagine that that amount of subsidized credit
really moves the needle on tuition, but now if you look at
graduate programs where the student can borrow up to the full
cost of attendance as set by the institution for as many years
as they want to, you can get two, three, four, five graduate
degrees and just keep borrowing and pay for your cost-of-living
while you are there.
My guess is if there is a place where loose and very
cheaply available federal credit is pushing up the price of
college education, it is definitely in the graduate programs.
Mr. Walberg. I appreciate that. That is probably an area we
ought to look to find disincentives to encourage our costs of
education to moderate at some point and that probably ought to
be part of our quest.
I also would guess that providing further incentives to
families to save for college education would be helpful in the
process.
Mr. Draeger, about how many students are benefiting from
the subsidized Stafford loans currently being offered a 3.4
percent rate?
Mr. Draeger. By our estimates, looking at NPSAS data, about
7.5 million.
Mr. Walberg. How many of these students also obtained
subsidized loans with PLUS and Stafford?
Mr. Draeger. Just about half of them. So 4 million of our
subsidized borrowers are also borrowing in the unsubsidized
Stafford loan program.
Mr. Walberg. Are there any private lenders able to offer
loans to Michigan or other state students at significantly
lower rates?
Mr. Draeger. We have seen private lenders who are currently
marketing rates lower than the federal loan limit--or excuse
me, federal interest rates, particularly for Stafford and PLUS.
The unknown question, the answer that I can't give you, is
what the distribution is; how many people who apply for those
private loans are actually getting them.
What makes it difficult for financial aid administrators is
trying to explain the benefits of staying in the safety of the
federal loan programs when private loans are being marketed at
a lower rate.
Mr. Walberg. Thank you.
Chairman Kline. The gentleman's time has expired.
Mr. Tierney?
Mr. Tierney. Thank you, Mr. Chairman, and thank you for
having this hearing, Mr. Chairman. I think it is good to begin
the discussion and certainly we have to address the doubling of
the subsidized Stafford loan, but we have to go on beyond
there. Obviously we can't stop there. We have to think a little
bigger. We have to look at the responsibility over the whole
realm of that.
But I wanted to try to put this conversation in a little
context. Most of my constituents think it incredibly unfair
that Wall Street banks can go to the Federal Reserve and borrow
money at almost no interest rate at all, yet they turned around
and look what they have tomorrow to go to college and they find
that comparatively exorbitant compared to that.
Now, the people on Wall Street are the ones that just about
wrecked our financial system taking these reckless risks and
yet they can go it get a deal. All that the people who are
trying to do when they graduate is added to the nation's
productivity, innovation, and creativity, but they get a bad
deal in comparison on that.
So that is the context in which I work. A lot of people
coming into my office and wanted to know what the heck is going
on.
Dr. Lucas, you mentioned that one of the reasons--and
correct me if I got this wrong--but one of the reasons why
interest rates should increase and not be fixed is that lenders
need to be assured their return on capital will increase to
account for that inflation. Is that fair?
Ms. Lucas. I said that if inflation were higher that is
what the market would require.
Mr. Tierney. It would. All right, and you are saying if
that doesn't happen that it is a cost to the taxpayer.
Ms. Lucas. I am saying that when you fix loans as they are
now when inflation goes up you are still charging students the
same rates, which makes the loans further below market rates.
Mr. Tierney. Below market rates on that. But what if the
lender was a not-for-profit? What if the lender was somebody
that said, you know, I am happy to cover my costs? And I think
that there is a value to covering my costs and not getting that
profit back or on that basis because I think it is good public
policy to have more people graduate from school, increase our
productivity, our creativity, and all of that going forward,
then that is a whole different consideration, right?
Ms. Lucas. I agree with you completely that it may be good
public policy to keep the interest rates on student loans low.
My comments about changing the accounting for them had to do
with the transparency and recognition of the true costs which
would make it easier for Congress to decide to use student
loans in judicious proportion to other types of aid, but as far
as----
Mr. Tierney. So we would get to see--so we would get to see
what our public policy was is what you are saying. You get
transparency and you know what profit you weren't making and be
able to decide whether or not that was commensurate with the
policy plusses that you thought you might get. So they can make
that kind of decision on that basis.
And I think that is great, but--and I think that is the
kind of discussion we ought to have around here but I don't
think we ought to lose sight that it is--you know, we are not a
for-profit organization and we talk all the time about--our
rhetoric speaks to the idea of needing more college graduates
and all of our employers need it and we need it for our
productivity and for our creativity and our innovation, but our
policies and our interest rates still counter to that.
You know, making it difficult for people to pay off loans.
Some people don't even go to college because they see the
frightening costs going forward. So I think we ought to have
that discussion but not lose sight of the fact that there is a
value to not making a profit so much.
And if we thought we had to make up that money somehow,
maybe we wouldn't give billions of dollars in tax subsidies to
oil companies every year. So basically shoveling money out the
door to them as a gift with no real public policy plus back on
the other side, or if we thought we had to make it up, maybe we
would put a transaction tax on those very Wall Street people
that almost drove us into ruin and slow down the volatility of
the electronic trades and at the same time for the value of
what the proposal I have seen is the cost of about 1 cup of
coffee, one dollar for every 800 cups of coffee and we get a
plus on the way the market runs and also get them to start
contributing to fixing what is going on in the country and get
us more graduates on that.
That is all I really wanted to cover on that, but I do
think on the other part of that, Mr. Chairman, is that at some
point we have to start looking at making sure that the people
that have these college loans and they are getting collections
on the other end get treated the same as people that have
borrowed for other purposes.
I mean, Donald Trump can walk into bankruptcy, clear his
record, and go out and start investing the next day, but a
student that falls on some calamity and can't repay their loans
cannot go into bankruptcy at all and never gets a restart. I
have a number of people that come into my office that just keep
having trouble with the collection process, penalties, interest
going up and up on them and they seem to never be able to get
out.
So I think we need some consumer protections. We need to
take a look at why students are one of the very few groups that
can't get the protection of bankruptcy that our Constitution
generally affords everybody else, and then we will have truly
looked at this on a larger scale on that basis.
So I thank you, and I yield back.
Chairman Kline. Thank the gentleman.
Mrs. Roby?
Mrs. Roby. Thank you, Mr. Chairman. I would like to thank
all of the witnesses for being here today and just want to talk
about--last district work week I organized a roundtable
discussion with Alabama's Department of Postsecondary Education
Chancellor, Mark Heinrich, and presidents of Alabama's
community colleges in my district.
And we had a great discussion about the impact that federal
policies and regulations have on their colleges in addition to
college affordability and as you can all agree, here in the
United States we are fortunate to have a diverse educational
system.
Students can use federal financial aid and many other
scholarships and funding sources to attend their school of
choice; public, private, proprietary, 2-year, 4-year,
certificate, undergraduate, graduate, et cetera.
And for these student loan programs to remain available, we
have got to strengthen them. So I just have a couple of
questions.
Mr. Delisle, historically the interest rate for PLUS loans
are often a little bit higher than the rates of the Stafford
loans. So my question is do you believe that the higher PLUS
loan interest rates deters graduate students or parents from
borrowing and obtaining a postsecondary education?
Mr. Delisle. Well, I do think on the parent side, I think
there something that you might want to be concerned with which
is there is a little bit of an adverse selection issue where
the interest rate on a parent's PLUS loan, the APR, is 9
percent.
I know we talk about the 7.9 percent, but the APR is really
9 percent once you add in the 4 percent origination fee.
