Prepared Remarks of the Student Loan Ombudsman Julia Barnard to the Consumer Federation of America

Looking to the Future of Student Borrower Protection

Thank you to the Consumer Federation of America for inviting me here and thank you to all of you for being with us today. The CFPB is an agency that has been fighting on the frontlines for student loan borrowers for over a dozen years. Today, I want to tell you a story of where we have been in this fight and where we need to go.

The CFPB has been the cop on the beat making sure that student loan servicers and lenders are held accountable when they defraud or harm students for over a dozen years now. Over time, this work related to student debt has paved the way for broad policy accomplishments. For example, the Department of Education re-counted, or “adjusted,” every borrower’s entire payment history to get millions of borrowers closer to cancellation and accelerated the pace of Public Service Loan Forgiveness because of a long history of documented servicer errors. And the CFPB’s ITT Tech case, along with the case against Corinthian Colleges,¹ led to the cancellation of $3.9 billion in federal student loan debt for hundreds of thousands of former students and millions in related private student debt cancellation.²

In just the past few years, these efforts have resulted in billions of dollars of cancellation for almost 5 million student borrowers.³ This relief has been profound: we know from a recent CFPB survey that a majority of these borrowers have been able to make a beneficial change in their life sooner than they otherwise would have. That is a beautiful and significant accomplishment.

The Work Ahead

However, we’re still a long way off from a student loan system that reliably complies with basic consumer protection laws and truly protects students.⁴ And even if we could completely guarantee full compliance, we would still be stuck with debt-financed education, which holds people back and prevents them from making life-affirming decisions like getting married, having children, going back to school, or starting a business. And we know that bad actors continue to exploit loopholes in federal regulations to maximize their profits.

So where do we go from here? I want to propose that we turn some of our focus to behavior by colleges. We need to approach colleges and universities seriously when they act as brokers, lenders, debt collectors, and data providers. We need to understand how colleges set prices, whether prospective students are offered loans and in what amount, what types of products are being offered and advertised by colleges, and whether different pricing or types of products are offered to different types of prospective students.

Over time, as our government has pulled back public funding for higher education, colleges have had to adjust their practices to make ends meet.⁵ Now, colleges have become increasingly financialized, and the true price of college is increasingly convoluted – leading many families to simply give up on understanding how the pricing works or which of the financial products they are being offered might be best for them. So, before presenting a consumer protection agenda, I want to take some time to discuss this trend and the related complexity that is baked into the types of products that students are encountering.

The Financialization of College

Much has been written on the general trend toward financialization for all types of colleges, and I highly recommend Charlie Eaton’s great book, Bankers in the Ivory Tower, if you’d like to dive into all of the ways that different types of institutions have become reliant on financial markets, private equity investments, and complicated financial instruments.⁶ I’d like to focus on three related practices today: (1) how colleges collect data and set prices in partnership with third-party, private equity-backed “enrollment management” companies; (2) how these prices are then communicated to students in financial aid award letters that often also include loan offers, and sometimes even refer to the loans as “awards;” and (3) how students are increasingly being targeted by “embedded” finance – meaning, they are presented with competing, complicated, and expensive products at every turn – in the cafeteria, on their school’s website, and especially at basketball and football games.

First, I’d like to discuss how colleges collect and use data to determine tuition prices. College tuition pricing has become increasingly complicated, with initial sticker prices being later “discounted” by an average of over 50 percent via subsidies.⁷ These discounts are generally set for individual prospective students according to algorithms to increase institutional revenues, maximize enrollment, and rise in the national rankings.⁸ Most institutions rely on third-party enrollment management companies to calculate these financial aid amounts. Enrollment management companies seek to maximize institutional revenue by predicting the lowest amount of aid needed to convince a prospective student to enroll. They use algorithms fueled by large volumes of sensitive data to do so.

