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Director Cordray Remarks at the 2014 Boulder Summer Conference on Consumer Financial Decision Making

By Richard Cordray

Thank you for having me here today. I am very pleased to be able to join so many experts in consumer finance, a field whose interdisciplinary nature incorporates many fascinating issues from economics and psychology and many other subjects. As the first Director of the new Consumer Financial Protection Bureau, it seems to me that consumer finance is undeniably important. Just consider that in every macroeconomic model that exists today, consumer spending makes up about 70 percent of all economic activity. All of that activity requires practical and sustainable methods of financing.

Then consider that in the last two generations, the markets for household credit and consumer finance have expanded and become much more complex for the average American family. The mortgage market today stands at nearly $10 trillion. Student loan debt has reached $1.2 trillion. Credit card debt and auto loan debt each now total more than $800 billion. Large numbers of Americans utilize small-dollar loans and other consumer loans.

As debt has grown, so has the variety of financial products and services, with remarkable growth over the past half-century since I was born. The mortgage market at that time was smaller and much simpler. Student loan debt and general purpose credit card debt were embryonic at best. Auto loans existed on a much smaller scale, in part because the product itself was so much less expensive in real dollar terms. The other financing products mentioned were either non-existent or at most a marginal part of our economy.

At the same time, the other predominant household financial issue of saving for retirement was a simpler affair, without the wealth of products now available. In that era, many working Americans were reliant on a defined-benefit pension offered through a single employer or through a multi-employer plan. Think about that for a minute and consider how dramatically the world has changed.

One conclusion that flows from these observations is that the field of consumer finance is increasingly central to truly understanding the entire economic picture. Where credit is available to people, it affords opportunity. It permits forward-looking investments. It creates the ability to time-shift available and expected resources. It allows people to plan ahead in ways that are not available to those more constrained by the straitened limitations of present circumstances. It allows them greater latitude to leverage current assets against prospects for the future.

Moreover, the large credit reporting companies exist today in part as a reflection of this great expansion of household credit. Credit reporting was a minor factor fifty years ago. And in turn they have facilitated the consumer credit boom by permitting underwriting and risk assessment at a more sophisticated level than ever before. Further, they have become independently influential actors in their own right and are now affecting consumers in direct and immediate ways. More and more, the information they gather and the models they use can influence whether a particular consumer can get credit at all or on what terms and at what price. They even are having a growing effect on people’s prospects for employment, rental housing, or insurance, with credit checks growing more common as part of background checks that may factor into those decisions.

So I would submit that consumer finance should be elevated in our perspective as a field of growing interest, growing complexity, and growing importance. And this is true not only as an academic or research subject, but also as a basis for directing policymaking that can make an enormous difference in the everyday life of people in this country and indeed around the world.

With that observation, I bring this brief discussion back to the Consumer Bureau and its role in American life. For the historic financial reform law that Congress adopted just four years ago created this new agency and positioned it at the center of these issues. Much creative and interesting work in the field of consumer finance is now underway at the Bureau and I am proud to see some of that work on the agenda at this conference. We have access to information that is essential for such research to be undertaken. If you recognize the importance of this field of study, and you want to be able to have an actual effect on the current and future prospects of average American families, then you should become engaged with the work we are doing.

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Let me spend the rest of my time today focusing on just one of these issues in consumer finance, which is student loan debt. This is an issue of tremendous public importance, and it probably hits close to home for this audience. You, after all, include many who have attended not only college but also graduate school, may also be parents of children who have done that or are currently doing so, and are teachers of undergraduate and graduate students. You thus are well aware of what this issue means for yourself, your peers, and your students. It is not an overstatement to say that we are now standing at a precipice when it comes to the magnitude and consequences of our student loan debt in this country. We have reached $1.2 trillion of student loan debt, second only to mortgage debt as a category of consumer finance. This fast-growing burden is a pressing problem and a matter of grave importance to public policy in America.

Over the past three years, we at the Consumer Bureau have heard countless stories from consumers about how student loan debt is impeding people’s lives and having a domino effect on the broader economy. The consumers we hear from tell us how their debt burden has stopped them from buying a home, opening a small business, or starting a family. As one consumer astutely observed, “When students delay major purchases because they’re struggling to pay back their loans, it weakens the economy for everyone.”

