Know Before You Owe: Student Loans

Thank you. I am thrilled to be here in Minneapolis. On behalf of all my colleagues at the Consumer Financial Protection Bureau, thank you for welcoming us to your city.

We are here today to talk about student debt – a topic that’s relevant to students here at the University of Minnesota and to students and graduates across the country.

As I’m sure you’ve heard from recent news reports, student debt in this country has been climbing. Outside of mortgages, it is now the largest form of household debt. And it is becoming a major issue for not only recent grads but their families.

Now, college education is part of the American dream. It was certainly part of my American dream. As Robert Kennedy once said, “Education is the key to jobs – to income – to human dignity itself.”

When Robert Kennedy spoke those words, college was out of reach for too many Americans. The situation has improved to since then. Today about 40 percent of young Americans hold college degrees.

In recent generations, student loans have made the dream of going to college come true for many Americans. In some ways, the student loan market is one of the best examples of how credit can be used to open doors and improve lives.

Today, I’d like to talk about how the Consumer Financial Protection Bureau is working to make a better student loan market, and I’d like to announce an exciting initiative with the Department of Education. But first, let me provide some context by describing some of the challenges faced by consumers of student loans.

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The stakes have never been higher for students and their families to clearly understand the cost and risk of various student loans.

College is becoming more expensive. Over the past decade, tuition and fees at public colleges have increased by an average of 5.6 percent per year above the rate of general inflation. The tuition and fees at the state school I went to in California are nine times higher than when I started. While grants and tax credits have certainly helped, college costs are a big ticket in these tough times.

Many students are covering these rising tuition costs by taking on more debt. According to the College Board, seniors who graduated in the last school year, and who borrowed money to pay for college, ended up with about $22,000 in debt for a public college, and $28,000 in debt for a private college.

More debt can mean more risk, especially in a tough economy. Our recent grads enter a job market that has been soured by the worst financial crisis since the Great Depression. Signing up for tens of thousands of dollars in student loans – and agreeing to pay a monthly bill that is likely several hundred dollars – is a decision that needs to be made with a clear head and clear information.

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Unfortunately, the combination of higher costs, more debt, and greater risk has created serious financial hardship for millions of former students now burdened with more debt than they can handle. Since July, the Bureau has been inviting consumers to tell us their stories to help us understand their experiences. One recent grad told us that 18 months after she earned her diploma, her monthly private student loan payments unexpectedly doubled from $250 a month to $500 a month. Another told us she didn’t apply for federal loans because she was misled to believe her parents made too much money. She is now saddled with $160,000 in private student loan debt.

These people – and many like them – are in trouble, partly because the complex and confusing process of taking out student loans makes it too hard to understand college costs, to evaluate loan options, and to figure out how much debt to take on. Many people simply don’t know what they are signing up for.

One challenge that students face is comparing financial aid information from different schools. With more than half of enrolled freshmen saying they applied to four or more colleges, it’s important to be able to make side-by-side comparisons. But when prospective students open their financial aid letters, they find that different colleges often use different terms and different formats.

On one school’s financial aid letter, it might say the student’s financial aid would include an “alternative loan,” while another school calls that exact same loan an “institutional loan.” Or, my favorite, a school may use its own acronym without explaining what the acronym stands for. I won’t single out the school, but I saw one award letter recently that said a student’s financial aid would include $600 for a “PHEAA” without explaining anywhere on the letter that this is a loan.

Because the terms are not clear, students and families might not be able to tell which school is more expensive over the long run. Instead, too many students end up focused only on the immediate out-of-pocket costs.

Another problem is that financial aid award letters don’t offer information on all the different places a student can get loans. The federal government offers loans that are often cheaper than the alternatives, and more flexible if a student doesn’t land that perfect job right after graduation. Some states and nonprofits offer good loans too. And, then, within the private student loan market, there are all kinds of loans – good and bad. Loans from reputable lenders and loans from others.

