[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
AN EXAMINATION OF STATE EFFORTS
TO OVERSEE THE $1.5 TRILLION
STUDENT LOAN SERVICING MARKET
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
JUNE 11, 2019
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-30
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
39-450 PDF WASHINGTON : 2020
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California PETER T. KING, New York
GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri SEAN P. DUFFY, Wisconsin
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut ANN WAGNER, Missouri
BILL FOSTER, Illinois ANDY BARR, Kentucky
JOYCE BEATTY, Ohio SCOTT TIPTON, Colorado
DENNY HECK, Washington ROGER WILLIAMS, Texas
JUAN VARGAS, California FRENCH HILL, Arkansas
JOSH GOTTHEIMER, New Jersey TOM EMMER, Minnesota
VICENTE GONZALEZ, Texas LEE M. ZELDIN, New York
AL LAWSON, Florida BARRY LOUDERMILK, Georgia
MICHAEL SAN NICOLAS, Guam ALEXANDER X. MOONEY, West Virginia
RASHIDA TLAIB, Michigan WARREN DAVIDSON, Ohio
KATIE PORTER, California TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
BEN McADAMS, Utah JOHN ROSE, Tennessee
ALEXANDRIA OCASIO-CORTEZ, New York BRYAN STEIL, Wisconsin
JENNIFER WEXTON, Virginia LANCE GOODEN, Texas
STEPHEN F. LYNCH, Massachusetts DENVER RIGGLEMAN, Virginia
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
Subcommittee on Oversight and Investigations
AL GREEN, Texas Chairman
JOYCE BEATTY, Ohio ANDY BARR, Kentucky, Ranking
STEPHEN F. LYNCH, Massachusetts Member
NYDIA M. VELAZQUEZ, New York BILL POSEY, Florida
ED PERLMUTTER, Colorado LEE M. ZELDIN, New York, Vice
RASHIDA TLAIB, Michigan Ranking Member
SEAN CASTEN, Illinois BARRY LOUDERMILK, Georgia
MADELEINE DEAN, Pennsylvania WARREN DAVIDSON, Ohio
SYLVIA GARCIA, Texas JOHN ROSE, Tennessee
DEAN PHILLIPS, Minnesota BRYAN STEIL, Wisconsin
C O N T E N T S
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Page
Hearing held on:
June 11, 2019................................................ 1
Appendix:
June 11, 2019................................................ 41
WITNESSES
Tuesday, June 11, 2019
Buchanan, Scott, Executive Director, Student Loan Servicing
Alliance....................................................... 11
Darcus, Joanna K., Staff Attorney, National Consumer Law Center
(NCLC)......................................................... 4
Sanders, Joseph, Student Loan Ombudsman and Supervising Assistant
Attorney General, Consumer Fraud Bureau, Illinois Attorney
General's Office............................................... 6
Smyth, Nicholas, Assistant Director for Consumer Financial
Protection and Senior Deputy Attorney General, Pennsylvania
Office of Attorney General..................................... 7
Thoman, Arwen, Director, Student Loan Assistance Unit,
Massachusetts Attorney General's Office........................ 9
APPENDIX
Prepared statements:
Cleaver, Hon. Emanuel........................................ 42
Buchanan, Scott.............................................. 43
Darcus, Joanna............................................... 51
Sanders, Joe................................................. 64
Smyth, Nicholas.............................................. 69
Thoman, Arwen................................................ 74
Additional Material Submitted for the Record
Barr, Hon. Andy:
Written statement of the Consumer Bankers Association........ 82
Written statement of the Credit Union National Association... 84
National Review article entitled, ``The Consumer Financial
Protection Bureau's Student-Loan Shakedown,'' dated
February 27, 2019.......................................... 85
Article from The Wall Street Journal entitled, ``The CFPB
assault on Navient crumbles under discovery.'', dated May
2, 2018.................................................... 89
AN EXAMINATION OF STATE EFFORTS
TO OVERSEE THE $1.5 TRILLION
STUDENT LOAN SERVICING MARKET
----------
Tuesday, June 11, 2019
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Al Green,
[chairman of the subcommittee] presiding.
Members present: Representatives Green, Beatty, Lynch,
Velazquez, Perlmutter, Tlaib, Casten, Dean, Garcia of Texas,
Phillips; Barr, Posey, Zeldin, Loudermilk, Davidson, Rose, and
Steil.
Ex officio present: Representatives Waters and McHenry.
Also present: Representatives Porter and Pressley.
Chairman Green. Good morning, everyone. The Oversight and
Investigations Subcommittee will come to order.
The title of today's hearing is, ``An Examination of State
Efforts to Oversee the $1.5 Trillion Student Loan Servicing
Market.'' I would like to make a brief comment on behalf, I
believe, of the ranking member and myself. A good many persons
make inquiries about attendance at hearings, and I would like
to let those who are listening know that Members may not be
here because they may be in other hearings, but the Members do
pay attention to these hearings, and they have a good sense of
timing such that they can be here to ask questions when
appropriate.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. Also, without
objection, members of the full Financial Services Committee who
are not members of this subcommittee may participate in today's
hearing for the purposes of making an opening statement and
questioning witnesses.
The Chair now recognizes himself for 4 minutes for an
opening statement.
Section 1035 of the Consumer Financial Protection Act of
2010 established a student loan ombudsman with the Consumer
Financial Protection Bureau (CFPB) to provide timely assistance
to borrowers, compile and analyze data on borrower complaints,
and prepare an annual report. Despite this statutory mandate,
the CFPB has not issued an annual report on student loan
complaints since October 2017. The position of Student Loan
Ombudsman has been vacant since Seth Frotman resigned in August
of 2018, asserting in his letter of resignation that the CFPB
has abandoned the very consumers it is tasked with protecting.
According to the Federal Reserve, Americans owe over $1.5
trillion in student loan debt, an increase of over $100 billion
since 2017. Students graduating from a 4-year college in 2016
owed on average $29,650 each in student loans. Those pursuing
professional degrees or graduate studies can expect to amass
student loans in the hundreds of thousands of dollars. The
macroeconomic impacts of such a massive debt burden are
quantifiable and ought to be a resounding wakeup call to
everyone within the sound of my voice.
Federal data shows that rising student loan debt is to
blame for a decline in homeownership among individuals ages 24
to 32. In addition to often becoming a roadblock to the
American Dream, student loan debt creates significant financial
hardships, and the costs only multiply once a borrower falls
behind on payments, resulting in lower credit scores, higher
cost of credit, and a loss of access to numerous Federal
benefits.
To facilitate borrower repayment, the U.S. Government
relies on student loan servicers. These servicers are for-
profit financial service providers hired at taxpayers' expense.
Servicers are charged with processing payments, keeping
records, communicating with borrowers, and providing counseling
on report options. But the research shows that borrowers face
dramatically different financial outcomes solely due to which
servicer the government assigns to them. It seems to be that
the luck of the draw can make a difference in one's life.
What's worse, recent investigations by the U.S. Government
Accountability Office (GAO), the Inspector General of the
Department of Education, the Consumer Financial Protection
Bureau, and numerous State law enforcement agencies reveal a
disturbing picture of an industry that is rife with misconduct,
errors, and negligence that become a monetary cost to the
borrowers. Far beyond the occasional improperly-imposed late
fee, too often these upstream servicing failures are the
precursor to preventable defaults. As a result, the data show
that borrowers of color experience worse financial outcomes,
including default rates, than other student loan borrowers.
Black and Latino borrowers also have higher rates of late
repayment of student loans than white borrowers: 49 percent; 41
percent; and 32 percent, respectively.
Through the voices of today's witnesses, we will learn more
about this powerful unaccountable industry that is financed by
lucrative government contracts and gain insights into the
lasting financial injuries that misleading and dishonest loan
servicing practices cause to borrowers.
At this time, I will now yield 4 minutes to the ranking
member of the subcommittee, Mr. Barr.
Mr. Barr. Good morning. And first, I want to thank Chairman
Green for holding a hearing on such an important topic. The
growth of student loan debt is indeed a crisis in our country.
According to the Institute for College Access and Success, the
Class of 2018 averaged almost $30,000 in debt per student. And
many students have taken on debt that far exceeds that figure,
sometimes reaching as high as several hundred thousand dollars.
Recently, a constituent came to my office who was a medical
resident. She had borrowed through college, through medical
school, and through residency. And along with her new husband,
together in the aggregate their student loans were reaching a
million dollars. And I am sure we have all heard from
constituents who are dealing with student debt by postponing
things like marriage and buying a home, so this is a complex
problem, and we cannot address the higher education crisis
without an honest conversation about the causes.
Since 2010, when President Obama nationalized the student
lending industry, the Department of Education has become the
largest consumer lender in our country. New loans are disbursed
faster than outstanding loans are being repaid, and student
loan debt has reached an all-time high of $1.5 trillion. The
number of Federal borrowers since the government's takeover is
up 51 percent. A significant portion of that debt is at risk of
default, and because Democrats nationalized student lending
back in 2010, taxpayers are left holding the bag. Now as a
result of the government takeover of student loans, the
government owns or guarantees 93 percent of all outstanding
student loans.
So we must address major issues facing the current system.
There are currently no underwriting standards to measure the
level of risk for student loans. The Federal Government must
become a more responsible lender, and schools must be honest
about the costs and the value of their degrees so that students
can make decisions that will set them up for long-term success.
Schools that help students graduate with high-quality career
prospects and low debt should be rewarded, and students must
have access to data and advice that will help them to be
responsible consumers of education.
We are here today to address a small aspect of the student
loan servicing companies. I think these companies would be the
first to admit that they should always strive to do better with
respect to advising student borrowers of all their options. But
for the most part, these companies are simply abiding by the
terms of their contracts with the Department of Education. The
servicers do not set the terms of the loan. The servicers do
not set interest rates for the loan. The servicers do not even
choose which loans they service. All of those decisions are
made by the Federal Government.
The servicers are simply contractors. They perform
functions that are specifically enumerated in their contracts
with the Department of Education. So if we want them to behave
differently, then we need to focus our energy on adjusting the
companies' relationship with the Federal Government by
reconsidering the terms of their contracts. Once again, the
loan servicers do not set interest rates nor loan terms. They
don't advise students on how much to borrow or where to go to
school. They don't set the cost of tuition. They don't help
students choose their majors or decide whether to go to
graduate school.
If we are going to talk about the growth of student debt in
this country, then those are the issues we need to discuss. We
need to look at the student debt crisis holistically, and that
means working with the committees of jurisdiction in Congress
and the Administration to identify meaningful reform. This is
not an issue that can be addressed solely at the Federal level.
Steps must also be taken by the schools and the States to
combat rising tuition costs. It should be no surprise to
anybody that when the Federal Government intervenes with mass
subsidization, costs run out of control. What you subsidize is
what you get, and we are getting a lot more debt because the
government is subsidizing it.
I welcome our witnesses, and I thank them for appearing
today and for all their work in this area. I yield back.
