Senate HELP Committee Hearing, “Strengthening the Federal Student Loan Program for Borrowers”

Prepared by:  Wes Huffman (whuffman@wpllc.net)

March 28, 2014

The Senate Committee on Health, Education, Labor and Pensions held a hearing on March 27^th on “Strengthening the Federal Student Loan Program for Borrowers.”   Attending the hearing were Chairman Harkin (D-IA), Senator Warren (D-MA), Senator Baldwin (D-WI), Senator Franken (D-MN), Senator Murphy (D-CT), Senator Murray (D-WA),  and Senator Alexander (R-TN).

In his opening comments Chairman Harkin briefly reviewed the recent history of the federal student loan program, highlighting the creation of income based repayment in 2007 and the termination of new FFEL originations. Harkin also noted that all four Title IV servicers declined invitations to testify at the hearing.    He also commented that statistics show that low-income high-performing students have only a 20% chance of success in college while high-come, low-performing students have an 80% chance.

Harkin also commented that financial education was inadequate at colleges and cited an unnamed “young professional” who indicated that she had not received counseling/education that would have helped her understand her obligations.  The Chairman said he knew Iowa State was doing some great work in financial literacy and expected many other institutions were as well, but he also said this was a critical aspect of the loan process which was lacking at many institutions.

Finally, Harkin commented that collection agencies earn more than $1 billion per year on student loan collections.  He said that an agency that sends one letter that results in repayment of a loan may earn between 18-20% and suggested this was not fair.  He and other Democrats on the Committee would continue to raise issues with collection costs and one witness, Deanne Loonin, called for the removing agencies from the federal loan programs.

Senator Alexander started his comment by comparing collection agency fees structures to those of trial lawyers.   He noted that collectors may engage in substantial efforts to collection from some borrowers that result in no fees being earned.

Alexander then cited a number of statistics that he intended to “put loans into perspective,” indicating that the perception of what college costs is higher than it actually is and that public beliefs on student loan debt are greater than reality.   Alexander also stated that the net price at many schools was dramatically below what students actually pay.  He said that students at community colleges may receive aid that actually exceeds tuition and fees.   He noted the net cost of four year private colleges is only about $12,000 and that the net cost at for-profits is only $15,000.

Alexander also suggested that the occurrence of over-borrowing by students may result from federal policy.  He noted the policy of allowing half-time students access to full loan amounts.  He also suggested that schools do not have the right to reduce loan amounts where the aid administrator perceives a lower need for loans.

Senator Elizabeth Warren submitted statements from Senators Durbin (D-IL) and Reed (D-RI) for the official hearing record

Panel I

James Runcie, Chief Operating Officer of the Department of Education noted that FSA had successfully administered the full transition to 100 percent Direct Loans.  He also noted that loan volume had increased 700% since 2009.   Runcie also commented that current contracts supporting the Direct Loan program are “competitively based” as a means of assuring the highest quality services for borrowers.

Runcie noted that in 2012, 22% of students in repayment were using an income based repayment option.  He also outlined efforts to raise awareness of repayment options and reviewed the new Direct Loan consolidation web page intended to simplify that process.

Chairman Harkin asked Runcie about collection agency contracts.  He suggested collection agency fees were too high.   Runcie responded by noting that fee structures are consistent with industry practices.

Senator Alexander noted that the cost of administering the FDSL program had doubled since 2009, by $700 million. Runcie noted that volume had increased 700 percent and that per unit costs for origination and servicing had actually decreased.

Alexander also asked Runcie why more borrowers had not responded to the public awareness campaign intended to get more students into IBR repayment schemes.    Alexander also asked Runice about whether some students at community colleges were applying for loans just to get money and did not really need the funds.

Senator Warren suggested that an interest rate of 2.5% would represent a “break-even” level for the Direct Loan program.   She also asked Runcie “where the profits go” on Direct Loans.  Runcie replied that they go to fund the government generally.

Warren also questioned why Sallie Mae is still receiving government contracts, including the recent renewal of the Title IV servicing contract.  Runcie replied that the renewal was part of the overall renewal for all of the TIVAs and the company had not run afoul of any laws or rules that would prevent it from obtaining contracts from the Department.   Warren responded that it was wrong that Sallie Me continues to make “millions” on ED contracts while being in violation on some of the contract terms.

Two Senators who have introduced legislation on student debt and college costs—Sen. Al Franken (D-MN) and Sen. Chris Murphy (D-CT)—also asked questions.  Franken indicated he plans to introduce legislation pertaining to net price calculators in the very near future.  In addition to making changes to the data available to students, Franken also wants to make changes to the timing of the process.  Murphy spoke about his bill with Sen. Murray and Sen. Schatz, which would put new requirements for all colleges to contain costs.  He also said the “all or nothing” approach of CDRs was not a useful accountability tool and said it should be replaced with some form of risk-sharing.

