Lawmakers Split on Causes, Way Forward, on Student-Loan Troubles

WASHINGTON — Members of the Senate Banking financial institutions subcommittee split Tuesday on how best to confront problems in the private student lending market in the wake of a Consumer Financial Protection Bureau report that detailed potentially systemic shortcomings.

While Democrats highlighted the limits that private student loan borrowers face in trying to restructure their loans, Republicans said the focus should be on federal student loans.

"Private student loans are the riskiest way to pay for college," said Sen. Sherrod Brown, D-Ohio, who chairs the subcommittee. Such loans, he said, often include variable interest rates, and unlike federal loans "are less likely to have to come with affordable payment plans."

"In the short term, I hope that we can begin to explore ways to provide borrowers with short-term options to get out from under the burden of high-cost private student loans. And in the long term, I hope that we can provide students and their families with more transparency about private loan options and costs, as well as predictability when they are seeking to work with their servicers."

But Republican Bob Corker of Tennessee, the subcommittee's ranking member, said the debate over student-loan debt has been too one-sided. He said higher education costs are partly due to states having to pay more for Medicaid. Corker also noted that while the CFPB's report focused on private lenders, 93% of the market is comprised of federal student loans.

"It's more important that we look at the entire picture," Corker said, adding later, "All of us know the real problem we need to consider is the rising cost of college tuition and the amount of federal student loans students are borrowing.

"On one hand, the federal government seems to want to help solve this problem, and on the other hand continues to mandate to states things like Medicaid. In our own state, for every percentage that we spend more on Medicaid we spend less on higher education. That's the real driver of why students are borrowing so much money in our own state."

Subcommittee members questioned Rohit Chopra, the CFPB's student loan ombudsman, who presented findings from the CFPB report. The study, mandated under the Dodd-Frank Act and completed with the Department of Education, outlined how student lending has followed a pattern similar to the subprime mortgage crisis and recommended that Congress should review a current law restricting the discharge of student-loan debt through bankruptcy.

"Currently there is not a lot offering or marketing of" refinancing options, Chopra said.

He said the high level of outstanding student debt may pose challenges to recent graduates trying to attain financial progress, such as buying a home.

"The current conditions" in student lending "may have an impact on the economic vitality of many borrowers," Chopra said.

But Corker challenged the suggestion that allowing students to discharge their debt through the bankruptcy process is a solution. "It's fascinating that on the public side you're not advocating for students to file for bankruptcy," said.

The Tennessee senator also cited the bureau's recommendations for addressing student-loan costs as an example of why establishing the CFPB as an independent agency in the first place has repercussions. Corker said prudent bank regulators have not been enthusiastic about private lenders discharging credits.

"We have this problem where you're giving guidance which is contrary to what the safety and soundness regulators are saying," he said.

The hearing came as the CFPB and Department of Education have increased efforts to bring attention to the mountain of student loan debt. Following the release of their joint study last week, CFPB Director Richard Cordray and Education Secretary Arne Duncan on Monday touted a new form, the Financial Aid Shopping Sheet, to help students compare different financial aid packages.

In his prepared remarks, Chopra reiterated concerns outlined in the study that former students struggling with their debt have few options to restructure loans.

"Without a robust refinancing market, they struggle to reduce their monthly payments, even though they might have built a solid credit history since their early days of college," he said. "Will these honest borrowers be precluded from reaching the economic milestones familiar to American life? And if so, what might be the broader consequences?"

Jack Remondi, president and chief operating officer for Sallie Mae, testified that workout options at times are limited and said Sallie Mae would be open to certain bankruptcy reforms to ease the process for struggling borrowers.

"Since 2009, we have modified $1.1 billion in loans to help our customers manage their loans. Nonetheless, in some cases, loan modifications and other efforts are insufficient and bankruptcy may be the only path," he said in his prepared testimony. "Sallie Mae supports reasonable reform to bankruptcy laws that would allow borrowers to discharge their education loans — both private and federal — after a good faith period of attempting to repay.

"Any reform must recognize that education loans have unique characteristics and benefits. They are unsecured credit extended to borrowers whose assets are initially limited, but can be expected to grow over a lifetime of greater earnings power attributable to the value provided by the education obtained through these loans."