Chairman Green. Thank you. I will now extend a warm welcome
to each of our witnesses. And I am pleased to introduce to the
subcommittee at this time Joanna Darcus, Massachusetts Legal
Assistance Corporation Racial fellow at the National Consumer
Law Center; Joe Sanders, student loan ombudsman and supervising
assistant attorney general in the Consumer Fraud Bureau of the
Illinois Attorney General's Office; Nicholas Smyth, assistant
director for consumer financial protection, and senior deputy
attorney general in the Office of the Attorney General of
Pennsylvania; Arwen Thoman, the director of the student loan
assistance unit in the Massachusetts Attorney General's Office;
and Scott Buchanan, the executive director of the Student Loan
Servicing Alliance.
I would like to welcome all of you, and thank you for being
here. You will each be recognized for 5 minutes to give an oral
presentation of your testimony. And without objection, your
written statements will be made a part of the record. Once the
witnesses finish their testimony, each member of the
subcommittee will have 5 minutes within which to ask questions.
On your table are three lights. Green means go, yellow is
the 1-minute marker, which means that you are running out of
time, and red means you are out of time. The microphones are
quite sensitive, so please make sure you speak directly into
them. The witnesses' opening statements will begin now, and we
will start with Ms. Darcus. You are now recognized for 5
minutes to present your opening statement.
STATEMENT OF JOANNA K. DARCUS, STAFF ATTORNEY, NATIONAL
CONSUMER LAW CENTER (NCLC)
Ms. Darcus. Chairman Green, Ranking Member Barr, and
members of the subcommittee, the National Consumer Law Center
thanks you for giving us this opportunity to testify today.
Through our Student Loan Borrowers Assistance Project, my
colleagues and I represent individual clients and also train
and support attorneys who represent student loan borrowers
nationwide. We offer this testimony on behalf of NCLC's low-
income clients because there has never been a more important
time to focus on student loan servicing.
In this country, student loan debt affects people at every
stage of life. More education is supposed to translate into
more opportunities, but students who take on debt to afford
that education may struggle to realize that promise. These
borrowers need the help of a competent and efficient servicer.
Too often, however, borrowers languish in distress, struggle to
make ends meet, and wait to pursue life goals while paying
unaffordable student loan bills. Many unnecessarily experience
the perils of otherwise preventable defaults because they do
not receive the high-quality, timely assistance that could have
made a difference.
This is a well-documented problem. The largest servicers of
Federal student loans have a history of widespread servicing
failures that create obstacles to repayment, raise costs, cause
distress, and drive borrowers to default. Despite clear
benefits to the financial health of borrowers and their
families, many eligible borrowers are not enrolled in income-
driven repayment (IDR) plans. On these plans, borrowers may
make small or even zero-dollar monthly payments. IDR is a
sustainable option that provides a path to forgiveness of any
remaining balance after 20 or 25 years.
Instead of IDR, however, servicers steer many borrowers
into forbearances and deferments. These options are profitable
for servicers and costly for borrowers. An NCLC client had this
experience as she struggled to make her student loan payment
after completing a medical assistant program at a for-profit
school in Massachusetts. For 5 years, she dutifully contacted
her servicer and submitted documentation of her finances.
Despite clear eligibility for a zero-dollar IDR payment, she
was never enrolled in an IDR plan. Instead, each year her
servicer directed her into some kind of forbearance.
When this borrower came to NCLC, she had never even heard
of IDR options. Though she was still in good standing on her
loans during that time, she would have been better off on IDR.
She would have earned credit toward eventual loan forgiveness
and been spared the additional interest capitalization that
resulted from each forbearance. The worst part of this story is
that our client's experience is far from unique. State
enforcement actions targeted at this type of misbehavior derive
from similar stories. Several State attorneys general,
including those represented here today, have sued servicers for
these and other failures related to IDR.
Student loan servicing oversight is imperative because the
stakes are so high for all borrowers, and racial disparities in
student loan outcomes reveal particular harms to borrowers of
color. With less wealth than their white peers, black students
are more likely than other racial groups to borrow and to
borrow more for their education. Research shows that black and
Latinx borrowers experience higher rates of default than black
borrowers. Upon default, borrowers can face devastatingly
powerful debt collection activity.
Effective servicing is supposed to be a bulwark against
default and its consequences. Fairness and justice require that
borrowers have the ability to enforce their rights when
breached by servicers, yet few borrowers have the ability to
seek redress when servicers violate their rights. Robust public
enforcement at the State and Federal levels is necessary to
provide relief to borrowers harmed by systemic servicer
misconduct and to prevent future harms. The States have stepped
up to protect their residents. Now, borrowers need and deserve
to have the Federal Government provide stronger oversight and
for servicers to provide better assistance.
Thank you for the opportunity to testify today. I look
forward to your questions.
[The prepared statement of Ms. Darcus can be found on page
51 of the appendix.]
Chairman Green. Thank you, Ms. Darcus. Mr. Sanders, you are
now recognized for 5 minutes for your oral statement.
STATEMENT OF JOSEPH SANDERS, STUDENT LOAN OMBUDSMAN AND
SUPERVISING ASSISTANT ATTORNEY GENERAL, CONSUMER FRAUD BUREAU,
ILLINOIS ATTORNEY GENERAL'S OFFICE
Mr. Sanders. Chairman Green and Ranking Member Barr, thank
you for the subcommittee's interest in the important topic of
student loan servicing, and thank you for inviting me to
testify.
As we heard from Joanna, student loan debt has increased
exponentially over the last 10 years, and many students are
struggling with repayment. Student loan servicers are among the
companies tasked with assisting students in identifying
appropriate repayment options, among other functions. In recent
years, State attorneys general have investigated and brought
enforcement actions against multiple student loan servicers.
My office conducted an investigation of Navient
Corporation, one of the largest student loan servicers. The
investigation revealed a plethora of student loan servicing
abuses, including a deceptive practice referred to as
forbearance steering. Our office reviewed hundreds of phone
calls between Navient representatives and students. That review
revealed that when students who were behind on their payments
contacted Navient for assistance, the company steered them into
successive forbearances to increase the overall cost of their
loans instead of telling students about other repayment options
that may have been more appropriate, such as income-driven
repayment. We found that Navient used an incentive compensation
plan to pay employees more for shorter call times, thereby
reducing the company's costs. For borrowers, though, short
calls often mean that they are put into the wrong repayment
plan.
Forbearances are a temporary pause in payments that can be
set up in minutes over the phone. They are not beneficial for
borrowers if continued over the long term, though, because
interest continues to accrue and can be added to the principal
balance of the loan. Income-driven repayment plans, by
contrast, are relatively complex, and it takes time to analyze
whether borrowers qualify. These plans, however, offer
affordable monthly payments and ultimately lead to loan
forgiveness.
A former Navient employee gave us a view of forbearance
steering from inside the company. He described feeling
pressured to reduce call time, often getting pulled aside and
talked to because his calls were too long when he took the time
to see if borrowers' payments could be reduced. Our office sued
Navient in January of 2017, alleging that these issues, among
others, constituted unfair and deceptive practices pursuant to
the Illinois Consumer Fraud Act. Navient moved to dismiss our
lawsuit. Navient's primary argument in its motion to dismiss
our case and other State law enforcement actions is that State
laws outlining consumer fraud are preempted by the Higher
Education Act.
Many courts have rejected this argument. Indeed, in every
State law enforcement action where a court has ruled on a
motion to dismiss filed by Navient, the State has prevailed.
There have been some Federal court decisions, however, finding
that these types of consumer fraud claims are preempted by the
Higher Education Act.
The Department of Education developed a set of servicing
standards to protect students from these types of abuses. In
April 2017, however, the Department withdrew those protections.
Illinois thankfully also took action to protect our student
loan borrowers. Our State passed the Student Loan Servicing
Rights Act, which went into effect this year. The Act provides
an array of protections for students. It restricts forbearance
steering, requires that student loan servicers first offer
income-driven repayment options to struggling borrowers, and
requires servicers to create repayment specialists who are
specifically trained to assess financial circumstances in order
to effectively counsel students. The Act also creates a student
loan ombudsman tasked with developing outreach efforts and
responding to complaints.
I was appointed to serve as ombudsman this year, and,
through May, I have received over 300 complaints and over 200
calls related to student loans. What I have seen is that
borrowers lack basic information about their loans and options.
Many are unaware whether their loans are Federal or private,
and many are unaware of the existence of income-driven
repayment plans. Borrowers continue to struggle with servicing
abuses and need increased protections.
Servicing failures like these create more problems for
student loan borrowers as predatory companies seek to fill this
information void. For example, servicers' failure to provide
accurate information on repayment options has contributed to
some schools engaging consultants to push students into
forbearance in order to keep the school's cohort default rate
down. If too many students default on their Federal loans
within the first 3 years of repayment, schools may lose their
ability to participate in Federal student aid. To keep defaults
down, some schools hire companies that encourage students with
delinquent loans to enter forbearance. As the GAO recently
reported, these companies often push students into forbearance
instead of other more beneficial plans, like income-driven
repayment.
In conclusion, if student loan servicers were providing
proper repayment information to student loan borrowers in need,
these scams would not have victims to take advantage of. Thank
you for your attention to this topic. I look forward to
answering any questions you may have.
[The prepared statement of Mr. Sanders can be found on page
64 of the appendix.]
Chairman Green. Thank you, Mr. Sanders. Mr. Smyth, you are
now recognized for 5 minutes for your oral statement.
STATEMENT OF NICHOLAS SMYTH, ASSISTANT DIRECTOR FOR CONSUMER
FINANCIAL PROTECTION AND SENIOR DEPUTY ATTORNEY GENERAL,
PENNSYLVANIA OFFICE OF ATTORNEY GENERAL
Mr. Smyth. Chairman Green, Ranking Member Barr, and members
of the subcommittee, thank you for inviting me to testify
today. My name is Nicholas Smyth, and I am a senior deputy
attorney general from Pennsylvania.
In July 2017, Attorney General Josh Shapiro established the
office's first-ever Consumer Financial Protection Unit and
hired me to lead it. General Shapiro tasked us with focusing
special attention on for-profit college and student loan
servicers because the student loan debt crisis touches nearly
every resident of our Commonwealth. The average student loan
for new graduates in Pennsylvania is nearly $37,000, the second
highest in the country. About 2 million Pennsylvanians, almost
1 in 5 adults, have student debt.
This subcommittee is right to focus its attention on the
crisis in student loan servicing because the government
contractors that service Federal loans have caused needless
financial harm to millions of families across the country. They
have failed to carry out the programs Congress created to give
borrowers more affordable payment plans for their loans.
My testimony will focus on one particular servicer of
Federal loans, Navient, which has 1,000 employees in
Pennsylvania. Our office sued Navient in 2017. The consumer
bureaus in 4 other States have other sued Navient. Our 9-count
complaint is linked in my written testimony.
Among other things, we allege that Navient's deceptive
practices and predatory conduct harms student borrowers and
puts their own profits ahead of the interests of millions of
families across Pennsylvania and the country who are struggling
to repay student loans. Navient's conduct cost borrowers an
additional $4 billion in unaffordable interest that Navient
added to their loan principal as a result of multiple
forbearances.