Department of Education, by the way, I think is the only
financial institution that can tell you what the interest rate
is on your loan without telling you what the APR is.
So the APR is 9 percent. So parents, the people who think
that is a bad deal can go somewhere else and borrow--they can
get a home equity loan or they can use savings or they could
borrow in the private market and get a variable rate.
People who are stuck paying the high rate are people who
can't find any other means of credit, people who are those that
are probably most likely to find that repaying a loan at 9
percent APR is difficult.
Then on the back end, if you look at graduate students who
borrow those loans, they will get out of school, say they find
a job and they find a high-paying job; who is going to pay back
the loan first? The person who is making the money that can pay
back that Grad PLUS loan or refinance it in the private market
frankly. There are companies out there that are doing that.
So what is left in the loan pool? It is people who can't
pay quickly. You have essentially on the front end you have
selected out the good risk and then on the back end you are
further selecting out the good risk and you are left with a
pool that is most risky.
Combine that with the generally, you know, I think,
mischaracterization that the program makes money for the
federal government when you have those kinds of dynamics going
on, I think it is unusual. So this is one of the problems with
the interest rates in the PLUS program.
Mrs. Roby. Okay. Thank you.
And Dr. Lucas, what factors do banks consider when they
look to originate student loans versus the factors that the
federal government takes into account?
Ms. Lucas. Yes, well the federal government treats student
loans as an entitlement, so they basically don't take into
account any financial factors of the student but rather the
costs of attendance.
A private lender would look at credit history, credit
ratings, whether income is sufficient to afford the repayments,
wealth, and so forth. So it is quite different.
Now student loans are valuable just because they don't look
at those things. The justification for student loans is a
student might have no credit history, no credit score, so the
government is stepping in and providing credit where it might
not be available in the private sector, and the government is
purposely doing it at a rate that isn't attainable in the
private sector because that is what students need to have the
opportunity to pursue an education.
So there is certainly a justification for the way the
government has structured the program. Just to repeat, I feel
that those kinds of subsidies are completely appropriate and
they are the role of the government and credit markets. It is
problematic when you make these below-market loans and you
claim that not only have you helped the students but you have
created profits that the government can spend elsewhere.
Mrs. Roby. Thank you.
My time is running out. I have one more question for Mr.
Draeger, but I am going to submit it to the record for an
answer.
So thank you, Mr. Chairman. I yield back.
Chairman Kline. Thank the gentlelady.
Mr. Holt?
Mr. Holt. Thank you, Mr. Chairman.
I think the witnesses.
You know, there are lots of details that I would like to
get to about whether low income borrowers are more likely to be
harmed by being locked into a higher interest rate if we have
variable interest rates. There is a lot to be said about--or a
lot to be discussed about income-based repayment, but I have
got to get to the basic question here that has not been cleared
up this morning.
And that has to do with--let me ask you to get that for me
there again--whether this actually costs taxpayers or not, and
if it does, whether this is something that we want; whether
this is a public good that we are requiring here.
The CBO issued a paper this year that says CBO estimates
that new loans and loan guarantees issued in 2013 in the amount
of $635 billion would generate budgetary savings of $45 billion
over their lifetime, thereby reducing the budget deficit.
However, using a fair value approach, which we have heard
discussed this morning, CBO estimates that those loans and
guarantees would have a lifetime cost of $11 billion, thereby
adding to the deficit.
Now the witnesses here seem to be, at least Mr. Delisle in
particular, seem to be offended that the federal government
might consider offering risky loans at better rates more
favorable than the market, then the private sector would offer.
In fact, Mr. Delisle, you said it was ridiculous to look
backward to see whether we might recover--the taxpayer might
recover money. It seems offensive that the government might be
pursuing an interest that the private lenders were not willing
to pursue.
That is why we are here. We are trying to look after the
public good, not just the return on investment for a particular
bank, and therefore we don't need to match what they do.
We may be better, as Mr. Tierney has said and others, we
may be better off as a nation to have more people educated in
college and educated in graduate school and so it is
interesting--you use the phrase ``moral hazard.''
Now, you know, for oil companies or financial businesses
who are encouraged to shift more and more risk to other people
while they make out like bandits--and I use that term
advisedly--that is a moral hazard--that is not a moral hazard,
but for students to shift some of the risk to society at large
is a moral hazard, where you seem to be putting an emphasis on
the word moral as if the shame here is that we are creating a
generation of scofflaws.
No, what we are trying to do is create a generation of
innovators, a generation of doers and makers, a generation of
educated people, and until we face that point and get that
question out from under this, it doesn't make sense to talk
about whether we want variable loan repayments or income-based
loan repayments.
And I think we are just talking past each other here this
morning. I realize--I don't know how to put this into a
question, but I just was so frustrated to hear this, this
morning. Did you really mean, Mr. Delisle that it was
ridiculous to look historically whether the taxpayer gets the
money back and not at the rate that a bank would have gotten it
back?
Mr. Delisle. I think it is ridiculous to value risk when
you know what happened. That was my point of view. There is no
way, if you were going to make a bet on a coin toss and then
place your bet after you knew the results, there is no more
risk in the transaction. That is essentially the issue, but I
did say that I do support----
Mr. Holt. With all respect, you make a bet on a coin toss
after you have seen that coin tossed 1,000 times and you know
how biased it is, then you make your bet.
Mr. Delisle. And there is still some chance going forward.
Chairman Kline. The gentleman's time has expired.
Dr. Heck?
Mr. Heck. Thank you, Mr. Chairman.
Again, thanks all of you for being here and I approach this
debate from somebody who is still paying off their student
loans. I don't know how Dr. Roe did it, but I am still in
repayment and from somebody whose daughter just began her
student loan repayments, so I see it from both sides.
Mr. Delisle, you suggested that a fixed rate at some index
plus a percentage, I think you said 3 percent at the time of
issue, that would remain constant and I am assuming that is
even into the repayment period, so that is fixed. And I think
that potentially has some merit because I get periodic notices
of my student loan payment changing by plus or minus $5, but
there is always a question as to what the rate is going to be.
But as was mentioned by Dr. Lucas, if loans are disbursed
by semester, theoretically you could have a situation where you
might have eight or more student loan rates depending on how
long it takes you to complete your education. Is there a
downside to the fact that you are going to have eight or more
separate loans at different interest rates during the course of
your academic career and then into repayment?
Mr. Delisle. That is true. That is what would happen. Under
the proposal that we have discussed though, the rate would only
readjust once a year. So wouldn't happen in the middle of the
course of your school year, but theoretically, yes, you could
have multiple loans.
Now you can consolidate and them so that you get one
weighted average interest rate on the loan. But that is a
downside that people will have different rates, but there is
really no way around that. You can't give people fixed rates
that are based on something that are then always the same. They
are mutually exclusive qualifications on what you are trying to
do.
Mr. Heck. And at risk of bringing up the term ``moral
hazard'' again, but I believe that you mentioned moral hazard
in a context of a system that is actually encouraging people to
borrow more money than they need to borrow and if that is the
case, would you believe that there is also a moral hazard in
the loan forgiveness at 10 or 20 years and that the fact that
we are having people sign a contract or a promissory note with
the idea that after 10 or 20 years they may not be liable for
the amount that they signed for on the bottom line? Is that not
another potential moral hazard?