Sen. Tammy Baldwin (D-WI) also had numerous questions on the Total and Permanent Disability (TPD) process as well as the origination fee on Direct Loans.  Baldwin asserted this fee was a throwback from the FFELP days and no longer necessary.  Throughout all of these questions and statements, Runcie was very agreeable, but somewhat non-committal.  He said he saw the merits of many of these proposals, but also suggested in-depth policy discussions may be needed, and FSA would be able to comply with the variety of statutory changes under discussion.

Panel II—Witness Statements

Michelle Asha Cooper of the Institute for Higher Education Policy testified that more than 16 million students are receiving federal loans and 37 million hold outstanding debt.   She suggested reauthorization should ensure that policies help them complete college with manageable debt levels that can be repaid in an affordable, easy, and timely manner. With that goal in mind, she recommend three changes to the federal student loan programs “to allow for three things: Informed choices, simplified options, and shared accountability.”

First, Cooper suggested that students receive more complete answers to questions on college costs, debt levels, repayment, and outcomes, like graduation rates for those with Title IV aid and those without. Existing data provides some basic information on costs, but only for students in their first year.  She noted that students are “left guessing” about the amount they will pay in subsequent years and the debt they will likely accrue during their entire college career.  The amendment would be accomplished through changes in existing data in IPEDS and the National Student Loan Data System.

Second, Cooper recommended simplifying repayment options.   She said, “At present, there are many repayment options. The income-driven repayment options, alone, offer four different programs, with a fifth to be added later this year. We believe that if the number of repayment options were reduced, it would also reduce complexity and make loan options and terms more transparent.”  Cooper recommended maintaining the standard repayment plan and offering a single income-based plan, which would allow borrowers to benefit from more manageable monthly payments and the assurance of loan forgiveness if they experience extended financial hardship.

Finally, Cooper noted that as state appropriations decline and tuitions increase, students are taking on more student debt to pay for college.  She suggested that institutions assume greater responsibility for student loan defaults.   She said, “Cohort default rates provide some measure of accountability by spotlighting the worst institutional offenders. But, the all-or-nothing approach means that very few institutions receive sanctions, and other poor performing schools are then able to hide in the shadows.”

Her recommendation is that states and/or schools share in the risk of defaults.  In part, Cooper testified, “institutions would be held liable for some portion of the school’s loan balance based on their performance on a repayment measure like cohort default rates (although other measures like repayment rates might also be explored given the limitations of CDRs). Another possibility would be to require institutions—on a sliding scale—to pay a penalty that is proportional to their defaulted debt.”

Deanne Loonin, Attorney with the National Consumer Law Center and Direction of the NCLC’s Student Loan Borrower Assistance Project, outlined various recommendations in her testimony.   She suggested that Congress should explore requiring schools to pay directly for student loan defaults or adjusting cohort default rate thresholds so that more schools with default rate problems are sanctioned.  She also called for more borrowing counseling and expansion of ombudsman programs, including “creation of pilot programs to fund non-profit, neutral counseling entities and legal assistance programs.”

In terms of student loan servicing, Loonin called for establishing a single portal for all borrower transactions and simplification of the income-driven repayment system.   She called for automatic enrollment in IBR at the six month delinquency mark.

Loonin  also proposed improvements in student loan servicing and collection by the Department, including “ending the experiment” in using private collectors on student loans.”   She pointed to the IRS as an example.  Other recommendations made by Loonin included:

• Ensuring that all borrowers receive quality servicing with a minimum of confusion;
• Allowing borrowers to choose a servicer when consolidation their loans.
• Allowing borrowers to switch servicers.
• Expanding information about how servicers are evaluated, including detailed information on      performance metrics.
• Penalizing servicers that violate consumer protection laws.
• Eliminating the one-time limit on rehabilitation.
• Eliminate the FFEL program resale requirement on rehabilitated loans.
• Prevent ballooning loan  balances by limiting collection fees.

Roberta Johnson, Director of Student Financial Aid at Iowa State University, described the financial aid application and award processes.  Among recommendations relating to the award process, she suggested that students be able to use www.studentloans.gov for all information.  She also said, “Servicers should cease offering training on topics that have nothing to do with student loans to garner more favorable responses from financial aid personnel.”

Johnson also commented on the TIVA servicing contracts.  She noted, “Because the contract for loan servicers is up for renewal later this year, the Department has the opportunity to rethink how contracts are awarded. Does a loan servicer need to come from the previous FFEL environment or can superior service be achieved by contracting with entities from other financial sectors, such as credit card processors? How should servicers be compensated and are contracts equitable and “right priced”? “

Prompted by Senator Warren’s call for federal “profits” on student loans to be reduced, Johnson commented that “Surpluses, if any, should be reclaimed to enhance the Federal Pell Grant rather than being used at the discretion of the servicer only for a subset of the borrowing population.”