As you heard from Mr. Sanders and Ms. Darcus, income-driven
repayment plans are a generally much better option than
forbearance. Borrowers who enroll in forbearance face
significant costs, including accumulation of unpaid interest,
which is added to the loan's principal balance at the end of
the forbearance, missing out on low or zero-dollar payments
that could count towards loan forgiveness, and the borrower's
monthly payment can dramatically increase after the forbearance
period ends.
We alleged in our complaint that during the 5 years from
January 2010 to March 2015, Navient enrolled over 1\1/2\
million borrowers into 2 or more consecutive forbearances.
Navient's own numbers show that these consecutive and
unnecessary forbearances added nearly $4 billion in interest,
which works out to an average of $2,700 per borrower from
forbearances. As alleged in our complaint, Navient and its
agents were incentivized to push forbearances instead of IDR
because it was faster and more profitable for Navient, even
though it unfairly penalized borrowers. Forbearances get the
borrower off the phone quickly without any paperwork and allow
the Navient agent to move on to the next call.
In short, an entire generation is being held back by the
shackles of student loan debt, and these debts are growing
instead of shrinking in part because Navient is not helping
borrowers enroll in the payment plans that are best for them,
despite representing that it is the expert in the area and
would assist borrowers. For borrowers facing financial
hardship, IDR plans are generally much better. It is Navient's
job to help borrowers figure out which repayment plan is best
for them, but despite publicly assuring borrowers that it will
help them identify and enroll in an affordable, appropriate
repayment plan, Navient has routinely steered borrowers
experiencing long-term financial hardship into forbearance.
I will illustrate how IDR works with an example. Imagine a
family with a Federal loan balance of $40,000 with an income of
$63,000 a year. This family would pay $403 per month on their
Federal loans for 10 years under the standard repayment plan.
Under an IDR plan, that family would pay half of that, only
$203 a month, and would qualify for forgiveness of any
remaining loan balance after 20 years of payments. And if the
family works in public service, such as teachers or police,
they could earn forgiveness after just 10 years of those $203-
a-month payments. Now, imagine the household income drops to
$39,000. All of a sudden this family is eligible for zero-
dollar monthly payments under IDR. These zero-dollar payments
still count towards forgiveness in 10 or 20 years.
Now, imagine if the family had called Navient following the
income drop, and instead of IDR, as our complaint alleges,
Navient steered them into a 6-month forbearance. Instead of
qualifying for zero-dollar payments and eventual forgiveness,
the family will still pay nothing, but they will not receive
credit toward forgiveness. Many Pennsylvanians have suffered
from this steering, and we tell some of their stories in the
complaint. One told us she had worked in the public sector
since 2006, qualifying her for the 10-year loan forgiveness
under the Public Service Loan Forgiveness (PSLF) Program.
However, when she asked Navient about PSLF in 2007, their
employees gave her misinformation that deterred her from
enrolling. She didn't find out until 7 years later that they
had given her the wrong information, and had Navient been
truthful in 2007, she may have qualified for forgiveness as
soon as 2017.
I thank you for the opportunity to testify today, and I
would be happy to answer any questions.
[The prepared statement of Mr. Smyth can be found on page
69 of the appendix,]
Chairman Green. Thank you, Mr. Smyth. Ms. Thoman, you are
now recognized for 5 minutes to present your oral statement.
STATEMENT OF ARWEN THOMAN, DIRECTOR, STUDENT LOAN ASSISTANCE
UNIT, MASSACHUSETTS ATTORNEY GENERAL'S OFFICE
Ms. Thoman. Chairman Green, Ranking Member Barr, and
members of the subcommittee, thank you for inviting me to
testify on State efforts to protect student loan borrowers. My
name is Arwen Thoman. I am director of the Massachusetts
Attorney General's Student Loan Assistance Unit. On behalf of
Attorney General Maura Healey and borrowers from Massachusetts,
I appreciate the opportunity to speak on the critical issue of
Federal student loan servicing.
Attorney General Healey established our Student Loan
Assistance Unit in 2015. In the last fiscal year, the unit
received over 3,000 hotline calls, nearly 1,000 written help
requests, and generated savings and refunds of $1.5 million for
student loan borrowers. Each day, we are on the front lines of
the student crisis, helping borrowers to find more affordable
repayment plans and working to move loans out of default in
order to end involuntary collection activities that cause
serious harm to our residents.
If I can offer the subcommittee one takeaway, it is that
student loan borrowers and their families deserve much better
from the Federal Government and the private companies hired to
service Federal student loans. Every day we speak with
borrowers who have found their way to our office in despair. We
routinely hear that borrowers are worried about their ability
to start a family, to buy a home, or achieve even a very basic
minimal standard of living. Many have been struggling with
student loan debt for years and, in some cases, for decades.
Each borrower's story is unique, but the patterns and their
distress and their mistreatment are painfully clear. Given the
social and economic vulnerabilities of many student loan
borrowers, the inordinate complexity of the Federal loan
system, and the mounting scale of student loan debt across the
nation, the role of student loan servicers is more important
than ever.
Although we have worked hard at the State level to improve
servicer treatment of borrowers through direct advocacy and
enforcement of our State's consumer laws, we believe that more
Federal oversight and action is necessary to protect borrowers
and address the harm caused by inappropriate servicing
practices. This Federal oversight must not be concentrated
solely in the hands of the U.S. Department of Education, which
also serves as the lender, and has historically turned a blind
eye to many of the problems associated with student loan
servicing.
Effective servicing is essential to avoiding the
consequences of Federal loan default. Default occurs when a
borrower is 270 days past due. Default carries severe penalties
and can lead to many years of crushing student loan debt. When
borrowers default, collection fees exceeding 20 percent of the
loan balance are assessed. Moreover, borrowers face
administrative wage garnishments, tax refund interceptions, and
offsets to their Social Security and veterans' benefits. Unlike
nearly every other category of unsecured debt, Federal student
loans are generally non-dischargeable in bankruptcy, and there
is no statute of limitations on collection. They can remain
with the borrower for life.
Here is just one example of a complaint that we received
concerning a defaulted Federal student loan: ``My wages are
being garnished, but myself and my husband are living in a
motel, and they are taking out too much. I am not going to be
able to afford where we are staying right now. I explained that
I am going to be homeless, but they said there was nothing they
could do about it.''
The consequences of default and the long horizon on Federal
student loan collection create a heightened responsibility for
us all to ensure that servicers are helping borrowers to
successfully and affordably manage repayment. Unfortunately, we
consistently see servicers that fail to provide the help that
borrowers need.
As detailed in my written testimony, servicing problems
that we frequently encounter include failures to enroll
borrowers in income-driven repayment payment plans that reduce
payments and lessen the likelihood of spiraling debt and
default; failures to help borrowers maintain the benefits of
those plans through annual recertification of income; failures
to provide adequate guidance so that borrowers can effectively
pay down loan principal; and failures that obstruct the Public
Service Loan Forgiveness Program.
We have also observed the rise of predatory student loan
debt relief companies that take advantage of distressed
borrowers who turn to them when student loan servicers have
failed to help. Congress has taken significant steps to help
borrowers avoid ruinous student loan debt by creating
affordable repayment plans and forgiveness programs. However,
all of these programs rely on servicers. They are the
gatekeepers. They are the companies contracted by the
government to connect student loan borrowers with the help
those borrowers need. And when servicers fail to act in
borrowers' best interests, communicate effectively, or respond
to questions accurately, our students and their families suffer
serious consequences.
We hope that you will continue in your efforts to hold
student loan servicers accountable and improve servicing
standards. I appreciate the opportunity to share these thoughts
with you today.
[The prepared statement of Ms. Thoman can be found on page
74 of the appendix.]
Chairman Green. Thank you, Ms. Thoman, for your testimony.
Mr. Buchanan, you are now recognized for 5 minutes for your
testimony.
STATEMENT OF SCOTT BUCHANAN, EXECUTIVE DIRECTOR, STUDENT LOAN
SERVICING ALLIANCE
Mr. Buchanan. Thank you, Chairman Green, Ranking Member
Barr, and members of the subcommittee for allowing me to
provide testimony today to help inform this discussion about
student loan servicing. I am Scott Buchanan, the executive
director of the Student Loan Servicing Alliance, which
represents the companies, State agencies, and nonprofits which
are responsible for servicing over 95 percent of all student
loans.
It is first critical to understand what a servicer does and
what a servicer does not do. Servicers are on the front lines
every day, talking to and working with borrowers. We send
recent graduate statements and disclosure letters. We provide
online interactive Web experiences, videos, and calculators. We
hold Facebook chats and even Twitter parties about good
repayment strategies. We provide mobile apps, and we handle
tens of millions of phone calls each year.
But it is also important to remember what we don't do. The
Federal servicers do not set the parameters for student
eligibility. We do not set the interest rate. We do not set the
repayment option requirements. We do not do debt collection and
we do not own the loans. Those are matters set forth by Federal
statute and regulations governing the program. Also, our role
begins long after a student has chosen to take loans and exited
school or graduated.
While no single repayment plan or strategy is better, both
financially and in desirability for all borrowers, we have
delivered some pretty impressive results. We have increased
enrollment rates in IDR plans by 400 percent since 2013. Half
of the direct loan portfolio is now an income-driven plan.
While they were always low, complaints about student loan
servicing declined by nearly 50 percent last year according to
the CFPB, and represented just .6 percent of all consumer
financial complaints. And we have done all this while the
number of borrowers has grown by 40 percent in the last decade
alone.
It is probably also useful to address some other assertions
or rhetoric that has been part of this dialogue. There has been
much mischaracterization of the recent OIG report on student
loan servicing, yet there are important facts that are clear in
that report. The OIG report validated that every Federal loan
servicer exceeded the service level agreement standard set by
the Department of Energy. The report shows also that Federal
loan servicers had an average real error rate of 00.49 percent.
And the report shows that the Department of Education conducts
extensive onsite visits, monitors service levels, and samples
call recordings to validate the quality of service.
And while I am not party or privy to the ongoing State
legal matters that have may have been discussed, there are some
key points that should be considered relevant to this topic.
The Federal Student Loan Program is just that, a clearly
Federal program that is preempted from State efforts which
would create conflicting requirements. Setting aside those
discreetly legal matters, this means servicers are now stuck in
the middle between a government disagreement between the
States, multiple Federal agencies, and Congress. That conflict
between others means that the resources we otherwise devote to
helping borrowers access their options are being misdirected to
try and get clarity.
Most importantly, though, what can we do to improve
servicing? First, education. We have supported partnerships
with the States that help us educate borrowers, and that may
mean expanding their existing higher education authorities or
creating a student loan ombudsman office who can take
complaints and offer independent third-party counsel.
Second, simplification. Many borrowers face the challenge
of an antiquated process to handle applications from many
repayment plans, especially for IDR. We would like to work with
Congress to allow data-sharing between the Department of
Education and the IRS to reduce borrower paperwork. Further, we
welcome support to help us get permission to implement simple
modernizations to let us use pre-filled recertification forms
electronically for IDR, which has proven to nearly triple the
response rate for renewals.
Third, standardization. We continue to advocate for a
common servicing manual that could be developed in partnership
with the Department of Education and other regulators.
