Student Loan Ombudsman
Consumer Financial Protection Bureau
Congressional Forum on Student Loans
August 27, 2012
Congressman Quigley, thank you for hosting today’s forum on student loans. This is not only an important issue for families here in Illinois, but for all of us across the country.
To prosper in today’s global economy, our workforce needs skills to innovate in a highly competitive environment. For millions of Americans, student loans have opened doors to a college degree — offering new opportunities to create a better, more secure life.
But student debt has been growing rapidly, and many borrowers are struggling to stay afloat.
For the vast majority of Americans, college is a terrific investment. Since the recovery began, millions of jobs have been created, but mostly for those with a college education. (1) Among younger workers, wages for college graduates are nearly 80 percent higher than those without a college degree. (2) This can be a key to a higher standard of living for the next generation.
But not all borrowers today are pleased with their investment. Some of them even express deep regret about their choice.
Earlier this year, Attorney General Lisa Madigan filed a complaint against an educational institution offering degrees in criminal justice here in Illinois. The program, which took nearly three years to complete, cost over $70,000. Many students in this program borrowed heavily to complete it. In addition to federal loans, many students used an institutional private loan program where interest rates reached 18 percent.
According to the complaint, while students expected that they could seek a new career as a member of the Chicago Police Department or as an Illinois State Trooper, the school lacked the appropriate accreditation for graduates to even be considered. Some of these students are stuck with substantial debt but have been unable to get the wage increase they expected. Many of them are struggling to make ends meet. This is just one of many examples of the anxiety faced by student loan borrowers across the country.
Unfortunately, millions of Americans are now familiar with the concept of being “underwater” as a result of the turmoil in the mortgage market. By the end of 2011, there were approximately 11 million homes worth less than their outstanding mortgage balance. (3)
But it would be imprudent to ignore that there are likely many Americans who are underwater on their student loans. Take the example of the criminal justice program where many graduates were unable to get higher-paying jobs. These student loan borrowers might be employed in the exact same job as before they enrolled. Again, while college is still a great investment for most Americans, underwater student loan borrowers are seeing a decrease in their standard of living – far different than what we would traditionally expect.
Like the situation faced by struggling homeowners as the crisis began, underwater student loan borrowers making high monthly payments are often unable to modify or refinance their loans. While policy makers have launched a number of programs to assist homeowners with modification and refinancing programs, many student loan borrowers have not been able to take advantage of today’s historically low interest rates. This might have more long-term consequences than we expect.
We should not dismiss that growing student indebtedness can act as a drag on our recovery. The Treasury Department’s Office of Financial Research, established in the wake of the financial crisis, recently acknowledged that conditions in the student loan market could “significantly depress demand for mortgage credit and dampen consumption.” (4) I believe we might already be seeing this impact. Six million Americans ages 25-34 lived with their parents in 2011, a sharp increase from just a few years ago. (5) The 25-29 year old age cohort has experienced significant reduction in homeownership rates since the financial crisis. (6) There are also signs that young workers are not able to save enough in tax-deferred retirement plans.
With high levels of debt and flat wages, the ability for an underwater student loan borrower to fully participate in the economy as a homeowner or small business owner becomes farther out of reach. One consumer told us that he wished someone would “foreclose” on his degree so he could get a fresh start.
So what are some lessons from the mortgage market that we might think about when addressing issues facing the current population of distressed student loan borrowers, as well as preventing problems for new students?
1. Aligning incentives
In many financial transactions, there are more than just buyers and sellers. A mortgage note might be touched by an originator, brokers, securitizers, servicer, and many other actors. Investors and institutions have generally relied on the rating agencies to ensure the alignment of incentives across the transaction, but many of these ratings were imprecise.
In a recent report to Congress, the Federal Reserve Board stated that “by retaining a portion of the credit risk, the securitizer and/or originator will have an incentive to exercise due care.” (7) Policy makers might consider this principle to ensure that incentives are aligned among schools, students, lenders, and taxpayers.
2. Spurring refinance
With market interest rates at historical lows, many mortgage borrowers have been able to lock in low rates, potentially freeing up significant sums of money each month. This can have important implications for how these borrowers might increase their pace of deleveraging, saving, or consumption.
Unfortunately, the small size of the student loan refinance market reveals that there may be inadequate competition. For example, many borrowers who took out a federally-guaranteed PLUS loan in 2007 are paying a rate of 8.5 percent — which appears to be rather high given today’s interest rate environment. It would be helpful to determine impediments to vigorous competition in the student loan refinance market.
3. Ensuring adequate servicing
As individual lenders and the federal government launched mortgage modification programs, many borrowers reported difficulty with their servicer when seeking to better manage their obligations. Many simply faced runaround and frustration, while others eventually faced foreclosure.
The Consumer Financial Protection Bureau launched its student loan complaint system in March, and many borrowers have told us about problems they have faced with their servicers. Without adequate servicing, it may be difficult to achieve a successful level of modification or refinancing for borrowers.
Since opening for business one year ago, the CFPB has been hard at work when it comes to student loans. In addition to our student loan complaint system, which has already corrected errors for many borrowers, we’ve developed online tools, used by tens of thousands of consumers, on how to navigate their student loan repayment options, avoid default, and protect their credit history.
Working with the Department of Education, we released a “Know Before You Owe” financial aid shopping sheet. This model form will allow schools to reduce the fine print when providing financial aid information to students, allowing families to compare offers side-by-side and better understand the student debt decision.
Last month, CFPB Director Richard Cordray and Secretary of Education Arne Duncan also presented a report to Congress on private student loans, which are educational credit products originated outside of the federal student loan program. The Director and Secretary each provided recommendations on potential improvements to the marketplace. They each asked Congress to consider requiring school certification of loans and investigating whether the 2005 change to the bankruptcy code met its intended goals. (8)
Of course, there is still much more work to be done, especially for underwater student loan borrowers. Thank you for the opportunity to participate today, and I look forward to any questions you might have.
1. Georgetown University Center on Education & the Workforce: The College Advantage – Weathering the Economic Story (2012).
2. Economic Policy Institute: The Class of 2012: Labor market for young graduates remains grim (2012).
3. CoreLogic Negative Equity Report (March 2012).
4. Office of Financial Research: Annual Report to Congress (2012).
5. U.S. Census Bureau: Families and Living Arrangements, Table AD-1, Young Adults Living at Home: 1960 to Present (2010).
6. U.S. Census Bureau: Housing Vacancies and Homeownership (CPS/HVS), Table 15, Housing Inventory Estimates by Age of Householder and by Family Status: 1982 to Present (2011).
7. Board of Governors of the Federal Reserve System: Report to the Congress on Risk Retention (October 2010).
8. Consumer Financial Protection Bureau and U.S. Department of Education: Report on Private Student Loans (2012).