Mr. Delisle. Yes, and that is what the moral hazard is and
the moral hazard is not in the undergraduate programs because
we subject borrowers to a strict loan limit. They can't borrow
an unlimited amount of money, so on the front end--you have
either--you have capped it--essentially how much they can
borrow on the front end.
And if there are, you know, sort of well-founded public
policy rationales for having an undergraduate loan program and
Dr. Lucas mentioned them which is that these are people who you
won't get a fully functioning credit market.
So I you know, I reject a little bit the way that
Congressman Holt characterized my earlier testimony in that I
fully support a federal student loan program and one that makes
subsidized credit available to all students, but the issue is
on loan forgiveness and the Grad PLUS program where you can
borrow an unlimited amount of money and not have to pay it all
back any longer than 20 years and then it is forgiven.
That is where the moral hazard is and we have run the
numbers with a calculator that we developed at the New America
Foundation that is publicly available, and we have run
literally thousands of income scenarios and borrower debt
scenarios through this, and word will get out. This is a newly
available program but people will soon figure out that there is
really no difference in repayment between borrowing $100,000 or
$150,000. There is really no difference. So what would you do?
Mr. Heck. Mr. Draeger, you mentioned earlier that you
referred to the safety of staying within the federal student
loan system versus going outside to private loans. Can you
explain what safeties there are within the federal student loan
system that are not out with the private-sector loans?
Mr. Draeger. Essentially, the federal loan programs provide
safeguards and checks available for students and parents to
ensure that if their loan payment is ever more than their
income that they can remain within an income-based repayment
currently.
There is loan forgiveness so that people who enter aren't
deterred from entering public service or other nonprofit
service where they are not going to have a large income. There
are protections against death and disability so that your loan
debt isn't passed on to others in your family or doesn't
persist after you are permanently disabled.
So those are the protections that are available to
students. It is difficult to point those out to them when they
are seeing advertised rates that just aren't aligning up with
the federal interest rates.
Mr. Heck. And then if you could, just very briefly in the
time remaining, as the representative of more than 17,000
financial aid administrators, what singular change to the
federal financial aid system should be this committee's
priority to strengthen the federal student loan program?
Mr. Draeger. We think going back to something that was
mentioned earlier, we would love to see a comprehensive
discussion on reauthorization of the Higher Education Act
because it is difficult to make an adjustment to one program
and not expect unintended consequences in another. So the
piecemeal approach that has been taking place through budget is
less desirable than taking these as a whole.
Mr. Heck. Thanks, and I am hopeful that we will reauthorize
it before its 2014 expiration date.
Thank you, Mr. Chair. I yield back.
Chairman Kline. Thank the gentleman.
Mr. Courtney?
Mr. Courtney. Thank you, Mr. Chairman, for holding this
hearing.
And again, I want to thank Mr. Delisle actually for your
testimony which sort of walks through the history of Stafford
student loan and again, I think, you know, in response a little
bit to the Chairman's opening comments, the box we are in right
now in terms of fixed rate Stafford loans was created in 2002,
and I realize that there is frustration about the fact that the
cut to 3.4 percent in 2007 was kind of a piecemeal solution,
but the fact is, is it was an attempt to try to ameliorate the
fact that 6.8 by the time 2007 rolled around was out of sync
with the market which a number of the members have pointed out
and certainly that was the case last year.
I think frankly that was the power of the President's
message when he was on the road which is that people were
seeing home mortgage rates at 3 percent and kids were going to
see their rates go up to 6.8 percent. Hopefully we can find
that sweet spot to try and adjust the system.
But again, it is a challenge because of that 2002 budget
baseline that everything costs money when you are trying to
sort of fix this thing and--but I think again, we have got to
sort of step back and recognize there is a social value here
about making higher education affordable.
I was with the Connecticut Department of Labor last week.
We have about an 8 percent unemployment rate in our state, but
for people with 4-year degrees it is 4 percent. People who have
a high school degree it is 12 percent and that shows why, you
know, we, all of us as Americans have skin in the game in terms
of trying to come up with a system that again tries to create
opportunity because we all benefit from it and it is a social
benefit that we shouldn't allow arbitrary budget rules to
necessarily interfere with. We should try and sort of get it
right.
Mr. Delisle, your sort of concern about graduate education
being sort of too--lacking in skin in the game for students; I
am just trying to just sort of understand--we had a hearing a
couple days ago in the wake of Newtown where we had school-
based mental health testimony about the fact that there is a
crisis right now in terms of finding pediatric psychiatrists
and adolescent psychiatrists.
I mean, the cost of medical education, which is certainly
part of that graduate school tier that you are focused on is
too high for a lot of critical professions like pediatric
psychiatry to be affordable.
So if we have a policy for loan forgiveness that again is
trying to address critical workforce needs in this country,
which again, the mental health system we all know in the wake
of December 14, is desperate for help.
I mean, do you include those types of initiatives in terms
of criticizing loan forgiveness?
Mr. Delisle. Well, what we suggested is that the timing of
the loan forgiveness be somehow linked to the amount that you
borrowed. So if you borrow more, that the loan forgiveness
would happen after 25 years of payments rather than 20.
We haven't made any sort of statement on the loan
forgiveness provision for nonprofit government and religious
employees at 10 years of payments. Obviously, the graduate
students are going to benefit quite a bit from that because
they are going to have the most debt, but, I mean, I see that
as a slightly separate issue since that is a program that
essentially is providing a subsidy in one way or another to
people who are working in jobs that Congress believes are
valuable.
I do think, however, though, that it is a very, very un-
transparent way to provide a subsidy to those people. I am not
even sure that they know they are getting it.
Mr. Courtney. So for a medical student right now who maybe
would aspire to going into a specialty area that frankly does
not compensate as well as being an orthopedic surgeon or
whatever, you know, we have, I think, a duty to make sure that
we are helping people make that choice and loan forgiveness
when you are talking--I mean, medical students are coming out
with $200,000 or $300,000 in debt.
And if you are saying well be a, you know, pediatric
psychiatrist where you are going to be basically you know
living you know a pretty meager existence, that is just not an
option for people--and I--so where does that fit in to your
sort of critique?
Mr. Delisle. Well, I mean, I would say right now under
current policy, it is not an issue. I mean, and you have made
recommendations to changing current policies----
Mr. Courtney. Actually, the Affordable Care Act has a loan
forgiveness program for adolescent psychiatry and pediatric
psychiatry which expires this year.
Mr. Delisle. Well, the student loan program though is
permanently authorized, loan forgiveness for public service,
nonprofit----
Mr. Courtney. Wait a minute.
Mr. Delisle [continuing]. It is permanently authorized.
Mr. Courtney. But a pediatric psychiatrist is not a
nonprofit----
Mr. Delisle. Oh, if they are not--oh, so if they are
working in a for-profit, then they get loan forgiveness after
20 years.
Mr. Courtney. I mean, that is the way the professions are
structured.
Mr. Delisle. And then they--so if it is in a for-profit,
that they get loan forgiveness after only 20 years' payments--
--
Mr. Courtney. Well, I----
Mr. Delisle [continuing]. Regardless of their income.
Mr. Courtney. I just think, you know, that is a blind way
to----
Chairman Kline. The gentleman's time has expired.
Dr. DesJarlais?
Mr. DesJarlais. Thank you, Mr. Chairman.
There are so many things about this issue that are
troubling to me and I feel like we have just been kind of
missing the point as we talk about what the federal government
should do, what the interest rates should be, and that is just
the personal responsibility of the students.