Additionally, we have been actively helping to support an
effort to standardize and modernize credit bureau reporting to
help borrowers.
And finally, protection. We have also actively been
supporting efforts to pass legislation to crack down on debt
relief firms that scam borrowers. We would love to partner with
the States and others on this fight.
Thank you, and I look forward to your questions and also
working with you and others on these important issues.
[The prepared statement of Mr. Buchanan can be found on
page 43 of the appendix.]
Chairman Green. Thank you, Mr. Buchanan. The Chair will now
recognize the gentlewoman from Ohio, Mrs. Beatty, who is also
the Chair of our Subcommittee on Diversity and Inclusion. Mrs.
Beatty, you are recognized for 5 minutes.
Mrs. Beatty. First of all, thank you, Mr. Chairman, for
hosting this subcommittee hearing this morning. And let me just
say to not only the witnesses, thank you for being here, but,
Mr. Chairman, I couldn't help but notice the audience behind
our witnesses. Since I have been on this committee, this is
without a doubt the youngest-looking--I don't want to make any
assumptions--average age that we have had to fill this hearing
room, so I think that speaks volumes to the importance of this.
And I want to thank all of those millennials who are here
because I am making the assumption that you either have student
loans--and you are nodding. So let the record show that they
are here because they are part of this wonderful America, and
they, too, applaud you and are interested in this topic.
Let me just very briefly say this is very important to me.
And I am really pleased that we are talking about something
that is so important to not only you as young folks, not only
to educators, but it is important as we look at housing, as we
look at debt, as we look at financial credit scores, because
debt, regardless of where you get it from, affects everything.
And when we talk about education, the numbers that are on
the board in this room are very alarming to me, so I am going
to be very critical of this Administration. I am going to be
very critical of this Secretary of Education. And while I may
not be an expert-expert, I want the record to know that I have
served as an academic adviser. I have served as a college
administrator, and at one time as an adviser to young college
students. I developed the curriculum at that time for the
largest 2-year college in the State of Ohio, which is the State
I am from, on college survival skills. And even then, one of
the things that we frequently heard was, how do we pay back our
student loan? Here we are now some 3 decades later still
dealing with this issue.
And I say, shame on this Administration. Shame on this
Secretary of Education. I was critical when the appointment
came. I think when you are talking about our future, you need
to make sure that you have someone who has worked in education,
who understands all of the principles of it. So with that, let
me pose my first question to the panel.
It is my belief that most Americans who have to take out
student loans to fund their education, first of all, want to
pay those loans back, and many want to do it as quickly and as
efficiently as possible, but have not been able to do that. So
who are the borrowers relying on to get information regarding
their loans, and is this Government under this Administration
setting them up for failure? There is a lack of information on
the Education Department's website. The Department of the
Treasury has even criticized the Department of Education's lack
of oversight.
So to the panelists, are they being set up for failure, or
where do they go to for information? We will start with you,
Mr. Smyth, and Ms. Darcus.
Mr. Smyth. Borrowers are utterly dependent on the
contractors, on the student loan servicers. The servicers make
representations that they will help borrowers identify their
options, and the servicers are failing in widespread ways at
this--
Mrs. Beatty. Okay. Ms. Darcus, failing, succeeding? Whose
fault is this?
Ms. Darcus. That is correct. We pay servicers billions of
dollars to do the job right. They compete for these lucrative
contracts. They say that they are the experts. They claim that
they can accomplish the task. But student borrower outcomes
belie those claims.
Mrs. Beatty. Okay. Mr. Buchanan, Ms. Thoman, quickly
because I only have about 25 seconds?
Mr. Buchanan. Sure.
Mrs. Beatty. Failing or not?
Mr. Buchanan. I think if you look at the actual metrics
that I talked about, we are improving dramatically.
Mrs. Beatty. I am going to rush you. Failing or not?
Mr. Buchanan. Not. We are working better every day.
Mrs. Beatty. Ms. Thoman?
Ms. Thoman. Failing.
Mrs. Beatty. Okay. Mr. Sanders, you highlighted something
great in the State of Illinois. Should we use that same thing
here in the Federal Government? Would it be helpful?
Mr. Sanders. Absolutely. I think that the protections that
we have instituted in Illinois would be helpful for borrowers
nationwide. And I know that there is legislation that has been
introduced in the Senate that would institute some of those
protections on the Federal level.
Mrs. Beatty. Okay. Thank you, and I yield back.
Chairman Green. The gentlelady's time has expired. The
Chair will now recognize the gentleman from Kentucky, Mr. Barr,
the ranking member of the subcommittee, for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman, and, again, thanks for
holding this important hearing. And thank you to my friend from
Ohio for recognizing so many young faces out there. I do think
it is unconscionable the level of debt that so many young
people today have to deal with. It is deferring homeownership.
It is deferring marriage. It is deferring retirement savings.
It is producing a savings crisis in this country. And it is
unfortunate that Federal policy is enticing so many students to
take on too much debt, especially with the degrees and the
income that can be produced for repayment. I think that is
something that we all have to really assess as policymakers.
Mr. Buchanan, since 2010 when President Obama nationalized
the student loan system, the Department of Education has become
the largest consumer lender in the country. Your association is
made up of student loan servicers who are contracted by the
Department of Education to ensure that borrowers repay those
loans. There seems to be some confusion as to the role of
servicing companies in the $1.5 trillion student debt crisis,
and I am hoping you can help me clear up the confusion. Do
student loan servicers advise students as to which school to
attend or which degree to pursue?
Mr. Buchanan. We do not.
Mr. Barr. Do student loan servicers set tuition rates?
Mr. Buchanan. We do not.
Mr. Barr. Do student loan servicers advise a student as to
how much money to borrow?
Mr. Buchanan. We do not.
Mr. Barr. Do student loan servicers set the terms of the
loan?
Mr. Buchanan. We do not.
Mr. Barr. Do student loan servicers set the interest rate
for the loan?
Mr. Buchanan. We do not.
Mr. Barr. Do student loan servicers create the forbearance
or deferment option that is available to students?
Mr. Buchanan. We do not.
Mr. Barr. And who did create the forbearance option?
Mr. Buchanan. Congress did.
Mr. Barr. Thank you. So it sounds like all the factors that
are driving the growth and total student debt in this country,
things like lack of information available to students who are
in college, high tuition rates, low graduation rates, not to
mention the interest rate in terms of the loan, those are all
set long before the borrower even makes contact with a loan
servicing company.
Mr. Buchanan. That is correct.
Mr. Barr. Now, Ms. Darcus made, I think, an important
point. She talked about this forbearance, and all of the
witnesses are talking about this forbearance or deferment
option. As I recall, Ms. Darcus' testimony was that forbearance
and deferment is a profitable option for the servicers. I want
to explore that a little bit with you, Mr. Buchanan. Do student
loan servicers make more money, are they more profitable by
placing students into forbearance status?
Mr. Buchanan. We are paid far less for any borrower who is
in a forbearance status. In fact, the numbers are clear. We are
paid, on a monthly basis, $1.05 to service a borrower who is in
forbearance. We are paid $2.85 for a borrower who is in
repayment.
Mr. Barr. So you are paid less if the student goes into
forbearance?
Mr. Buchanan. That is correct.
Mr. Barr. So if student loan servicers have no financial
incentive to move students into forbearance status, why are so
many students moving into forbearance status?
Mr. Buchanan. Well, the rates of forbearance utilization
have declined over the last few years. Right now, approximately
10 or 11 percent of borrowers utilize forbearance, but it is
important to understand what forbearance is used for many
times. When someone applies, for example, for an income-based
repayment plan and that borrower is already delinquent on their
accounts, many servicers apply a forbearance in order to bring
that borrower current, which is useful to that borrower because
if we do not use the forbearance, they will become delinquent
and get reported to the credit bureaus.
Mr. Barr. And, again, Congress created the option.
Mr. Buchanan. That is correct.
Mr. Barr. The servicing industry did not. Mr. Smyth, I
appreciated your testimony that for borrowers facing financial
hardship, often, income-driven repayment plans are generally
much better than multiple forbearances. I couldn't agree with
you more. Repaying the loan instead of forbearance makes a
whole lot of sense to me, especially if you can. Obviously, a
lot of these students are facing financial hardship. My
question to you is, since your office sued because of this
issue, this problem, should Congress reform the Federal Student
Loan Program to repeal the forbearance option?
Mr. Smyth. That is an interesting question. We haven't
given it any thought, and I think it would be impractical for
the reason that Mr. Buchanan explained, that forbearance is
sometimes used to help people when they are delinquent in
getting into IDR.
Mr. Barr. Right, so it is helpful. So, you are saying
Congress shouldn't mandate IDR?
Mr. Smyth. I think that it would be helpful if IDR were the
default option; in other words, if there were easier steps to
getting people into IDR. And I think Congress should explore
prohibiting multiple consecutive forbearances, which is the
significant harm that we found and that we talk about in our--
Mr. Barr. My time has expired, but I appreciate the
recognition that IDR is better, but that Congress is really the
responsible party here. I yield back.
Chairman Green. The gentleman's time has expired. The
gentleman from Massachusetts, Mr. Lynch, is recognized for 5
minutes.
Mr. Lynch. Thank you, Mr. Chairman, and Mr. Ranking Member.
I want to thank the witnesses for your testimony this morning.
It's very helpful. Mr. Chairman, I ask unanimous consent that I
might enter into the record the complaint in the case of
Commonwealth of Massachusetts v. Pennsylvania Higher Education
Assistance Agency, d/b/a Federal Loan Servicing.
Chairman Green. Without objection, it is so ordered.
Mr. Lynch. Mr. Chairman, the complaint here lists a litany
of abuses by this particular servicer that have been recounted
in the testimony of our witnesses this morning, varying from
not informing students that there was an income-related
repayment option to, in some cases, students were not made
aware that their public service entitled them to a more
favorable loan repayment schedule.
Ms. Darcus, we are dealing with this whole situation, and
it is so varied and so widespread, as Ms. Thoman has laid out
as well. Would it be a cleaner solution for Congress just to
impose a fiduciary duty on the part of the servicers so that
they have to act in the best interest of the student who takes
out the loan? That would seem to get at all of this rather than
trying to do it piecemeal, trying to create incentives for the
servicers to treat people more fairly.
Ms. Darcus. That would be a powerful accountability tool.
Many borrowers are unable to speak up for themselves because
their relationship with the servicer is indirect. They don't
choose their servicer, they don't choose the terms of their
servicing, and they don't have a contract with their servicer
that they can then try to enforce when the servicer violates
their rights. Creating a duty that requires the servicer to
affirmatively act on behalf and be responsible for borrower
outcomes could be very powerful.
Mr. Lynch. Thank you. Ms. Thoman, I know that you are
involved in, and I thank you for your good work, and also
Attorney General Healey in my State of Massachusetts, is doing
terrific work on this. You have seen, at least in the
complaint, it talks about the shifting irresponsibility on the
part of some of these servicers. When you nail them on one
aspect of it, they seem to create a new and different type of
abuse that they employ. Would creating this fiduciary duty that
requires the servicer to act in the best interest of the
student who takes the loan out be helpful in relation to the
cases that you continue to see in Massachusetts?