Effectively, these companies enable price discrimination of tuition. Because the goal is often revenue maximization and not meeting financial need, schools sometimes extend so-called “merit aid” to wealthier, out-of-state students to encourage them to attend while suggesting expensive Parent PLUS loans to cover the costs of the families of lower-income applicants.⁹ Thus, these companies could be artificially raising the cost of college for the neediest students through “optimized” algorithmic pricing. One economist called this system “a brilliantly analytical process of screwing poor kids.”¹⁰ Most families are unaware about how and why these decisions get made and may only begin to develop an inkling when they hear stories from their peers. For instance, one student, who had recently taken on $14,000 in high interest PLUS Loans to cover the cost of college, was tipped off after hearing her wealthier friend and classmate make an offhanded remark about receiving an extra $14,000 that their college had given her but that she did not need, and the student described the realization as a “punch in the gut.”¹¹

The system I’ve just described relies on large amounts of data about applicants who are, in many cases, still minor children. Companies like the College Board sell student data to help colleges build lists that they use to recruit prospective students, and private equity firms buy and sell data related to prospective students that they also use to maximize revenue for schools. This data universe can, and often does, include data points as sensitive as disciplinary records, religious activities, parental education level, income, wealth, and even whether and for how long the prospective student has spent visiting an institution’s campus or website.¹² Furthermore, although the Equal Credit Opportunity Act (ECOA) and other anti-discrimination laws generally prohibit lenders, loan brokers, and other participants in credit transactions from using demographic data as inputs in credit decision algorithms, colleges and data brokers routinely access race, gender, and zip code information from FAFSA and combine it with other data to make loan decisions that adversely impact students.¹³ We have even observed cases where data points like whether a person is a victim of domestic violence are sold to colleges and private lenders.¹⁴ Private companies then feed all of these datapoints into algorithms to calculate the “optimal,” or revenue-maximizing, prices, discounts, and debt burdens for each student.

These prices are then communicated through notoriously confusing and often misleading financial aid “award letters,” which act as both educational pricing and loan “offers.”¹⁵ In 2022, the GAO found that 76 percent of letters reviewed referred to loans as “awards,” 58 percent did not label the source of aid (e.g. whether a loan is federal, state, private, or institutional), and 31 percent of colleges included Parent PLUS loans in their financial aid offers.¹⁶ For instance, one borrower told the CFPB that they were “led to believe that the financial assistance offered to me primarily consisted of grants and federal Pell Grants. However, I recently discovered that a significant portion of my financial aid package includes private loans, which were not clearly communicated to me at the time of my enrollment.” This student added that “As a student, I trusted the guidance and information provided by the school’s financial aid office. Had I been fully informed about the nature of my financial aid package, I would have explored other options or made different decisions.”¹⁷ Through these so-called financial aid “award” documents, most colleges may be engaging in pricing, financial advising, institutional lending, and loan brokering.

As we all know, students who can’t afford the cost of college upfront often rely on many forms of student debt to pay for college. These students are, of course, offered federal and private student loans, and are also offered various forms of credit that are extended directly from their colleges. These products are often called something other than a loan, even when they are covered under federal consumer protection law, and include tuition payment plans (where students can pay their tuition in installments) that are often described explicitly as being “alternatives” to debt despite often being extensions of credit themselves,¹⁸ “emergency loans” that can be extremely expensive for those who are unable to quickly pay back their balance,¹⁹ and even automatic bookstore cash advances for recipients of federal financial aid like the Pell Grant and federal student loans.²⁰ When students receive these types of credit, they are sometimes expected to repay them within months and, when they are unable to do so, they may have their interest-free tuition payment plan automatically converted into an 18% APR loan.²¹ Additionally, students get hit with negative credit reporting, and harsh debt collection tactics such as having their transcript withheld, and even removal from campus meal plans and housing. And even students who know that these products are more expensive than their other options might not feel that they have much of a choice – one borrower said that their school’s “inability to process [financial aid] in a timely manner [forces us] to sign up for a payment plan which is more expensive.”²² And another said that their Pell Grant was delayed and their school put them on a payment plan and they were on the hook for $800, which they described as money they did not have.²³

And even once a student has figured out how to pay for their basic living expenses and tuition, there are many companies that are eager to extract as much revenue as possible from them during their college years – and many schools have become partners in marketing these third-party financial products. We’ve seen examples where schools, and in particular athletic departments, market products to students such as private student loans with interest rates as high as 23 percent and even products related to sports gambling and payday loans.²⁴ In many cases, schools also have lucrative partnerships with financial service providers, through which they are paid by financial institutions to advertise deposit accounts and credit cards.²⁵ In some cases, schools will even link financial accounts to student IDs and, in these cases, students may open new accounts because they think it is mandatory.²⁶ When students use these products, they may end up paying more than they would with other products – especially when there are low- or no-cost alternatives available that they do not know about.²⁷