I, like my colleague Dr. Roe, am a little more seasoned,
maybe not quite so much as him, but I graduated medical school
in 1991 with $120,000 in debt. My lowest interest on my loan
was 9 percent. My highest was 18 percent. And I couldn't have
gone to college and medical school without Pell grants and
loans so I am very much in favor of the programs, but they have
to be managed properly.
You know, this ship is sinking because of mismanagement and
educational institutions continue to raise costs because we
continue to throw money at that.
Pell grants just 6 years ago helped 5 million students at
the cost of $12 billion. Now we are helping 9 million students
at the cost of $43 billion. So that ratio isn't working. We are
subsidizing student loans. Student loans have almost become an
entitlement and as Mr. Draeger said, I don't think we are
educating students and Mr. Delisle also. There is no
disincentive for kids to be responsible.
It is very easy for us to be cavalier up here when we talk
about federal government or federal loans, but all you out
there are taxpayers, and the federal government is made up of
taxpayers. There aren't federal loans; there are taxpayer
loans. We are paying these loans and we should be able to get a
return on investment.
If you educate a student and they get a good job, then they
should be able to come back, pay off these loans, become a
taxpayer, and this should all work out, but it is not working
out because we are not looking at the real problem.
When a lot of us went to college, you went to sign up and
it was a 4-year plan. You were going to graduate in 4 years.
You took 16 credit hours. I have got a senior graduating right
now that is looking at his colleges, almost every one of them
starts at a 12-credit hour program. There is no way to finish
in 4 years.
So are we creating lazy kids? Have we gotten to the point
that we want so much for our future generations to have it
better than we did that we have handicapped ourselves and we
have done that through spending?
You look at the federal government debt, and it is at
almost $17 trillion and it is rising. These student loan debts
now surpass--I think as Dr. Roe said, auto loan and credit card
debt combined in this country, and we are making it a situation
where they don't have to pay these back in a reasonable
fashion.
When I got out of medical school with 18 percent interest
loans, I didn't want to go buy a new house and car, I wanted to
get those loans paid off and did so in 7 years because I was so
privileged, in my mind, to get those loans and have the ability
to go to college and go to medical school, but now I don't
think kids have that same level of education and we are failing
at a bunch of levels.
The institutions are failing by looking at the money they
can make with prolonged student participation and the
graduation rates are abysmal. I mean, I think that right now in
a 4-year institution, if you go back to the 2004 class, only 38
percent are graduating 4 years, 53 percent at 5 years, and 58
percent at 6 years.
So your taxpayer dollars are not being invested wisely and
the problem I think is in the education of the students, the
responsibility of the educational institutions, and then the
good proper parenting of the federal government to use the
money wisely.
If you all were private lenders right now, were going to
take over this program, you would look at it like we are all
looking at it today. You would look at it cannot lose money and
I think that that is what we need to be focusing on to fix this
problem.
So, Mr. Draeger--someone brought up earlier work-study too.
I did work-study and that was great. What if we shifted some of
this Pell Grant money into work-study and people actually
learned responsibility and worked?
When you go to college, you are poor; I mean, you are poor
in college and not just, I mean, that is actually part of the
fun of it. If you are not poor, then you have money and the
student loans shouldn't be an issue anyway.
So, you know, we have got to be realistic in what we
expect. We have kind of created this false sense of prosperity
in our country here today with the federal government and that
is why we have this debt problem.
So is there a way that we can start to push for a 4-year
program again, more responsibility, and is there a way to shift
study funds? Mr. Draeger and Mr. Delisle, you both had great
comments. I will give you just a few seconds to chime in on all
that philosophy.
Mr. Draeger. So to answer the question about can we do more
particularly with financial aid to push students through
college at a faster rate, one of the things that was rescinded
fairly recently without a lot of study was year-round Pell
grants; the ability for students to attend all the time
throughout the year as opposed to a traditional academic year.
And there were concerns about the cost of the program,
there were concerns about misestimates on how many students
would utilize it, but that was a good example of how we can
make financial aid more agile to meet the needs of modern
students, which is allow them to enroll ongoing so they can get
through their program at a lower cost and become productive
members of society.
Mr. Delisle. Well, one of the things that we proposed in a
paper that we recently released at The New America Foundation
is that you time limit loan eligibility. Right now, loan
eligibility is just an aggregate and annual number mostly
pulled out of thin air. So you could borrow essentially for 7
years to complete a 2-year degree.
And that is an area where you might want to align the
amount you can borrow or for how long you can borrow with the
types of programs you are pursuing.
Chairman Kline. The gentleman's time has expired.
Ms. Bonamici?
Ms. Bonamici. Thank you very much, Chairman Kline and
Ranking Member Miller, for holding this important hearing
today.
I have a group of students visiting today from the great
city of Hillsboro, Oregon, they are with the Mayor's Youth
Advisory Council, and I assure you they are very interested in
this topic, so thank you.
Before I ask my question, we have a letter here from Robert
Reischauer, the former director of the CBO, stating opposition
to the fair value accounting, and I would like to make sure
that that is entered into the official record.
[The information follows:]
Robert D. Reischauer,
5509 Mohican Road,
Bethesda, MD 20816, January 23, 2012.
Hon. Chris Van Hollen,
1707 Longworth HOB, Washington, DC 20515.
Dear Representative Van Hollen: I am writing in response to your
request for my views on the desirability of adopting ``fair value
accounting'' of federal direct loan and loan guarantee costs in the
budget as proposed in H.R. 3581. I strongly oppose such a change.
The accounting convention used since enactment of the Credit Reform
Act of 1990 already reflects the risk that borrowers will default on
their loans or loan guarantees. Under Credit Reform, costs already are
based on the expected actual cash flows from the direct loans and
guarantees (with an adjustment to account for the timing of the cash
flows). H.R. 3581 proposes to place an additional budgetary cost on top
of the actual cash flows. This additional cost is supposed to reflect a
cost to society that stems from the fact that, even if the cash flows
turn out to be exactly as estimated, the possibility that the credit
programs would cost more (or less) than estimated imposes a cost on a
risk-averse public. Under the proposal, this extra cost would be the
difference between the currently estimated cost of direct loans and
loan guarantees to the federal government and the cost of those loans
and loan guarantees if the private market were providing them.
A society's aversion to risk may be an appropriate factor for
policymakers to take into account in a cost-benefit assessment of any
spending or tax proposal but adding a cost to the budget does not make
sense. Nor is clear that the cost of societal risk aversion should be
based on individual or institutional risk which is what the private
market reflects. Inclusion of a risk aversion cost for credit programs
would be inconsistent with the treatment of other programs in the
budget (many of which have costs that are at least as uncertain as the
costs of credit programs--for instance, many agriculture programs and
Medicare) and would add a cost element from a traditional cost-benefit
analysis without adding anything based on the corresponding benefit
side of such an analysis. It would also make budget accounting less
straightforward and transparent.
H.R. 3581 represents a misguided attempt to mold budget accounting
to facilitate a cost-benefit analysis, with the result that neither the
budget nor the cost-benefit analysis would serve their intended
purposes well.
I would be glad to discuss these issues in more detail if you would
like. With best wishes.
Robert D. Reischauer.
______
Chairman Kline. Without objection.
Ms. Bonamici. Thank you, Mr. Chairman.
I appreciate the discussion that we have had about
financial literacy and making sure that students and their
families understand what they are undertaking when paying for a
college education. And Mr. Draeger you talked about disclosure
and you have your big, big binder with disclosures in front of
you.