Ms. Thoman. Yes, I absolutely believe that creating a
fiduciary duty for student loan servicers would be helpful. It
would also need to come with a means for borrowers to enforce
that obligation.
Mr. Lynch. Right. Well, there is plenty of case law that
articulates what a responsible fiduciary must do so they would
be measured by that standard. Are there any other
recommendations that you would like to see in terms of
protecting some of these students? I have nieces and nephews
who are up to their eyeballs in student debt, and it is
unbelievable the amount of debt that some of these kids are
carrying. We have to figure out a better way because borrowers
have to put their lives on hold. They can't start a family. In
many cases, they are still living at home with their parents.
It is just very depressing and a heavy burden on these kids. Is
there something else we could be doing here that might lift
that burden?
Ms. Thoman. I think that part of what we are all saying
here is that Congress has done a lot to try to lift that burden
by creating these income-driven repayment plans and public
service loan forgiveness programs. I do think that those
programs could in many cases be more generous towards
borrowers. We could raise the amount of income that is
protected so that we are not looking at 150 percent of the
Federal poverty line, which I think for a single borrower in
Massachusetts is less than $20,000.
Mr. Lynch. Right.
Ms. Thoman. The student loan servicers are also not wrong
that the system is very complicated. And so to the extent we
can do things to streamline, to make recertification simpler.
But I do think that in large part, a framework has been created
to address many of these problems, and that implementation of
that framework has been very challenging for the servicers.
Mr. Lynch. Okay. Mr. Chairman, my time has expired. I yield
back. Thank you.
Chairman Green. The gentleman's time has expired. The
gentleman from Florida, Mr. Posey, is recognized for 5 minutes.
Mr. Posey. Thank you, Mr. Chairman, for holding this
hearing. Mr. Buchanan, how many Federal loan repayment plans
are there today?
Mr. Buchanan. Well, that is a complicated question, because
for every borrower, the amount of repayment plans that they
have eligibility for varies based upon when they took out those
loans, what year they graduated, and when Congress gives and
takes away repayment plans. But all in all, including
forbearances, deferments, and 5 different flavors of income-
based repayment, there are more than 55 repayment options that
are available to any given borrower at a particular time. And,
as I said, some borrowers may not have access to all of them,
and that is the complexity of the Federal Student Loan Program.
If you ask what particular borrower has access to what loan
repayment options, there is a whole laundry list of questions
that have to be asked and assessed before you can even
determine which of those 55 are on the short list of things
they could turn to.
Mr. Posey. Do any of the applications for the loans ask the
student how they plan to repay them?
Mr. Buchanan. In a master promissory note, I am not
familiar. I would have to look at that on the front end, which
is the Department of Education originates these loans and is
the lender, so they handle all of the loan disclosure up-front
for originating the loans. But to my knowledge, I don't know
that that is specifically called out, but I could be wrong.
Mr. Posey. If a student wanted to pursue a Ph.D. in
primitive basket weaving, where along the process would
somebody tell them that it is highly unlikely they would be
able to repay the loan?
Mr. Buchanan. Well, one would hope that that communication
came before choosing to take that degree and moving forward.
That is really an opportunity for, and, again, this not an area
that we are involved in because this all happens long before
the borrower comes to us. They have already made those choices
and decisions and have gotten and hopefully graduated into the
job marketplace.
But that is probably where, from a front-end perspective as
the lender, the government should look at what is its level of
disclosure and communication to borrowers. Schools should
probably be playing a role in that conversation. And I think
that is also a great opportunity for States and others to
participate with individuals in their jurisdictions and be part
of that education process.
At the end of the day, I think what we are all trying to do
is help people make informed and better decisions, right? And
we would love them to make informed, better decisions before
they come to the servicing side where we have to, in essence,
deal with those choices that have been made and try to put them
on the best path that is available under the Federal law.
But I think working together, whether it is Congress,
schools, the Department of Education, and States, and families
on being informed about making good decisions before they take
on debt, I think that would be very helpful.
Mr. Posey. Does anyone know where it is mandated that the
various parties that Mr. Buchanan represents are actually
obligated to help students make intelligent decisions about how
much they are going to borrow and be able to repay?
Ms. Darcus. I don't believe that servicers are expected to
advise borrowers about how much to borrow when they are in
school. I think a lot of what we are speaking to from the
borrower experience is that the cost of attending college
increases in repayment due to servicer error and misconduct. I
have seen borrowers who borrowed $6,000 to go to school, wind
up with 6 figures of debt because of servicing errors.
Forbearances, default, and issues with getting into income-
driven repayment after years of struggling can make a balanced
balloon even after the initial borrowing--
Mr. Posey. So, it sounds like we need to require a
financial literacy test or at least a course before somebody is
allowed to apply for a student loan. Mr. Chairman, I would like
to yield the remaining of my time to the ranking member.
Mr. Barr. Thank you for yielding. Mr. Buchanan, does the
student loan servicing industry have any data about the risk of
default when a borrower responds to servicer outreach versus
when a borrower does not interface with a servicer?
Mr. Buchanan. Yes, I think the data exists, and that is one
of the more troubling things in this conversation. As
servicers, we make mistakes from time to time. You look at the
statistics, and those are not at a high level at all. But when
the conversation is saying, avoid talking to your servicer, who
is the expert, who is supposed to working with you, that is a
real problem because if we can talk to someone who is on the
cusp of default, which is the worst thing that can happen to a
borrower at the end of the day in terms of consequences, 9 out
of 10 times we can get them into a repayment program or a
repayment option that is going to help divert that default and
get them back current.
Chairman Green. The gentleman's time has expired. We will
now move to the gentlewoman from New York, Ms. Velazquez, for 5
minutes.
Ms. Velazquez. Thank you, Mr. Chairman. Ms. Darcus, Federal
student aid began accepting and reviewing applications from
borrowers seeking loan forgiveness under the Public Service
Loan Forgiveness Program in the fall of 2017. As of March 31,
2019, the Department of Education has only approved 518 of the
more than 73,000 borrowers who have applied under the program,
and discharged only approximately $30 million in student loans.
Why are these numbers so low? Why has the Department of
Education not approved more borrowers for forgiveness under the
Public Service Program?
Ms. Darcus. We know that borrowers who are seeking Public
Service Loan Forgiveness have a lot of hurdles in order to get
there, and their servicer is supposed to walk them through that
process. As the lawsuits that you have heard about and these
witnesses can tell you more about exposing, there are many ways
in which servicers can thwart the efforts, the very determined
efforts of public servants to fulfill their responsibilities to
their community, repay their loans, and get the forgiveness
they deserve.
That happens when they believe that they are track on to
get forgiveness because their servicer assures them they are in
the right repayment plan, and that they are doing everything
they need to do to comply. As you have heard today, there are
affirmative misrepresentations made by servicers. They are not
just forgetting to tell people information or saving time and
highlighting some of the options. They are telling people they
are on track when they are not. And they are--
Ms. Velazquez. Thank you. Mr. Buchanan, State attorneys
general have initiated enforcement actions to protect student
loan borrowers from unlawful servicing practices. Do you think
those cases are without merit?
Mr. Buchanan. Listen, again, I am not privy to the details
of those cases. Those are between the attorneys general and
those entities. I think so far it is clear that there have been
no rulings on the facts in those cases and on the merits of
those arguments. They are assertions, but there has been no
determination that they are true, and I--
Ms. Velazquez. Okay, thank you. Reclaiming my time, Ms.
Darcus, student loan borrowers with direct loans do not choose
their loan servicer. Rather, the Department of Education
assigns the loan to a servicer after disbursement. Can you
explain why this is the case and how this came to be?
Ms. Darcus. I think it is certainly problematic that
borrowers don't have the option to vote with their feet and
choose their servicers in most contexts. Yes, they are assigned
a servicer, they are stuck with that servicer, and that is a
problem for borrowers who are not getting the kind of service
that they need. And it is also a problem because the same
servicers that systematically fail those borrowers continue to
get more borrowers assigned to them.
Ms. Velazquez. Do you think student loan borrowers would
have better experiences with their servicer if they were able
to choose their servicer, and servicers were forced to compete
for borrower business?
Ms. Darcus. That is a very good idea. We are sorely lacking
competition in the servicing market, and that harms borrowers.
Ms. Velazquez. Would you support that, Mr. Buchanan?
Mr. Buchanan. Well, that is a policy choice. Congress
previously did allow competition among servicing and let
borrowers make those choices. But that was eliminated when
Congress passed the Affordable Care Act and took over direct
administration of the Student Loan Program, and choice was
taken away. But I think that is a conversation for Congress to
determine about what is the appropriate way to give people
options here.
Ms. Velazquez. Okay.
Mr. Buchanan. We support options and making sure that
borrowers have good access to quality service, absolutely.
Ms. Velazquez. Mr. Buchanan, in November 2017, the Illinois
Student Loan Bill of Rights became law. Would you be supportive
of or do you think this is something we should be developing on
the Federal level?
Mr. Buchanan. As I talked about, I do agree that we need to
have some common servicing standards. And we have long endorsed
a common servicing manual that would be developed in
cooperation between all the interested parties so we could get
some agreement about what those standards are. The real
challenge is when you have those conflicts at the State and
Federal Government level, and when agencies at the Federal
Government fight with each other about what the rules are, we
sit in the middle of trying to find out what is the right way
to service the loan, and we follow the guidance by the
government. And so, any effort to create some common standards,
I think, we would think is a valuable contribution to the
dialogue.
Chairman Green. The gentlewoman's time has expired.
Ms. Velazquez. Not a common standard, a bill of rights.
Thank you. I yield back.
Chairman Green. The gentlewoman's time has expired. The
gentleman from Ohio, Mr. Davidson, is recognized for 5 minutes.
Mr. Davidson. Thank you, Mr. Chairman. And thank you to our
witnesses. I appreciate your expertise and commentary in
writing and in person. There is no doubt that the student debt
crisis is indeed a crisis. It is complex, and I look forward to
your input into how we might go about improving the problem and
mitigating the downsides for taxpayers, but also providing the
service that could be provided.
As we have had the dialogue, and Mr. Posey addressed
earlier that no one could answer, how do we do the
underwriting? That is because the people who actually do the
underwriting aren't in the room, so we are holding up the
servicers as if they have a fiduciary duty when they don't
actually do any of the underwriting. We don't price in the risk
of default based on major, based on college or university
selected, or based on aptitude. We don't base the loan on
creditworthiness unless we happen to do it on a co-signed loan
where the family's creditworthiness is really there. And so, we
keep loaning money to students regardless of these decisions.
Last Congress, it became controversial for a minor reform
to the Higher Education Act to advise people about the risk of
default, and then to have some consequence for the universities
that do have higher default risk. It was a deal-killer because
the politics were so bad. As a history major, I don't know that
I favor the idea that the government picks what your major is,
but certainly we shouldn't be indifferent to the default risk,
particularly if we are going to hold someone to a fiduciary
responsibility for the performance of the borrower in repaying
that loan.