It has long been ingrained in the fabric of our country that if you work hard, study well, and act responsibly, you can get ahead in life. Going to college has been a key milestone on the path to opportunity, and almost certainly is more important today than it has ever been. But in recent years, the hefty price tag of a college degree has the potential to become more of a burden than a blessing if it digs some students into a hole that is too deep to manage. Household balance sheets were battered by the financial crisis. At the same time, tuition has skyrocketed, outpacing virtually every other measure of cost inflation in our society over the past two decades. In part for these reasons, more students and their families are taking out loans – and taking out more money in loans – in order to afford college.

Famed economic theorist Bruce Springsteen once noted, “I have spent my life judging the distance between the American reality and the American dream.” Many Americans today are coming to believe that this distance is becoming increasingly vast. People are wondering why the American dream is not working. Wages have stagnated, and inequality has grown. Students and their families have scrimped and saved for college only to find that they are still saddled with unmanageable levels of debt.

Last year, we sought comments from the public about how student debt is affecting individual consumers as well as the broader economy. The response was overwhelming, and it evidenced that the overhang of high student loan debt not only can constrict the choices many young graduates are able to make about their careers and the communities in which they live, but it can also undermine their overall well-being.

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The domino effect of student loan debt is real, and it is spreading, which makes these vital decisions about loans and higher education all the more critical. The housing market, small business development, retirement savings, household formation, and rural communities are all taking a hit. In combination, these hits are adding up to serious effects on the economy.

One borrower, Kristi, put it bluntly, “We are stuck. Because of my loans we will never have the option to buy a house. We can’t afford to have kids if we can barely feed ourselves…We can’t save for retirement because we need all of our money for these loans.” Part of the problem is the sheer amount of debt so many students are taking on. The research shows that individual debt load from student loans has increased by 70 percent in less than a decade.

This is not debt that can be quickly erased – it can take many years to pay it back, which means that it may prevent borrowers from achieving other financial milestones for at least that long. A recent Pew study found that about 40 percent of younger households – those headed by someone under the age of 40 – have student loan debt, and we can see no reason why this percentage will not continue to grow.

Tuition costs have risen rapidly. Debt has risen even faster than tuition and default rates have increased. Graduates are earning less because of the recession. It has become increasingly clear that a weak labor market and rising student debt are putting the squeeze on young people. The Bureau estimates that more than 7 million Americans are in default on a student loan. For those who default early in their lives, the negative consequences for their credit report can make it more difficult to pass employment background checks, let alone buy a home.

At the same time, the formation of new households is a key driver of economic growth. Notably, it appears that young people are not forming new households at the same rate they did in the past. Many are living with parents or sharing space with their peers. In fact, according to a recent Pew survey, more than one-third of young people aged 18 to 31 are living with their parents – a jump of nearly 18 percent since the start of the recession.

This carries over into the market for home purchases. The homeownership rate for young people peaked before the financial crisis and by the first quarter of this year had fallen by more than 15 percent. This is particularly troubling since young people constitute the majority of first-time homeowners and they drive the marketplace for home purchases. According to a recent survey by the National Association of Realtors, 49 percent of Americans cited student loan debt as a “huge obstacle” to homeownership.

Traditionally in the housing market, consumers with student loans had higher rates of home ownership than those without student loans. Because student loans were an indicator of higher levels of education, these borrowers typically had higher incomes and were therefore more likely to buy a home. Today, however, we are seeing more student loan borrowers shying away from making this investment. According to an analysis by the Federal Reserve Bank of New York, for the first time in at least a decade, households with student loan debt are less likely to have a mortgage than those without student loan debt.

Student loan debt may also be impeding small business development, as those who would be interested in taking on such risk may be struggling to save capital and access credit. Those who are able to save enough to start a small business may be confronting the dilemma that the burden of repaying their student loans requires them to divert cash away from the business. One woman told us that student loan debt had prevented her from “even qualifying for a business loan” and pushed her goal of starting a small business “even further” away.