But we have also talked about what has happened in the
financial markets and drawing some analogies there, certainly
with mortgage brokers having more of a fiduciary responsibility
to make sure that their customers or clients get the best deal
possible. I think we need to have a discussion about making
sure that students really understand what is the best package
before them and it is my understanding that at the height of
the private loan market in 2007 and 2008 about half of the
undergraduate private loan borrowers still had capacity to take
out additional federal loans.
So I wonder how we could better ensure that students
understand the differences between private and federal loans
and ensure that they are really made aware if there are federal
loans that are available to them, that they have that
information, that they really exhausted all of the federal
options.
And Mr. Draeger, if you would like to take that, please.
Mr. Draeger. Be happy to. I think you will find widespread
agreement amongst institutions, student advocates, students,
and even loan providers that the best way to do that is to
require school certification on private education loans.
That no private education loan should be made without the
knowledge and the certification of a financial aid office; that
the student is indeed enrolled, and if they are considering a
private loan that they fully understand the terms and
conditions and disparities between the private education loan
and the federal loans.
Ms. Bonamici. And how much more work is there to do
probably some institutions are already doing that but not all.
Mr. Draeger. The work would be minimal because they are
already doing this on all federal loans. So it is basically a
duplication of a process that they have already mastered and
one that I think most private education lenders, reputable
ones, would welcome as well because they want to make sure
those students are in fact enrolled for the period of time that
they are taking the loan for.
Ms. Bonamici. Thank you so much.
I wanted to turn to Dr. Mercer. I appreciate your attention
to the issue of access and completion because completion is an
important part of getting through our investment, and our
taxpayers' investment in education.
I had to Oregonians visit my office yesterday and they both
went through school with the support of Trio programs and they
talked about how TRIO had changed their lives and really played
a critical role in making sure that they ultimately succeeded.
So access was crucial, but they wouldn't be here today
without the support of the programs that break down the
barriers and help them continue and complete their studies.
So Dr. Mercer, what are the biggest barriers to completion
that college students face? And what role do loans play in the
challenges to degree completion? And if you could distinguish
between private loans and federal loans in talking about that.
Thank you.
Ms. Mercer. Thank you. I think as one of the panelists
indicated before, most students generally report that cost of
going to school as the biggest challenge that they tend to
experience and our conversation today has largely focused
exclusively on obviously the acquisition of loans and the
impact that that has.
What we haven't really touched upon obviously is the role
of grant aid and how that makes a difference as well as how you
can incorporate an appropriate amount of work into a student's
schedule to ensure because there is research that substantiates
that an appropriate amount of work actually does encourage
students to move through and complete degree.
The pivotal part and as you mentioned, TRIO, is the lack of
the institution's role in terms of not just counseling because
that is obviously is a part, but supporting students to move
through the system. By definition, most of the individuals who
are receiving this aid have need. Often times they come with
other indicators of risk such as probably low preparation or
being married, having children, things that make it more
difficult for them to move through the system and not less.
So failing to provide them with support outside of just
counseling and understanding the amount of loans one is
borrowing is really a critical piece of that. And that is one
of the parts in the report that the alliance recently released
talking about student aid, is that it needs to be comprehensive
and there needs to be appropriate amount of institutional
supports built in to make sure that students are able to move
through the system.
With respect to loans, I would say loan volume obviously
and keeping that appropriately managed for students as they
move through the system is critical whether that be private or
the federally supported program. I am not sure the distinction
really exists except for the fact that there are many
safeguards built into the federal program that don't exist in
the private market.
Ms. Bonamici. Thank you.
Chairman Kline. The gentlelady's time has expired.
Mr. Grijalva?
Mr. Grijalva. Thank you, Mr. Chairman. I appreciate the
hearing. I appreciate the time.
I am still trying to get my head around some concepts that
I heard today. That irrespective of the amount of money you
borrow or the interest rate that you still ended up paying the
same amount. I am going to have to work on that one a little
bit.
And also what a horrible and ridiculous idea that students
might get a better deal from a government administered loan as
opposed to a private sector loan. Those two concepts are things
that I am still having trouble understanding fully; or why
there is opposition.
Mr. Draeger, you recommended I think that colleges be--you
are recommending that colleges be given greater authority, to
limit students eligibility for loans, and the monitoring of
those loans; however, your organization's recent RAD white
paper said, and I quote--``Restrictions on federal loan
borrowing could drive students to borrow under less
advantageous private loan programs, discourage some students
from enrolling, or cause more enrolled students to drop out due
to lack of funds.''
Given that statement in your white paper, what evidence can
you point to that would outweigh the risks of forcing all of
those three bad consequences and the statement about the
limitation that you have been talking about.
Mr. Draeger. I appreciate you bringing up our ``Reimagining
Aid Delivery and Design'' paper where we put forth ideas that--
--
Mr. Grijalva. I know, answer that part of the question.
Mr. Draeger. Well, my answer is that we recognize the
limitations of our own proposals. If you had a requirement for
private student loan certification, then all of that would be
running through the financial aid office and you could mitigate
the risk of students going into the private market without the
knowledge of----
Mr. Grijalva. And in that report, if I may, sir--and in
that report you also I am sure have provided data documenting
the over borrowing problem that has been mentioned here today,
that the committee would--that you could share with the
committee. Do you have that data?
Mr. Draeger. Sure. We can submit that.
Mr. Grijalva. Okay. That would be great.
I also--one kind of general question, you talked about the
13 percent default and the focus being on the graduate student,
let me, for anyone that wants to respond, in that 13 percent
default on loans, are you making a distinction between for-
profit colleges and not-for-profit colleges and public colleges
and institutions of higher learning and community colleges?
Is there a distinction being made and is the gravity of the
default higher in one area than in another? And if so, what
restrictions or strategies in terms of student loans would you
recommend to this committee in order to bring let's say--let me
guess that the for-profit college has a higher default rate--
how would you bring those----
Let me begin with Dr. Mercer, if she has a comment.
Ms. Mercer. I am sorry, from what my limited research on,
in this area, is that default rates do generally tend to be
higher at for-profit institutions. Often times, you have to
look at the reasons why students are defaulting on their loans.
Obviously, a lot of it is simply that students don't have
money whether they are aware or knowing that they should----
Mr. Grijalva. If I may, doctor. I think a part of it is
that the point that the revenue source is part of the profit
line. And so recruitment strategies and obligating students to
a certain amount of loans does increase the likelihood, and as
all the witnesses said, you know, pre-counseling, post
counseling in terms of loan acquisition is very important
points that have come up in this hearing, but when the bottom
line is at stake here, does that ethic follow as closely as it
should be?
Ms. Mercer. Right. There probably needs to be much greater
attention paid to how these students are being selected and
moving through the system and the aid that they are receiving.
I think you also have to consider the quality of degrees
that students are receiving, or if they are receiving degrees
at any institution, to ensure that the amount of loan that they
have assumed positions them once they complete, if they
complete, to be in a position to be able to repay.
Mr. Grijalva. I don't know how much time I have. I don't
think I have much time.
Thank you, Mr. Chairman. I yield back.
Chairman Kline. Thank the gentleman.
Mr. Polis?
Mr. Polis. Thank you. Am I the last speaker, Mr. Chair?
Chairman Kline. You are the cleanup batter, sir.
Mr. Polis. Excellent. It is a long-standing tradition of
this committee to save the best for last. So I am very exalted
to be in this position.