Lastly, I would say in my commentary portion here that as
we talk about what to do for the students, the idea that we
would take out these loans with no real intent to repay them is
called fraud. So we shouldn't allow or support fraud, and we
shouldn't go down a path that makes it so unbearable for them
to pay the debt. I just want to highlight that it begins up-
front by knowing how much debt to take on.
We are here only focusing on the back end, so I don't know
that we are looking at the problem in a way that will
holistically help us solve it. But with that, Mr. Buchanan,
what can be done about the components of an interest risk, the
time value of money and the default risk? What can servicers do
about that?
Mr. Buchanan. Well, no, I appreciate this, and I appreciate
all of the comments. And you get into the complexities and I
know everyone has acknowledged that we are not fiduciaries. But
at the end of the day, I think we are trying to look out for,
what is the best option for borrowers. And what our real job is
to say, all right, let's take your situation. Let's meet you
where you are. You have made choice, decisions. Things have
happened in your life, and those are complications that can
impact your ability to repay, and our job is to say, let's
regularly communicate. Let's stay in touch and talk about that
as it changes.
So I think anything we can do to increase the amount of
contact that we have with the borrower. And keep in mind, one
of the challenges when you are managing north of 50 repayment
plans is that when a borrower calls up and wants to talk to us,
very seldom do they want to stay on the phone to talk through
55 repayment options. So part of our job is to do all this
other disclosure along the way. That is why we have these
websites and other things and calculators.
Mr. Davidson. Thank you for that. Reclaiming my time, the
point is that these decisions have already been made. You can
try to ameliorate the consequences of decisions that have
already been made. And as a system, the higher education regime
in the country has highly incentivized 4-year degrees, and the
concern I have is that this isn't always the best fit.
Sometimes, people don't find that that is the case until they
are far along and far in debt, and now they are looking at
other degrees, many of which have a better path for ability to
service debt, that have better demand for employability.
And I just want to commend some of the trade schools,
particularly Butler Tech, our community college, that are
there, that are innovative in the 8th District of Ohio,
offering students a path to a career and a vocation that has
high employability and a great, great chance. And I just wonder
lastly, Mr. Buchanan, how could we go about providing that up-
front advice? Does the government need to do it, do the
universities need to do it, or, as you alluded to, could we
return to the private sector making sound underwriting
decisions?
Mr. Buchanan. I think all of those are options, and I think
this is a complicated problem and there are no simple answers
to this. And I think we have to have everyone engaged, whether
it is institutions that are being creative and innovative,
talking about the value of what they are offering, whether it
is about bringing families in, in high schools and counseling
before people make decisions or look at financial aid packages,
colleges and universities, the financial aid offices continuing
to do better jobs on disclosures, making them transparent.
Those are all things we should all be doing.
Mr. Davidson. Thank you. My time has expired. Thank you.
Chairman Green. The gentleman's time has expired. The Chair
now recognizes the gentlewoman from Michigan, Ms. Tlaib, for 5
minutes.
Ms. Tlaib. Thank you, Mr. Chairman. You are right, Mr.
Buchanan, there is not really a simple answer to all of it.
However, I think what needs to be at the forefront and is
simple to me is that this is people who are buying an
education, not a Lamborghini, not some sort of luxurious
something. This is a responsible decision, I think, that they
are making, which may be informed or not informed. And as a
person that when you enter, you look at the tuition for a
minute, but the point is you want your bachelor's degree. You
want your degree at the end, and that is really what the focus
is when young people get in there. And then afterwards, they
expect the government and the quasi-governmental relationship
they might have with private companies to do what is in the
best interest of their future.
Michigan borrowers have some of the highest student loan
debt in this country. Many residents are pulled into courts--I
have talked to residents directly about this--and later having
to pay double what they owe due to student fees and interest
rates and even attorney fees. In 2017, the CFPB sued Navient
for incentivizing employees to encourage borrowers to postpone
forbearances, an option where the interest rate accrued and
collected. They collected over $4 billion in interest.
The Department of Education often encourages the debtor to
talk to their loan servicers for advice and help. I am a person
who called and they said, call your servicer. However, in
response to the lawsuit filed, Navient, the servicer, stated in
their response to the complaint that they ``don't have to
provide good advice to borrowers,'' and that they have ``no
affirmative duty to do so.''
A question for you, Mr. Buchanan, the Federal Government
spent about $700 million in 2017 on debt collections for a
little fewer than 7 million borrowers in default. Navient is a
member of your organization. Do you agree that servicers have
no responsibility to the borrower to give good advice, even
when more than half of its accounts come from the Department of
Education?
Mr. Buchanan. First of all, servicers don't do debt
collection, so the litigation and all that about borrowers,
that is not something that we have any involvement with. We
serve borrowers up until the time in which they default, so I
couldn't speak to the debt collection component, but--
Ms. Tlaib. But do you believe that many of the members of
your alliance have a duty, a responsibility to give good
advice?
Mr. Buchanan. As I think folks on both sides of the aisle
and the panel today talked about, there is not a legal
fiduciary responsibility. But I absolutely believe--
Ms. Tlaib. Well, it is interesting, Mr. Buchanan, because I
have only been here for 5 months, and it seems like any
corporation, it is like they wait for us to force them to do
what is right. It is almost common, like, okay, you have to
give good advice. You have this contract with the Department of
Education. Your responsibility is to help these folks who have
loans and guide them through the process. I almost feel like if
we don't spell out, ``Do what is right, this is your
responsibility'', for me, it is like a ``duh'' moment. Like,
``Duh, you have to give advice to those who are calling you. I
don't care how long it takes. At the end, that person on the
other end of the line wants to be able to pay as close to what
they borrowed as possible, and they want that kind of advice.''
The question I have is for many of the attorneys general
here, folks from the attorneys general offices as well as Ms.
Darcus. Thank you all for being here. One of the things I am
wondering is what other things are you doing on the State level
and the local level to push back against abusive and profit-
driven practices? And what are some of the predatory practices
of loan servicers and debt collectors you have seen in your
State that hasn't been discussed in this hearing right now?
Ms. Thoman. Speaking for Massachusetts, we have seen an
inordinate number of student loan borrowers who have been
victimized by for-profit schools that made false promises of
employment, 90 percent employment rates. We talk about
underwriting standards here, but in many instances, some of the
Federal student loan servicers in sort of a prior incarnation
of their existence made loans to many of these students, in
part because they were interested in Federal student loan
volume. And so, the abuse of these for-profit school borrowers
and the role of these companies in creating that system is very
significant and should not be overlooked.
Mr. Smyth. Speaking for Pennsylvania, we have sued the U.S.
Department of Education twice for the gainful employment rule
and the borrower defense rule, two important rules that they
are attempting to roll back. Gainful employment would have made
important disclosures to borrowers up-front and would have
actually shut down programs where default rates were very high.
So, it would have gotten at some of the underwriting problems
that people have been talking about. But the DeVos Department
of Education is attempting to repeal those rules.
Ms. Tlaib. We had a committee hearing--
Chairman Green. The gentlelady's time has expired.
Ms. Tlaib. Thank you, Mr. Chairman.
Chairman Green. The gentleman from Tennessee, Mr. Rose, is
recognized for 5 minutes.
Mr. Rose. Thank you, Mr. Chairman. I think an important
fact that we need to keep in mind as we have this discussion
today, and it is an important discussion, is that in 2011 when
the Federal Government took over the Student Loan Program, we
did so under the false premise that over 10 years, we were
going to create $61 billion that we were going to take from the
Student Loan Program and use it to pay for a flawed national
healthcare plan that many of us call Obamacare. In fact, as we
know, that hasn't worked out. In fact, most recent reports show
that we are nearing the point where the program is actually
going to cost, and clearly we have created a burgeoning student
loan problem in our country.
And as a small businessman and first-time elected
officeholder in Tennessee, this is just the sort of shenanigan
that the voters in the 6th District of Tennessee are upset
about when they see the performance of Congress, and how when
we attempt to federalize programs like this and remove the
private sector incentives to make responsible lending
decisions, and we create just these sorts of crises.
Shifting now, several of you have testified that your
agencies have brought lawsuits against Federal student loan
servicers for various reasons. Mr. Smyth, you mentioned in your
opening statement ongoing litigation. I want to make sure that
I understand where we are in the process of this litigation.
You are an attorney, I believe, and I am trained as an attorney
as well, and I just have a question. Have things changed in
this country or are individuals and corporations presumed
innocent until proven guilty in a lawsuit?
Mr. Smyth. Well, in the criminal context, they are presumed
innocent, yes. This is not a criminal lawsuit, but there has
not been a judgment yet, sir.
Mr. Rose. But even in civil cases, it is the responsibility
of the plaintiff to prove the case and prove the facts of the
case, isn't that right?
Mr. Smyth. That is correct.
Mr. Rose. Isn't it true that in the case you made reference
to, the defendant has not had their day in court to defend
themselves yet?
Mr. Smyth. That is right. That is why I referred to
allegations in my testimony.
Mr. Rose. So your office has made allegations against a
servicer, the servicer has disputed those allegations, and the
court, to date, has not made any decision based on the facts in
that case.
Mr. Smyth. That is correct, but many of the things that I
said were based on the facts that we know from documents that
Navient has provided to us. So, for example, the $4 billion in
interest, I have the document right here that Navient provided
that supports that allegation.
Mr. Rose. So your statements today remain unproven
allegations and no court has determined whether or not they are
true?
Mr. Smyth. That is correct.
Mr. Rose. It seems to me that this is yet another example
of Director Cordray's regulation by enforcement ideology where
once again the CFPB, under Director Cordray, demonstrated a
proclivity for self-promotion instead of consumer protection.
Mr. Smyth, if the CFPB is so focused on student borrower
protection, why was there no rule proposed in dealing with
private student lending?
Mr. Smyth. I can't speak for the CFPB.
Mr. Rose. Mr. Buchanan, given the lawsuits that are
currently in process, as they have not actually made any
rulings on the facts at present, what solutions are servicers
proposing, from your experience, that will make a difference
today for some of these struggling student loan borrowers?
Mr. Buchanan. Yes. As I talked about sort of in my opening
statement, my written statement goes into some more detail, and
I would love to work with the committee on those things. But if
you look at it, there is a lot of opportunity to take the
process that we have to deal with today. So the process, for
example, on income-based repayment or public service loan
forgiveness is dictated by the Department of Education, and we
want to work with them, and we have been providing feedback
pretty regularly. And that is how a lot of things actually have
changed and improved. You see the IBR uptake that has increased
pretty dramatically. We have worked through improving the
recertification process with the Department.
And some simple things like allowing sort of data-sharing
between the IRS and the Department of Education. Today, if
someone wants to stay in income-driven repayment, they have to
go to a separate website at the U.S. Department of Education.
They have to re-fill out that form. They have to resubmit
documentation to the IRS to ask for the same thing they asked
for last year and redo all that, and that is a hurdle for us in
keeping people current. So those kinds of process
simplifications are things that I think we all at this table
hopefully could agree upon, are things that we ought to be
working on.
It is also making sure that we have consistent credit
reporting so that when someone has an issue, that they are
treated properly.