Johnson also suggested that Congress consider H.R. 1716, the Earnings Contingent Education Loans (ExCEL) Act, introduced by Representatives Petri (R-WI) and Polis (D-CO).  She stated enactment of the bill, which would replace traditional loan repayment with an employer withholding scheme, would “completely eliminate defaults.”

Marian Dill, Director of Student Financial Aid at Lee University in Cleveland, Kentucky.  Dill reviewed the student demographic profile at her University and made several recommendations to improve the student loan program:

• Institutions should be allowed to require additional counseling (if deemed appropriate) for      students meeting various identifiable risk factors and before any loan disbursement, not just the first one.
• Institutions should be allowed to limit borrowing based on broad categories of students while      retaining the authority to allow students to borrow up to the federal annual and aggregate limits on a case-by-case basis.
• Parent PLUS loan borrowers should be held to a more restrictive underwriting standard.
• Income-Based Repayment (IBR) should be considered as the automatic repayment plan for borrowers.
• Congress should mandate the creation of a single web portal where institutions and students can go   and easily access information about federal, private and institutional loans.
• The Department of Education should overhaul existing entrance and exit counseling to provide      clear, concise, customer friendly information which meets legislative requirements.
• The primary responsibility of default management should shift to the federal servicers or the former guarantee agencies. (“In the shift from FFELP to Direct Lending the burden of default management shifted from the lenders and guarantee agencies to the schools. Schools are now faced with the need to hire additional staff to oversee the process, hire costly third party servicers or risk the penalties of rising cohort default rates.”)

Panel II Q&A

As the hearing was approaching the two-hour mark, there were several less Senators in attendance for questions for the second panel—Chairman Harkin, Sen. Alexander, and Sen. Warren.  However, this round of Q&A did provide a little more in the way of substantive, or at least somewhat surprising, discussions.

To open the questions, Harkin asked about an apparent difference of opinion on “automatic” or “universal” IBR.  Cooper responded by indicating that IHEP’s work with the Gates consortium on this type of proposal had convinced her the standard repayment option should remain in place at the present time.  Cooper said that such an idea still has promise, but that until the details can be worked out on the best way to target resources, the standard-repayment option should remain the default option.

Dill, the aid director at Lee University in Tennessee, suggested that making IBR the default option for borrowers would greatly reduce defaults.  Dill held that IBR should be the default option, but the standard repayment plan should also be an option.  After hearing the discussion, in which Cooper highlighted some of the potential unintended consequences of such a system, Harkin indicated that the Committee needed to review repayment and suggested he was not completely convinced on “auto-IBR.”

Alexander offered the next set of questions, asking—as he has done at all of these hearings—for each of the witnesses to submit a response on how to simplify the Department’s repayment instructions.  He noted this was not an “ideological question,” rather one on “simplification.”  Alexander also pressed the witnesses for additional specifics and again suggested they could provide more detailed answers in writing.  In particular, the Ranking Member was most interested in how the details of a risk-sharing model would actually work.  He also continued to ask questions on the issue of over-borrowing and providing more options for schools to prevent it.

Warren’s questions continued in a similar vein as her questioning of Runcie.  She discussed “obscene” profits for the federal government in the loan programs, as well as investigations surrounding Sallie Mae.  Her questions were largely directed at Loonin, who indicated that private collection agencies should be removed from the loan programs.  Loonin referenced the work of the IRS with PCAs and suggested the government should be handling collections itself.  She indicated that the Department should be commended for its efforts on the conversion to Direct Lending, but a similar effort was needed in the oversight of contractors.

In the final questions, Harkin asked about this week’s report on the increase in loan volume for students attending graduate school.  He wanted to know what was known about borrowing at the graduate level and how this might impact the mean and median debt levels of students.  When the panelists indicated that very little was known about Grad PLUS, including the performance of the loans, Harkin indicated he found this lack of data “disturbing” and indicated he would be asking the Department of Education for additional information and data on Grad PLUS.

Conclusion & Additional Information

With its criticism of the TIVAS and PCAs peppered throughout the discussion, the hearing offered much of what is to be expected of a review of the federal student loan programs.  The numerous references to the absence of Sallie Mae and the other TIVAS highlight what is likely to be an ongoing tension for many of the Department’s student loan contractors.

The Q&A session with both panels appeared to illustrate to the members of the Committee in attendance that student loan reform is rarely an issue with easy answers.  The Chairman and Ranking Member also seemed very surprised and genuinely dismayed at the lack of available data on loans for graduate students.

Additional information on this hearing, including an archived broadcast and witness testimony, is available online:  http://www.help.senate.gov/hearings/hearing/?id=be24605b-5056-a032-5264-da1396baca15