My first question is about online education. My district is
the home to the global program of Colorado State University,
University of Colorado also has an online programs; students
across the country.
One concern I have is that federal loan programs are still
oriented towards the bricks and mortar model with regard to
cost of living and other requirements which aren't really
applicable for online universities.
How do we make sure that federal loans for online courses
are treated the same as loans for traditional classes and don't
deal with them in a discriminatory way just because some of
their cost factors are different? I will open it up to whoever
wants to comment on it.
Mr. Draeger?
Mr. Draeger. Can I ask one clarifying question? Do you mean
discriminated in terms of limiting them, making them smaller
even though they still have educational expenses?
Mr. Polis. Exactly. Currently, a component of the loans are
designated for cost-of-living which is not necessarily an
appropriate restriction for online; however, they have other
expenses that are not appropriate for the off-line.
Mr. Draeger. Right. So I think there is an idea that if you
are taking an online course that doesn't require as much time,
and so therefore you must be working a full-time job and
therefore don't need living expenses built into your cost of
attendance.
The truth of the matter is, a rigorous online course is
going to require the same amount of time that a blended or
brick-and-mortar course would. So I think it is important that
we continue to examine online courses in the context of these
folks may not be doing a full-time job and a full online course
and be able to do those things simultaneously just like brick-
and-mortar.
Mr. Polis. So would you recommend considering either making
the definition of some of the cost of living requirements more
general or simply having less restrictions on it to ensure it
doesn't discriminate against innovative curriculum delivery
methods?
Mr. Draeger. My sense is that that is--some of those
decisions are best left at the institution, which is why we are
asking for broader authority to be able to adjust some of
those--the limits of borrowing based on academic program or
enrollment so that schools can take a look at their student
populations and adjust accordingly.
Mr. Polis. And the next question is for Mr. Delisle. To
avoid accountability and oversight, I have heard of several
examples where colleges might be masking high default rates by
grouping campuses for purposes of reporting that a high rate at
one campus might be masked by a low rate at another. What
should be done to prevent colleges from using this kind of
tactic to evade responsibility and prevent transparency around
student debt?
Mr. Delisle. Well, we actually prefer repayment rate to
default rate for----
Mr. Polis. Whatever term you use.
Mr. Delisle [continuing]. Assessing because it is going to
show you even though people who don't default, but graduate
with a high debt to income ratio or are struggling to repay
their loans in that their loan balance is growing and not
shrinking, which is something we allow to happen in the student
loan program and still be in good standing.
We think that those types of measures are more robust and
better accountability measures than the cohort default rate.
And I should point out that this--the cohort default rate that
everybody is referencing is the 2-year and sometimes 3-year
cohort default rate--is not the lifetime default rate on these
loans. The lifetime default rate on federal student loans is
somewhere around 20 percent.
Mr. Polis. But the issue I am trying to get at is how do we
avoid masking through combining campuses so that it is reported
in a way that may look optimal on paper but may mask
deficiencies at some campuses vis-a-vis others.
Mr. Delisle. I mean, it is something I guess the Department
of Education would have to look at and how they allow
institutions to define with what is their ID, what is the
actual jurisdiction of a particular campus, but I am sure that
they are able to get around that in some way.
Mr. Polis. Any other comments on that issue?
And finally, last year I introduced a ``Know Before You Owe
Act'' which would require private lenders to certify borrowers
are enrolled in school and also it would require higher
education institutions to inform students about their federal
financial availability and eligibility. What we found is that
some students were actually buying--while they had extra
federal capacity, were still borrowing at higher commercial
rates.
Briefly, for Mr. Draeger for the remainder of the time, how
can we help students who are stuck in private loans make sure
that they are aware of the opportunities that exist in low-
interest federal loans?
Mr. Draeger. The best way to do that is by ensuring that
the financial aid office has a comprehensive understanding of
all of the offerings that a student has. That includes from the
private markets. So a private student loan certification would
ensure the financial aid office is brought into that decision.
Mr. Polis. Thank you.
And I yield back.
Chairman Kline. I thank the gentleman. I want to thank the
witnesses for excellent testimony in answering our questions. I
think you cleared up some things and frankly for some of us, we
are more confused. But that is okay. We are going through a
process here where we are addressing a problem that is
increasingly recognized as a problem for our country, for
students, for schools, and so we are going to continue to press
on with this.
Mr. Tierney, any closing remarks?
Mr. Tierney. Just very briefly, Mr. Chairman. Again, I want
to thank you for having this hearing and beginning the
discussion.
I want to thank all of our witnesses for their
contribution. It was valuable to all of us. We shouldn't lose
sight of the fact, obviously, that were really looking at
students and their families and trying to reach a policy goal
here of graduating people with the appropriate credentials and
abilities to help drive our economy forward and to give us a
competitive advantage amongst other countries on that and to be
innovative and creative on that.
So in that context, in the context of what is a good
investment for this country and for the taxpayers, is I think
the basis which we ought to consider all of the things that we
heard today and I think we made a good start.
So thank you.
Chairman Kline. Thank the gentleman.
There being no further business, the committee stands
adjourned.
[An additional submission of Chairman Kline follows:]
Prepared Statement of the Education Finance Council
The Education Finance Council is the trade association representing
nonprofit and state agency student loan organizations across the
country. EFC commends the Committee for examining the current federal
student aid system in order to benefit students and families. The
members of EFC share this goal and believe there are several short- and
long-term solutions to improve the system. In the short term, the
student loan experience for borrowers can be enhanced through
improvements to the Not-for-Profit (NFP) servicing program. Over the
long term, the PLUS loan programs must be eliminated so students can
choose consumer friendlier loans and fair value federal budget
accounting must be implemented to provide an accurate account of the
impact of federal student lending on the federal deficit, and
ultimately, taxpayers.
The NFP servicing program, created by Congress, allows eligible
not-for-profit student loan organizations to provide high quality loan
servicing under the Direct Loan Program. NFP servicers that are under
contract have been working closely with staff from Federal Student Aid
and are taking extraordinary steps to ensure their borrowers are
getting the best possible loan servicing experience. Customer service
has been a focus of all NFP servicers and despite the difficult
accounts they have been allocated to date, the NFP servicers have
received customer service survey results and produced delinquency
results that approximate those of the other, larger servicers. The
benefits borrowers and the federal government are realizing can be
enhanced by allocating more loans to the NFP servicers. Increasing
allocation of loans, including newly originated Direct Loans, provides
a reliable source of accounts NFPs can receive so that they can supply
the high quality of service that Congress expects them to bring to more
Direct Loan borrowers. The federal government benefits by increasing
the allocation because any additional accounts beyond the initial
100,000 allocation means pricing equal to what is paid to Title IV
Additional Servicers.
Improving the NFP serving program provides near-term efficiency for
the Direct Loan program, but Congress must look beyond programmatic
enhancements to the current federally-based student aid system and
consider significant policy changes to truly create a better student
aid system. Congress should eliminate both the graduate and parent PLUS
programs and encourage schools to shift borrowing to consumer-friendly
programs offered by nonprofit and state agency providers. As college
costs continue to climb, students and parents need to be provided with
alternatives to high interest rate loan products, such as the PLUS
programs. Current policies that favor steering borrowers who need
reasonable financing options beyond grant aid and Stafford loans into
7.9 percent PLUS loans are depriving them of options that will lower
their debt burden. Nonprofit alternative loan programs feature fixed
interest rates below the percent rate for PLUS loans and have consumer-
friendly features such as low or no fees, institutional certification
and flexible repayment terms. Moreover, nonprofit and state agency
alternative loan programs have default rates that range from less than
one percent to three percent. Finally, information available on
nonprofit and state agency loans programs far exceeds what the
Department provides for PLUS loans. For example, as the Chronicle of
Higher Education reported ``U.S. Department of Education doesn't know
how many parents have defaulted on [PLUS loans]. It doesn't analyze or
publish default rates for the PLUS program with the same detail that it
does for other federal education loans.'' \1\ By contrast, nonprofit
and state agencies actively monitor and disclose default rates and
employ a range of steps--including reducing the amount borrowed from
the outset, to ensure that students and parents are not taking out more
than they can handle.