Those grappling with student loans may also be unable to save for retirement or have to borrow against their own parents’ savings to help pay their debts. One woman told us she had to turn to her mother, who was trying to save for her own retirement, to help her pay down her student loans. And research shows that only half of workers under 30 have enrolled in their employer’s 401(k) plan; barely four out of ten contribute enough to receive a full employer match.

For many borrowers, student loan payments of several hundred dollars a month or more will crowd out personal savings, including contributions to their retirement plans. One recent estimate projected the impact for a dual-headed household with college degrees compared to the same type of household without any student debt. This study found that the student debt would crowd out more than $200,000 in net assets over the course of their careers, including a loss of nearly $135,000 in net retirement savings.

As the AARP has noted, growing debt burdens “pose a threat to the financial security of Americans of all ages.” We are concerned that those struggling with high levels of student loan debt today will have no retirement savings to fall back on in the future. Moreover, these kinds of financial concerns also stand in the way of household formation, as it takes people longer to get their affairs in order before they are able to turn their attention to the rest of their lives.

If the consequences of student loan debt weigh down individuals and markets, it is inevitable that they hold back communities as well. Recent research has shown that for every $10,000 in additional student debt, young graduates are 6 percent less likely to pursue a career in public service, especially careers as teachers. Rural areas in particular struggle to attract and retain doctors, nurses, and other young professionals. In many of these places, ownership of a car is a prerequisite for employment and rental housing may be scarce.

Young consumers struggling with large debt loads may be unable or unwilling to buy or lease a car or to buy or rent a home. The necessity of doing either may be enough to dissuade them from settling in certain communities. One mother told us that her daughter has thousands in student loan debt, is making $12 an hour, and would be looking for other jobs except that she cannot afford a car “so her choices of jobs were limited.” The overhang of student loan debt can be a vicious cycle.

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That cycle is made even more vicious when problems arise through no fault of the borrowers. We have heard the story too many times. A loan servicer makes an error, maybe they debited the borrower’s account twice or did not credit a payment in time. This results in lost money or fees for the borrower, which can easily disrupt a carefully crafted financial life. The borrower is then left feeling helpless – they did everything right, and still, it went awry. Not only does this have a tangible impact on borrowers’ current accounts, but more lasting repercussions may be transmitted through their credit reports. It also takes an emotional toll, as borrowers are left frustrated without any reasonable resolution of their loan issues.

More than 40 million Americans rely on loan servicers as the primary point of contact on their student loans. Servicer duties typically include managing borrowers’ accounts, processing their monthly payments, and answering their questions when things do not go according to plan. For borrowers with federal student loans – and those loans make up the bulk of student debt today – if borrowers encounter a rough patch, they are supposed to be able to turn to their servicers to enroll in alternative repayment plans or obtain deferments or forbearances.

We have heard from many student loan borrowers about the struggles they have faced with their servicers. They have told us that their servicer is not held accountable for answering their questions and providing quality customer service. Or that they had trouble making prepayments or partial payments on their loans. They have also noted that when their loans were transferred between servicers, their paperwork was often lost and servicer processing errors resulted in late fees for the borrower.

A critical point is that borrowers typically have no choice about what company services their loans. With young college graduates facing higher unemployment and lower wages in recent years, the damage done by their student loan burdens is magnified when they are given the runaround by their servicers. So the Bureau is taking action to improve accountability in the student loan servicing market. Our supervision authority covers most of the student loan servicing market, including both the larger banks and the larger non-bank servicers.

That is potent authority to send examination teams into these firms to assess them for compliance with the law and direct them to remediate any harm to consumers. In this manner, we will be working to ensure that student loan servicers play by the rules and treat borrowers fairly. This work also gives us access to information about the complete cycle of private student loan debt, from origination through servicing to debt collection and credit reporting. This visibility will help us better protect millions of student loan consumers from potential credit problems.

Just last week, federal regulators ordered Sallie Mae to grant almost $100 million in relief to consumers for violations of several laws, including the Servicemembers Civil Relief Act, which protects active-duty military personnel from harmful overcharging practices and improper default procedures. Sallie Mae also committed unfair practices by processing payments in ways that maximized late fees. The Consumer Bureau initially referred the matter to the Justice Department, and though it was not a formal party to the enforcement action, we are deeply concerned about the effects of these kinds of practices.