What’s surprising is that 54 percent of students who take out private loans haven’t exhausted their federal loan options. That means that they may be taking out more expensive, less protected, less flexible loans than necessary.

Sometimes, the student loan market is so confusing to parents that they turn to credit cards to help pay for their child’s education. For many families, that may be some of the riskiest and most expensive debt that they can take on.

A worrisome recent trend is the increase in the number of nontraditional, high-priced private loans offered by, or in partnership with, for-profit colleges. We have heard some cases where these loans are made with little evaluation of the student’s ability to repay the debt, and without a cosigner to provide a backup source of repayment. Unlike federal loans, there is often no safety net built into these loan programs, such as loan forbearance or modification rights for those who can’t make payments after graduation. The schools that arrange or make these loans admit that many of these loans will quickly end up in default, a very bad outcome for borrowers who were trying to do the right thing by pursuing a degree to improve their lives.

A third problem is that students can’t easily determine how much debt is too much debt. Financial aid award letters often don’t even estimate what a student’s total debt or projected monthly payment will be – even though that information is readily available. Instead, students take a leap of faith that whatever they will owe will be affordable in four years – or 10 or 20 years.

For students to assess their future ability to repay, they have to consider their probability of completing the degree and forecast their future earnings – as well as understand the terms of the loan.

Now, more transparency alone won’t fix the problem of rising college costs, but it can spur competition among schools and among lenders, and it will enhance a more fair market where people better understand the terms of what they are signing up for. Given the substantial investment that families make in higher education, clear information can help ensure that students and families take on the levels of debt that make sense for them.

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Better information about higher education is a priority not just for the CFPB but for the Department of Education as well . In fact, the Department of Education has already made great strides by simplifying the Free Application for Federal Student Aid – known as the FAFSA – so that it is no longer a form with more than 100 questions (the old version was so long and cumbersome that I once heard it described as being more complicated than the typical federal tax return).

And now, given the Consumer Financial Protection Bureau’s significant interest in student loans, we are pleased to be working with the Department of Education to provide better cost information to students.

One of our first initiatives is our Know Before You Owe student loan project. As part of that project, we have released a draft one-page “financial aid shopping sheet” – a model disclosure form that colleges and universities could use to make the costs and risks of student loans clear upfront, before students have enrolled.

With a financial aid shopping sheet, students and their families get important information that will help them make their final college selection. The prototype we released this week makes it easier for students to compare offers side-by-side by using the same format and standard terms. It clearly distinguishes between loans and scholarships, and lays out options for federal aid. Finally, the draft shopping sheet outlines the full costs of attendance, and estimates both the total student loan debt and the monthly payments after graduation.

This is a thought starter. It is our way of soliciting input for the Department of Education – from students and their families and from educational institutions and lenders – as to how best to provide useful and understandable information about college costs. We’re interested in your thoughts about it. You can go online at www.consumerfinance.gov to weigh in.

Now, for the many students today – recent graduates and others – who are already having difficulty with their student loan debt, we created an online tool that provides borrowers with information on their repayment options.

We are also working to bring transparency to the private student loan market – one of the least understood consumer credit markets – through our efforts with the Department of Education to provide a detailed report next summer to Congress. To that end, we are now asking the public, the higher education community, students, families, and the student loan industry – both lenders and servicers – to provide information voluntarily.

We believe that by engaging the public early and often, and promoting greater transparency, we can shed light on all types of student loans and make the market work better for students and their families.

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At the CFPB, we believe that a properly functioning market for consumer credit is a critical part of our economy. There’s no greater example of that than in the student loan market. Student loans should make lives better. They help make the American dream possible.

But to ensure that the credit markets can do that, we need to make sure they are transparent so that people can avoid the things that make their lives worse. At its core, this is about knowing the price of a financial product before you buy it. It’s that simple.

And so to all the students out there, I leave you with one request: Go to our website, www.consumerfinance.gov, to tell us what you think. Tell us how to make student loans work better for you, for the industry, and for the market as a whole.

Thank you for your time.