Mr. Rose. Thank you, and I yield back.
Chairman Green. The gentleman's time has expired. The
gentleman from Illinois, Mr. Casten, is recognized for 5
minutes.
Mr. Casten. Thank you, Mr. Chairman. Thank you to all the
members. Mr. Buchanan, what is the typical servicing fee paid
to your members on a given loan?
Mr. Buchanan. For a loan that is in repayment, it is about
$2.85 a month per borrower.
Mr. Casten. Is that calculated per loan volume? Is there,
like, a percent of loan volume, or is it just per loan?
Mr. Buchanan. It is per borrower. Not per loan, but at the
per-borrower level.
Mr. Casten. Okay. And is it my understanding that as loans
go into default, that rate falls?
Mr. Buchanan. That is correct. It declines. We are
incentivized to keep a borrower in current repayment in one of
these income-based repayment plans or standard repayment. And
our compensation declines as that loan gets more and more
distressed, encouraging us to keep the loan active. And, in
fact, we talked earlier about forbearance utilization. That is
paid the least of all of these things relative to a loan that
is right at the end--
Mr. Casten. Okay. But when they go into forbearance, you
would ensure that they do not go into default. I think a lot of
the people here have mentioned that putting in forbearance
keeps the default rates low.
Mr. Buchanan. It can help, yes.
Mr. Casten. Okay. So, therefore, you make more money by
putting people into forbearance and keeping them out of the
default rate because you earn more money on your overall
portfolio.
Mr. Buchanan. I don't think that would be the calculus that
is involved in this. I think what we are trying to do is to
make sure, so when they are in delinquency and getting ready to
default--
Mr. Casten. Sir, just if I may, I spent 16 years as a CEO.
Mr. Buchanan. Yes.
Mr. Casten. You provide incentive compensation to employees
that makes you more profitable. The fact that there are
incentives that are driving people to do this, and, look, I
have no problem with profits. Profits are a beautiful thing.
They drive human behavior. The idea that there are incentives
to employees to push people into forbearance, and that you have
no profit incentive to do that strains a little bit of
credibility. I am not saying there is not a problem there, but
I am saying we have to acknowledge if you are making more money
by keeping people out of default, and if forbearance is the way
to keep people out of default, let's acknowledge that. That is
all I am asking.
Mr. Buchanan. The rate of forbearance is relatively low
here, and it is used, in general, for pretty short periods of
time. And I am unaware of any servicer who provides
compensation to put someone into forbearance. We try to make
these calls efficient and effective so we can get people as
quickly as possible to the best outcomes for them.
Mr. Casten. Well, let me pivot, if I could, to some of the
other witnesses. The challenge I have is that there is--as I
said before, the pursuit of profits is a wonderful motivator of
human behavior. It is neither moral nor amoral. It is just
pursuit of profits. The challenge we have as regulators is to
try to make sure that profit incentive is tied to the public
interest. And the challenge that we have on this committee is
that so often people deny that there is any conflict. That
makes our job as regulators tougher. It is particularly
difficult in this moment when the Secretary of Education is
actively defanging it.
And I am extremely proud to come from Illinois where the
efforts that you have led, Mr. Sanders, through your ombudsman
and through the Student Loan Bill of Rights, one of the best
programs in the countries. Can you just talk a little bit about
what challenges you have in this moment with the Trump
Administration and Secretary DeVos culling back on obligations
that are not being done federally that you have to step up and
fill?
Mr. Sanders. Absolutely. So, the Office of the Attorney
General in Illinois has been active in the student lending
space for many years. We will continue to be active going
forward. I think that the big change that we have seen is that
we don't have a partner on the Federal level in protecting
students. In many ways, we have an opponent. So instead of
sharing information with State attorneys general to determine
ways to help borrowers, we have the Department of Education
issuing a notice of interpretation saying that States can't
enforce their own laws, that they can't access the information
that law enforcement needs to determine if they are in
violation of our laws.
And we have to spend our time fighting against the Federal
Government. So, for example, that notice of interpretation has
been discredited by several courts, but it takes our time and
effort away from helping student borrowers when we have to
fight roadblocks that are thrown up like that.
Mr. Casten. Would any of the rest of you from the States
care to comment on what that hassle means for the burdens borne
by students who are in default, or former students?
Mr. Smyth. It certainly delays our lawsuit. We also faced
delays in getting borrower data from Navient in the context of
our discovery and our lawsuit. And we had to go to our judge
and ask him to force Navient to turn over the borrower data.
The excuse that Navient gave was that the Federal Privacy Act
prevented them from turning over the data, but that was not
correct legally. And they only made that excuse because of the
Department of Education telling them that they could do that.
Mr. Casten. Thank you.
Chairman Green. The gentleman's time has expired. The Chair
will now recognize the gentleman from Georgia, Mr. Loudermilk.
Mr. Loudermilk. Thank you, Mr. Chairman. Thank you all for
being here. This is an interesting panel that we have here, and
it is an interesting subject. However, I would like to get to
the root of the problem, and the root of the problem I see is
the astronomical costs of education these days. It is
unbelievably high, and I don't know that we are really
addressing that situation here. We saw this in Georgia years
ago.
It used to be that in the university system of Georgia,
they had to keep their tuition rates competitive enough that a
working-class family could afford to send their children to
college with minimal outside support. What changed in Georgia
was a public funding program to ensure every child gets a
chance to go to college, and when that went through the
legislature, the cost of education skyrocketed, and it is has
remained high ever since.
I recently was speaking to a group about the need that we
have for students to go into technical fields and the jobs that
are available there. And after I got done speaking, a young
lady came to me and she said, ``Let me tell you what happened
to me and my sister. We both graduated about the same time. She
went to college. I decided to go into a technical field, went
to technical college, and graduated. Now, 4 years later, about
the same amount of money I have made, she now has in student
debt because of the cost of actually going to college.'' And I
think our government involvement is part of the problem why we
are seeing this. It is a natural effect. You have this free
public money out there, so now we are going to get that and we
can raise our rates. I don't think we are going to get a handle
on this until we can actually do something about the
astronomical cost of going to college.
But with that aside, Mr. Buchanan, I know that we are
talking about servicing these loans here today. And from what I
know about any major loan that you are taking out, when you
look at the costs these students are accruing this early in
their life is unbelievable. But with any other significant loan
that we take on, I mean, car loans, the amount you are
borrowing is much less than most of these students are
borrowing. There are rigorous truth-in-lending disclosure
statements for those. There are rigorous truth-in-lending
disclosure statements for buying a home, or for commercial
loans. Are there such requirements for student loans, or do
these students really know what they are getting into?
Mr. Buchanan. Well, again, I can provide some context
having been in the higher education space for 20 years or so on
what is going on. That is not a servicer role or function, but
I think it is important for borrowers to be well-educated
upfront about what the consequences are of the choices that
they are going to make, for good and for bad. College is an
investment, and the idea is that we let people borrow money so
they can increase their earning power over time. And when that
works well, it works very well.
And I think by having people understand the repayment plans
that they are going to select, the interest rate, all that is
being set up, up-front, and fixed by statute, and then
understanding that if you do take advantage, and we talk a lot
about income-driven repayment plans, and those could be very
beneficial for some borrowers. For some borrowers, they can
increase the total cost of borrowing pretty materially over the
life of that loan, and that is based upon the borrower's
individual situation. And so having a borrower be disclosed of
what those situations could look like--listen, having an
informed borrower before they make choices is always the best
kind of borrower.
Mr. Loudermilk Do we need to do anything to ensure better
disclosures for these loans?
Mr. Buchanan. I think that is a policy question for the
front-end of lending. But I think having disclosures, and if
you look to the private sector there is a lot of disclosure
that goes on there. Is there an opportunity? Again, we have
talked a lot about harmonization and simplification. Is there
an opportunity to harmonize with what is done on the private
student loan marketplace? I think that is something that ought
to be looked at and considered.
Mr. Loudermilk. Are there any requirements to assess the
student's ability to repay the loans?
Mr. Buchanan. I'm sorry?
Mr. Loudermilk. Is there any requirement we have to assess
the ability of the borrower, the student, their ability to
repay the loan?
Mr. Buchanan. No, currently the Federal Government, when it
makes loans, does not assess an ability to repay.
Mr. Loudermilk. And I can understand part of that because
it is a student, and they are usually not employed. But I also
look at this, if the student is academically inclined and they
are going to get a nuclear engineering degree, their
likelihood, the ability to pay it back is much higher than
someone who may just be getting a literary arts degree or
something that may not pay as well. But we don't take any of
that into consideration?
Mr. Buchanan. That is correct. The government does not.
Mr. Loudermilk. All right. I yield back.
Chairman Green. The gentleman's time has expired. The Chair
now recognizes the gentlewoman from Texas, Ms. Garcia, for 5
minutes.
Ms. Garcia of Texas. Thank you, Mr. Chairman, and thank you
so much for bringing attention to this critical crisis. And I,
too, like my colleague, Mrs. Beatty, want to acknowledge the
different look that we are getting behind the panel table. And
I might add that not only is it younger, it is also absolutely
more diverse, and it is good to see so many young women there
watching.
And I wanted to start with a little focus on that because,
Ms. Darcus, you mentioned the impact of some of these practices
and the default rate on African-American students. And it is
strikes me that no mention was made of Latino students and,
more importantly, too, young women because, by and large, not
only are we not included, but at the end of the tunnel when we
graduate, we may get hired and not get equal pay for equal
work, which means our ability to repay is also diminished
somewhat because of inequities in salary and training and
promotion. So do you have any data with regard to other people
of color and also women?
Ms. Darcus. Yes, the data are still developing. We need
more information that is disaggregated by these
characteristics, like race and gender. But I can tell you that
like black borrowers, Latino borrowers also report higher rates
of late payment. They struggle to repay in part because of
that, the racial wealth gap. And my research also shows that
Latino borrowers, like black borrowers, experience higher rates
of default.
We also know that women carry about two-thirds of
outstanding student loan debt. So when we are thinking about
who is bearing the burden, who might be struggling in
repayment, we are thinking about people of color. We are
thinking about women. And that is in part because of the legacy
of discrimination on the basis of race and on the basis of sex
in this country, and the ongoing gaps in earnings and in
wealth. And we are actually seeing that student loan debt
widens those gaps into chasms. So we have to be very--
Ms. Garcia of Texas. So you would say there is a
disproportionate impact on people of color and women?
Ms. Darcus. Yes.
Ms. Garcia of Texas. There is? And that would be true all
across America, not particular to any region or State?
Ms. Darcus. Yes.
Ms. Garcia of Texas. Okay, thank you. Now, I want to go on
to Mr. Sanders, and thank you to all the representatives here
from attorneys general offices. It is great that they are doing
some good work. I just wish that my attorney general was at the
table with you, but regrettably I can't say Texas is doing what
some other States are doing. Mr. Sanders, you pointed out that
the colleges sometimes engage in their cohorts management
services companies that will steer the student to forbearance
because they are concerned about the default rate in their
colleges. I find it so troubling that a college or any public
institution would actually try to find a group that would do
that more to decrease their default rating. Could you just
explain that a little bit further? I am running out of time,
but also why they would do it? Is it that they are being
reviewed on the basis of that, because obviously this may be
another scandal in the making.