We also are working closely with other regulators to incentivize student loan servicers to provide more modification and refinancing options for private student loans. This has been a difficult issue, but it is clear that more needs to be done by the student loan servicers, and Congress is now taking an interest in this issue as well. Together with greater outreach to encourage more borrowers to utilize affordable repayment options on federal student loans, these efforts will help promote more latitude for those laboring under significant levels of student loan debt to find ways to better manage these obligations.

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Despite all the financial challenges people face, the numbers still show that it pays to go to college. College graduates continue to earn more than those with no college; the difference amounts to a premium of more than 70 percent for recent graduates. The gap between the earning power of a young graduate with a college degree and a young high school graduate is now the widest it has been in at least 40 years.

Unfortunately, this wage premium is mostly attributable to the rapid decline in wages for non-college graduates. In the past decade, young people have struggled to overcome falling wages, irrespective of educational attainment. Real wages for young college graduates have fallen by more than 7 percent since 2000. In contrast, real wages for young people with no college have fallen an alarming 11 percent. The unemployment rate for workers in their early 20s is twice as high for those without a college degree as it is for college graduates.

This suggests that a college degree is an increasingly expensive necessity just to stay afloat. Other research suggests that college graduates without significant amounts of debt are happier overall. So the Bureau is also engaged in ways to improve the consumer experience of financing higher education at the crucial moment before students make decisions about taking on debt.

For high school students considering college, we are applying the same “Know Before You Owe” approach that we have applied to mortgages and other consumer financial products. In partnership with the Department of Education, we created the “Financial Aid Shopping Sheet,” which gives college-bound students hard numbers in a common-sense format. This form presents a model of what all financial aid award letters should look like and provides a uniform way to inform potential students of their true college costs – before they commit to a school.

The form lays out what is a loan and what is a scholarship. It lays out the total cost of attendance including tuition, fees, and other expenses. It details options for federal aid. It helps students understand how much debt they may have after graduation and what their monthly payment could look like. And in doing all of this, it enables prospective students to compare one college offer to another and make not just a choice among different schools, but an informed choice about how to choose the best option from a financial standpoint as well.

Thus far, over 2,000 schools have adopted the Financial Aid Shopping Sheet. And we have augmented our support on these issues by developing a more comprehensive set of tools we call “Paying for College” that is available on our website at consumerfinance.gov. This set of tools walks people through the experience of making decisions about how to pay for higher education, which is particularly valuable for students and their families who may be facing these decisions for the first time in their lives.

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In the end, we need to recognize as a nation that we cannot afford to put higher education on an unsustainable basis for people whose ambitions and abilities should mark them out as our future leaders. It is also profoundly discordant with basic notions of equal opportunity if young people with merit, and who lack only the means, are unable to advance or end up crushed under student loan debt for much of their lives. Ultimately, we must strike a proper balance on the appropriate cost of tuition, though we recognize that this important policy choice in our society generally lies beyond the jurisdiction and authority of the Consumer Financial Protection Bureau.

I was in Prague last summer, and they put me to work by having me meet with consumer advocacy groups to discuss common elements of the consumer financial issues that we are seeking to address. Many of our issues were familiar to them as well, except for the problem of student loan debt. Other countries often do less well than we do in terms of access to higher education, but they do better than we do in terms of the affordability of higher education. It was embarrassing to me to have to describe that, unlike them, the public policy choices we are making as a country are causing people to struggle so much to seize this key opportunity to improve their lives and then be able to manage the costs successfully over time.

In sum, student loans allow many Americans to pursue opportunities through higher education that they could not otherwise afford. But we must work to ensure that the price of those opportunities does not end up costing students their financial futures. We are committed to helping prospective students and their families gain a fuller understanding of student loan debt before these choices are made, helping people manage their debt once they have incurred it, and addressing complaints and concerns they may have about their lenders or loan servicers. The very future of our economy and our society is at stake, and we are determined to play our part to ensure that our future is bright. Thank you.

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The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.

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