---------------------------------------------------------------------------
\1\ The Parent PLUS Trap, accessed March 11, 2013 at http://
chronicle.com/article/The-Parent-Plus-Trap/134844.
---------------------------------------------------------------------------
Finally, Congress must accept fair value rather than the current
Federal Credit Reform Act (FCRA) method of estimating costs and savings
for federal student aid programs. Adopting fair value accounting will
allow policy makers to accurately evaluate new student aid programs
that provide value to students, parents and taxpayers.
The debate about government accounting for student loans is not
new. Dating back to 2005, the flaws of estimating costs under the FCRA
method have been detailed. GAO pointed out:
``Additional federal costs and revenues associated with the student
loan programs, such as federal administrative expenses, some costs of
risk associated with lending money over time, and federal tax revenues
generated by both student loan programs are not included in subsidy
cost estimates.\2\
---------------------------------------------------------------------------
\2\ GAO-05-874 `Federal Student Loans: Challenges in Estimating
Federal Subsidy Costs', October 26, 2005/
---------------------------------------------------------------------------
The Kansas City Federal Reserve Bank has acknowledged the benefits
in utilizing fair value accounting to assess the cost to the federal
government of the Direct Loan program. In their 2012 report Student
Loans: Overview and Issues, Kelly D. Edmiston, Lara Brooks and Steven
Shepelwich point out:
``Fair value estimates, which make additional adjustments for risk
and also include administrative costs, provide a more complete picture
of the cost of federal student loan programs. Fair value estimates
calculated in March, 2010 CBO report projected a net cost of about 11
percent of lending for 2012. New direct loan volume is projected to be
$121 billion in FY2013, yielding a net budget cost of $13.3 billion.
About $28 billion in consolidation loans is expected, which would
likely add an additional $3 billion. Using fair value accounting
principles, the student loan program would account for about 0.4
percent of the president's FY2013 budget outlay request of $3.8
trillion.'' \3\
---------------------------------------------------------------------------
\3\ Student Loans: Overview and Issues, RWP 12-05 at p. 15.
---------------------------------------------------------------------------
Fair value accounting gives Congress the ability to effectively
consider alternatives to the Direct Loan program including securitizing
loans held by the government and allowing the private sector to
originate and service loans to credit worthy borrowers.
There is room for much improvement in the federal student aid
system. Programmatic changes to certain elements such as the NFP
servicer program can provide immediate benefits, however broad policy
changes such as the elimination of the PLUS programs and a shift to
fair value accounting are needed to create a fundamentally better, more
sustainable system. EFC members have played a significant role in
helping students and families finance higher education for decades and
stand ready to help coordinate and implement beneficial changes to the
student aid system.
______
[Additional submissions of Mr. Draeger follow:]
[The report, ``Reimagining Financial Aid to Improve Student
Access and Outcomes,'' may be accessed at the following
Internet address:]
http://www.nasfaa.org/advocacy/RADD/RADD_Full_Report.aspx
______
[The report, ``Report of the NASFAA Task Force on Student
Loan Indebtedness,'' dated February 2013, may be accessed at
the following Internet address:]
http://www.nasfaa.org/EntrancePDF.aspx?id=13507
______
[The report, ``Report of the NASFAA Award Notification and
Consumer Information Task Force,'' dated May 2012, may be
accessed at the following Internet address:]
http://www.nasfaa.org/EntrancePDF.aspx?id=9992
______
[Questions submitted for the record and their responses
follow:]
U.S. Congress,
Washington, DC, April 3, 2013.
Mr. Justin Draeger, President and CEO,
National Association of Student Financial Aid Administrators, 1101
Connecticut Avenue NW, Suite 1100, Washington, DC 20036-4303.
Dear Mr. Draeger: Thank you for testifying at the March 13, 2013
hearing on ``Keeping College Within Reach: Examining Opportunities to
Strengthen Federal Student Loan Programs.'' I appreciate your
participation.
Enclosed are additional questions submitted by members of the
committee after the hearing. Please provide written responses no later
than April 16, 2013 for inclusion in the final hearing record.
Responses should be sent to Amy Jones or Emily Slack of the committee
staff who can be contacted at (202) 225-6558.
Thank you again for your important contribution to the work of the
committee.
Sincerely,
John Kline, Chairman,
Committee on Education and the Workforce.
representative richard hudson (r-nc)
1. There has been a lot of talk about a ``student loan bubble.'' Do
you think we are about to see the collapse of student loan programs
because too many people are borrowing to pay for college? What would
the collapse of this bubble mean for the economy and for the students
who are preparing for college now?
representative martha roby (r-al)
1. I know financial aid administrators are concerned about the
impact of sequestration on student financial aid programs, particularly
right now as campuses are starting to put together financial aid
packages for incoming students. How forthcoming has the Department of
Education been with the campus community about the impact of the cuts?
representative raul grijalva (d-az)
1. NASFASS'S Debt Task Force recently recommended allowing colleges
to limit students' eligibility for loans based on things like their
program length or program type and allowing professional judgment to
approve increased borrowing on a case-by-case basis (flipped from
current policy that allows for limiting borrowing on a case by case
basis). However, NASFAA's recent RADD white paper said ``Restrictions
on federal loan borrowing could drive students to borrow under less
advantageous private loan programs, discourage some students from
enrolling, or cause more enrolled students to drop out due to lack of
funds.'' What evidence can you point to that would outweigh the risk of
forcing students to drop out, not enroll, or turn to riskier forms of
borrowing?
______
Mr. Draeger's Response to Questions Submitted for the Record
representative richard hudson (r-nc)
1. There has been a lot of talk about a ``student loan bubble.'' Do
you think we are about to see the collapse of student loan programs
because too many people are borrowing to pay for college? What would
the collapse of this bubble mean for the economy and for the students
who are preparing for college now?
Draeger: The size of the mortgage market at the height of the
housing bubble in 2006 dwarfs the current student loan market. Using
rough estimates, the current student loan market is valued at roughly
$1 trillion. At the height of the housing boom in 2006, the residential
housing market was worth $22 trillion--more than 22 times larger. When
the mortgage bubble burst, it lost nearly $8 trillion in value (Baker,
2012). Even if every borrower defaulted on his or her student loan at
the exact same time (an impossibly unlikely scenario), it wouldn't have
the same impact on the economy as the housing collapse.
However, it stands to reason that as students and parents take on
more debt to pay for college, they could be delaying other financial
decisions such as purchasing a home, buying a car, or otherwise
participating in the economy through consumer purchases. Still, federal
student loans bet on the likelihood that the borrower's financial
circumstances will improve through the education or training being
financed, and that as a result the borrower will repay the loan over
time. For most students and for society in general, this is a good risk
to finance.