Developing a Consumer Protection Agenda

The good news is that consumer protection law has a lot to offer us as we seek solutions to the problems I’ve just discussed. Consumer protection statutes provide us with protections for conduct like this. I’ll conclude by discussing three ways that existing consumer protection laws can protect students from some of the practices I discussed above:

We have tools, like the Fair Credit Reporting Act, that can prevent private companies that qualify as consumer reporting agencies from selling consumer report data to the highest bidder for impermissible purposes and evading responsibility for inaccuracies.²⁸ The FCRA ensures that consumers are able to access credit reports for no more than $15.50, that consumer reporting agencies provide avenues for consumers to dispute inaccuracies in their credit reports and a right to receive notice when information in their credit report is used to take adverse action against them, such as a denial of credit. These protections could prevent prospective and current students from having inaccurate data sold and used for impermissible purposes and could ensure that when certain negative decisions about individual prospects occur, such as being offered a high-interest loan in place of a grant, they know about it. Even more, it would hold companies accountable in cases where they use inaccurate credit report data to make credit decisions or charge more than the allowable amount for consumers to access their own credit reports.²⁹

Other tools at our disposal, like the Equal Credit Opportunity Act, prohibits discrimination against students for their race, gender, or receipt of public assistance income, and can help remind private industry that algorithms and so-called “artificial intelligence” are no excuse for illegal, discriminatory behavior.³⁰ For instance, the CFPB, along with the Civil Rights Division of the U.S. Department of Justice, the Federal Trade Commission, and the U.S. Equal Employment Opportunity Commission, have stated publicly that the use of advanced technologies must be consistent with federal laws. These anti-discrimination protections may apply to behavior by colleges and third-party enrollment management companies that is intended to maximize revenue if it causes certain groups of students to be treated differently in any aspect of a credit transaction.

And finally, the inherent power imbalance between schools and students is nothing new, and laws including the Consumer Financial Protection Act’s prohibition on unfair, deceptive, and abusive practices could be used to protect students from unfair and abusive conduct by their schools.³¹ As CFPB examiners found with respect to certain schools’ withholding of transcripts as a debt collection tactic: in some cases, these practices can leave consumers with “little-to-no bargaining power [because their] academic achievement and professional advancements depend on the actions of a single academic institution, [and so] consumers do not have a reasonable opportunity to protect themselves” from abuses at the hands of their schools. While this reasoning has been applied to the case of transcript withholding, the logic may be applicable to a wide range of potentially abusive institutional debt origination and collection practices in the coming years. In fact, student debt cases have been at the forefront of developing UDAAP law precisely because of this power dynamic, and because students are so vulnerable to conditions such as “lack of understanding” “reasonable reliance” and “inability to protect [their] interests,” all of which can be elements of establishing abusiveness.³²

States have many consumer protection tools at their disposal and many local institutions can and do respond to local and state advocates and policymakers. For example, the CFPA grants state AGs and banking regulators authority to enforce parts of the CFPA and implementing regulations, including by bringing UDAAP actions, regardless of whether “unfairness” and “abusiveness” are included in the applicable state law.³³ We still have so many tools at our disposal, we know that organizing works and that state actions can make meaningful changes, and we all have a role to play in facing these challenges head on. I hope that all of you will consider us at the CFPB to be partners in the coming years and reach out to us if you ever want to learn more about anything I’ve talked about today, do a complaint analysis, or make sure that there’s a cop on the beat of a specific problem that you’re worried about.

I am so grateful for all of you, your commitment to the work, your expertise, and your friendship. I hope you will join me in celebrating our wins, leaning into our existing strengths as consumer advocates, thinking creatively about the tools we have available to us, and remembering to keep in touch. And I’m looking forward to the panel we’re about to learn from, which is comprised of my longtime colleagues and role models. Thank you.