Systemic economic risk is further reduced by the fact that federal
loans make up the large bulk of the student loan market and collection
rates are much higher than private sector collections. As long as the
program contains reasonable and effective repayment terms like income
based repayment--which act as safety valves--the loan program should
remain healthy. The loss of the student loan program would be
disastrous: without student loans, higher education in this country
would be impossible for many low- and middle-income students. The loss
of a broadly educated work force is untenable in today's world economy.
But more can be done to strengthen the programs and protect
borrowers. Underwriting standards might need to be examined for parent
borrowers to see if they provide adequate protections to both the
borrower and the government as lender. For undergraduate borrowers,
there are loan limits in place to ensure borrowers stay within
permissible amounts, but aid administrators need broader authority to
limit indebtedness for students whose borrowing is not-on-pace with
their program. Such a proposal is included in my written testimony.
REPRESENTATIVE MARTHA ROBY (R-AL)
1. I know financial aid administrators are concerned about the
impact of sequestration on student financial aid programs, particularly
right now as campuses are starting to put together financial aid
packages for incoming students. How forthcoming has the Department of
Education been with the campus community about the impact of the cuts?
Draeger: Financial aid administrators are always concerned when
cuts are made to the federal student aid programs, including the cuts
imposed by sequestration. The impact of sequestration has been
especially difficult given the timing--some of the scheduled cuts were
occurring at the same time aid administrators were delivering award
letters to new and continuing students based on non-sequester estimates
previously delivered by ED.
It is unclear to us why OMB did not release more specific estimates
that would have allowed ED to provide schools allocations at a post-
sequester amount given that the sequester was in the law and everyone
knew its effective date. In fact, institutions across the U.S. relied
on rough estimates created by us to construct their awarding packages.
If NASFAA could create fairly reliable estimated campus-based cuts
assuming sequestration, certainly the government could have done the
same.
Since the sequester went into effect March 1, ED has provided
regular communication and guidance about how to implement sequester
cuts and/or how to temporarily proceed until final implementation
instructions could be made. ED has also been responsive to NASFAA's
requests and questions since March 1.
REPRESENTATIVE RAUL GRIJALVA (D-AZ)
1. NASFASS'S Debt Task Force recently recommended allowing colleges
to limit students' eligibility for loans based on things like their
program length or program type and allowing professional judgment to
approve increased borrowing on a case-by-case basis (flipped from
current policy that allows for limiting borrowing on a case by case
basis). However, NASFAA's recent RADD white paper said ``Restrictions
on federal loan borrowing could drive students to borrow under less
advantageous private loan programs, discourage some students from
enrolling, or cause more enrolled students to drop out due to lack of
funds.'' What evidence can you point to that would outweigh the risk of
forcing students to drop out, not enroll, or turn to riskier forms of
borrowing?
Draeger: The passage being referenced from our Bill and Melinda
Gates Foundation-funded Reimagining Aid Delivery and Design paper was
offered as a ``possible unintended consequence'' of giving aid
administrators the authority to limit loans for specific categories of
students. We offered this thought as part of making an intellectually
honest policy argument that examines all sides of an issue. The
simplest and most effective way to deal with such an unintended
consequence is to require that all private education loans be certified
through the financial aid office just like federal loans. That would
ensure students are having conversations with financial aid
administrators before dipping into the private market and would further
ensure that students borrow within the federal loan programs before
turning to riskier private loans.
REFERENCES
Baker, D. (2012, March 11). Student Loan Bubble. Retrieved From http://
www.cepr.net/index.php/blogs/beat-the-press/student-loan-
bubble-nonsense-peter-peterson-and-the-washington-post-mess-up-
on-the-economy-yet-again
______
U.S. Congress,
Washington, DC, April 3, 2013.
Mr. Jason Delisle, Director,
Federal Education Budget Project, the New America Foundation, 1899 L
Street, NW, Suite 400, Washington, DC 20036.
Dear Mr. Delisle: Thank you for testifying at the March 13, 2013
hearing on ``Keeping College Within Reach: Examining Opportunities to
Strengthen Federal Student Loan Programs.'' I appreciate your
participation.
Enclosed are additional questions submitted by members of the
committee after the hearing. Please provide written responses no later
than April 16, 2013 for inclusion in the final hearing record.
Responses should be sent to Amy Jones or Emily Slack of the committee
staff who can be contacted at (202) 225-6558.
Thank you again for your important contribution to the work of the
committee.
Sincerely,
John Kline, Chairman,
Committee on Education and the Workforce.
representative richard hudson (r-nc)
1. There has been a lot of talk about a ``student loan bubble.'' Do
you think we are about to see the collapse of student loan programs
because too many people are borrowing to pay for college? What would
the collapse of this bubble mean for the economy and for the students
who are preparing for college now?
______
Mr. Delisle's Response to Questions Submitted for the Record
REPRESENTATIVE RICHARD HUDSON (R-NC)
Nearly all outstanding and newly-issued student loans are federal
loans. It would be hard to imagine that program ``collapsing'' because
the funding for it is provided directly by the federal government. That
is, this source of financing for higher education would only become
unavailable if lawmakers made it so. In that regard the student loan
program cannot collapse unless Congress and the president enacted a law
forcing it to collapse. I see that issue as a separate one from whether
students are borrowing too much to pay for college.
Nevertheless, rising levels of outstanding total federal student
debt (somewhere around $1 trillion, nearly all federal) have raised
concerns that students are borrowing too much and that will have
economy-wide effects. I believe that matter is best discussed by
focusing on undergraduate students and graduate students as two
separate groups.
For undergraduates, while are greater share of students are leaving
school with some debt, the amount of debt that they leave with on
average has not risen in real, inflation-adjusted terms by much in the
past 10 years. The figure is somewhere around $25,000 today.
Furthermore the federal government limits the amount undergraduates can
borrow in federal loans to about $30,000 for dependent undergraduates.
A borrower could make payments as low as $143 per month on a loan
of $25,000 with a 6.8 percent interest rate under the consolidation
repayment plan. His payment could be lower, even $0, under the Income
Based Repayment plan, and he can postpone payments for up to 3 years
under the forbearance terms if he is having financial difficulties. In
short, an undergraduate with the average amount of debt can make very
affordable monthly payments on his loan under the federal student loan
program. They are hardly figures that one would equate with a bubble.
Graduate student debt is a different story. Over 30 percent of
outstanding and newly-issued loan volume is for graduate and
professional education (although only 10 percent of borrowers are/were
graduate students). These borrowers can accumulate very large balances
mainly because the federal government allows them to borrow to finance
the entire costs of their educations as defined by institutions of
higher education, including living expenses. There is no annual,
aggregate, or lifetime limit. When we hear stories about graduates with
$100,000 in student loan debt, but earnings prospects that cannot
service such a debt level, the stories are almost always about graduate
students, not undergraduates. This is where there is a bubble in the
student loan market--but it is not a loan bubble, it is a cost bubble.
Unlimited federal student loans let graduate schools charge sums that
are not justified given the future incomes that their graduates may
earn.
I should stress, however, that this system will not necessarily
collapse. Again, the federal government makes the graduate student
loans available as an ongoing entitlement. Absent a change in law,
students can continue to borrow at current rates. Worse yet, recent
changes to the Income Based Repayment program (Pay As You Earn), which
allows for low payments and unlimited loan forgiveness, gives students
an incentive to borrow more, not less. That suggests that the graduate
school cost bubble will not burst anytime soon.
______
[Whereupon, at 12:11 p.m., the committee was adjourned.]