Mr. Sanders. I am happy to answer the question. It is a
good one. So under Federal law, if schools have too many
borrowers default within the first 3 years of repayment, they
could lose access to Federal student aid.
Ms. Garcia of Texas. Only that particular aid where the
student default rate is high or all student aid?
Mr. Sanders. Depending on how long the violation goes on,
it could be all student aid. So with the existence of income-
driven repayment plans, defaults should approach zero. There
will be some borrowers that we can never reach, but with
income-driven repayment, if you are not making any money, you
can make a zero-dollar payment, so everybody has the ability to
qualify for these. If servicers were providing better
information, schools wouldn't have to engage these low-rent
consultants that only have one goal, which is to push people
into forbearances.
Ms. Garcia of Texas. Well, I find it very troubling. And,
Mr. Chairman, I am sorry I ran out of my time because I really
think that this whole idea that colleges are maybe doing this
just to protect their own interests is very, very troubling.
Chairman Green. The gentlelady's time has expired. The
Chair now recognizes the gentleman from Wisconsin, Mr. Steil,
for 5 minutes.
Mr. Steil. Thank you very much, and thank you for holding
today's hearing. I am very concerned about where we are at with
student debt, but I think what we are missing sometimes is what
the underlying cause is, which is the cost of the underlying
product of the education. And so, Mr. Sanders, you mentioned at
the beginning of your testimony that students are often unaware
of the basics of the loans that they are taking out. And, Mr.
Smyth, you noted that Pennsylvania has the second-highest
student debt in the nation. I think that is very telling. Do
you know what the cost is for an in-State student in
Pennsylvania to attend Penn State?
Mr. Smyth. It is extremely high. The average 4-year tuition
for a public university in Pennsylvania is the third-highest in
the country after only Vermont and New Hampshire. So you are
absolutely right, the cost is far too high. I think it is about
$30,000 or $27,000.
Mr. Steil. So, just tuition and fees, before we get even
into living expenses, tuition and fees on the website: $18,454.
Mr. Sanders, do you know the cost of in-State tuition for a
student at the University of Illinois at Urbana?
Mr. Sanders. I don't know the answer off the top of my
head.
Mr. Steil. Tuition and fees is roughly, they estimate it at
$16,000 to $21,000, depending on exactly what school you are
in. If you look at what is going on in Massachusetts, Ms.
Darcus or Ms. Thoman, do you know the cost for an in-State
student to attend UMass Amherst, for an in-State student?
Ms. Thoman. I believe it is around $20,000.
Mr. Steil. On the website, for an in-State student, tuition
and fees, before we get into housing and living expenses,
$15,887. Before I came to Congress, I served on the University
of Wisconsin Board of Regents. To attend the University of
Wisconsin-Madison, a flagship in the State, tuition and fees,
$10,555, significantly less than your 3 States. What did we see
last year in the State of Wisconsin for overall debt? It
decreased. Why? Because we are controlling the underlying cost
of the product. That is absolutely critical.
And when States are able to control the underlying cost of
their tuition, and, in particular, for in-State students, you
legislate that ability to control the costs, and you have a
real impact on students' borrowing rates. But when you can't
legislate, you litigate. And what we are seeing is States with
high costs of in-State tuition where they are having high costs
of student debt then trying to go out and litigate their way
politically out of the problem rather than addressing the
underlying cost structure that we are placing on students.
So in the University of Wisconsin system where I was a
regent, what we did is we held the line on tuition. So dollar
for dollar for the last 6 years in the State of Wisconsin, the
cost of tuition to attend the University of Wisconsin-Madison,
the University of Wisconsin-Whitewater, the University of
Wisconsin-Parkside, or any of the campuses in the entire State
of Wisconsin in the UW system was flat dollar for dollar. What
does that do? That actually drives down the cost of tuition
against inflation, and makes college more affordable, and
actually reduces the total debt burden that students are taking
out.
But when you can't legislate that in, we take this
litigation path to go after it and to try to find out where are
there these disruptions in the market. And I am very open-
minded to trying to find opportunities to improve the process.
One of the things I think would be interesting is, do you any
of you, by a show of hands, answer calls that come to your cell
phone from an unknown number?
[No response.]
Mr. Steil. May the record reflect that no one raised their
hand. Including myself, I don't answer the phone from an
unknown number. If it is a known number, I am happy to pick up.
If it is an unknown number, I usually let it go. If we look at
our Federal law the student loan servicers are obligated to
operate under, they can't text you. They can't do all these
modern mechanisms to let people know that they might be late.
There are real opportunities for us to explore real solutions
to the problem to, God forbid, legislate rather than litigate
the problem.
I know Mr. Buchanan has had a number of items where you
have identified ways to improve the process to legislate an
improvement rather than to drive forward a litigation approach
where, one, the States are unable or unwilling to control the
underlying cost of the product, and then, two, we are holding
hearings on the litigation side rather than sitting down and
looking for significant improvements on ways that we can
actually be productive in collecting the student debt, and
then, on a go-forward basis, how we actually control the
underlying cost of the product, which will have a real impact
on students who don't need to take out the debt in the first
place.
I appreciate the time. Thank you very much. I yield back.
Mr. Perlmutter [presiding]. The gentleman yields back. I
will now recognize myself for 5 minutes. Mr. Steil made some
very good points about the costs going in. In Colorado, our
tuition is $12,000, so not much more than yours, and managed
fairly well. But he started at the beginning of the process. I
am going to the end of the process.
Ms. Thoman, in your opening, you talked about non-
dischargeability of the debt. And I practiced bankruptcy for a
long time before I got here, generally representing the
creditor side. In fact, I represented one of the lenders who
was mentioned by Mr. Lynch, the Pennsylvania Higher Education
Assistance Authority (PHEAA), on these kinds of things. One of
the things that happened that dramatically changed, I think,
the landscape was to make these student loans almost impossible
to discharge. And if I am not mistaken, we have seen a balloon
in the student debt since that time in 2005.
Can you talk to me, and, Mr. Buchanan, I want to you to
jump in on this, too. What would be the effect generally on the
system if we allowed these debts to be discharged?
Ms. Thoman. I think it would be positive for many
participants in the system. There are many borrowers who have
been victimized by schools, who are simply in no position to
repay these debts, and are often in no position to navigate
these more complicated income-driven repayment plans and the
associated processes.
Mr. Perlmutter. Mr. Steil talked about, we immediately go
to litigation, but sometimes you can't. There is no way to get
out of this, and you take a drastic remedy of bankruptcy.
People don't do this lightly. So, Mr. Buchanan, if we in the
Congress, because we changed the law in 2005, if we were to
reinstate what it was pre-2005, what effect do you think that
would have on the market generally, because the comments I have
heard is that it would cause the rates to go up. How does the
association look at it?
Mr. Buchanan. Again, we are on the servicing side, so we
are not on the lending side.
Mr. Perlmutter. Right.
Mr. Buchanan. And the Federal Government owns the asset, so
the cost of bankruptcy dischargeability is borne by the Federal
Government under a Federal loan. So I think that is a question
of, does the Federal Government, from a cost perspective, think
that is an appropriate subsidy or benefit to provide to the
loan?
Mr. Perlmutter. And the reason I even bring this back up is
because we have tried a number of different paths: forbearance;
reducing interest rates; and providing credits for service
rendered by public employees. We have come up with a dozen
different things to try to reduce what seems to be just this
dramatic increase in student debt in America. So as servicers,
I assume that you have thought about what would happen if
Congress changed it back. What has been your view of it?
Mr. Buchanan. Yes, I think that would be something that,
listen, I think there are a lot of borrowers who get into
distress. And at the end of the day, we are trying to say if
someone has an option, what is the best option for them. And I
think, looking at an appropriate sort of assessment of
bankruptcy reform is always something that should be on the
table. And, highlight, though, the evolution over time, and
that is sort of, I think, where Congress is sort of, you know,
prior to 2002, forbearance was a process that had to have
written documentation. And then negotiated rulemaking with
servicers, the National Consumer Law Center all agreed, let's
make it far easier to do verbal forbearance.
So those things need to evolve over time as we identify
pockets of individuals who are not being best served by the
current system. But that is also a function of time because the
amount of people, the people who are going into higher
education. The great success of putting more and more
individuals who historically were prevented from getting higher
education means we need to change the process constantly, and
that is where we are always looking to share that information
with our regulators, the Department of Education, and I am sure
they will share it with you about things we can do to improve.
Mr. Perlmutter. Mr. Smyth, so staying on the same theme,
and I have about 30 seconds. the law says to discharge requires
undue hardship, and I remember PHEAA was pretty tough on what
``undue hardship'' meant as we would proceed through the
bankruptcy court. Has that changed? You don't represent PHEAA,
you are with the attorney general's office, but how do you guys
look at that?
Mr. Smyth. I definitely can't speak for PHEAA, but I think
``undue hardship'' is far too high a line, and we should
certainly consider allowing student loans, both private and
Federal, to be dischargeable in bankruptcy.
Mr. Perlmutter. Thank you, and my time has expired. I now
recognize Ms. Dean for 5 minutes.
Ms. Dean. Thank you, Mr. Chairman. I am pleased to be here
to hear all of your testimony on this important issue. And I
want to just say at the outset that I look through a couple of
lenses, and one is as a mom, a parent, and a grandparent to
college-educated kids, and hopefully college-educated
grandchildren. I am also a former university professor for 10
years in Philadelphia, as well as a former State legislator who
dealt with the issue of higher education funding.
And I just want to say in response to some of the testimony
or questioning or statements from the other side, this is not
an either/or situation. We can agree that the cost of education
is extraordinarily high in this country, and we can agree that
we should do something about that, regardless of where we find
that funding. But it is not either/or, so I am puzzled by the
lack of curiosity by those on the other side of the aisle who
only want to speak about that as though there is no possibility
of harm to consumers on the other side. So that is where I want
to start.
First of all, Mr. Smyth, I come from Pennsylvania, as you
know. I really appreciate the work of our Attorney General Josh
Shapiro and what he is doing to protect borrowers and consumers
at many levels. Would you help me with the scope of the
problem? In your testimony, you identified that Navient,
between 2010 and 2015, enrolled over 1.5 million borrowers in 2
or more consecutive forbearances. Their own numbers show that
these forbearances added nearly $4 billion in interest to those
consumers. Is that Pennsylvania borrowers only?
Mr. Smyth. That is nationwide.
Ms. Dean. Nationwide, $4 billion. Can you specifically show
how that direct harm happens? What was the practice that led to
that massive harm to consumers, direct dollar-for-dollar harm
to consumers, not to mention credit ratings and other anxiety
and everything else that goes along with that?
Mr. Smyth. Sure. That $4 billion in extra interest comes
from multiple consecutive forbearances. We have been talking a
lot about forbearances and how they can be harmful. There are
occasions when somebody may truly have a short-term need. Say
they lose a job, but they know they are starting another job in
2 months and they will be making enough money then to go back
to their standard repayment plan. In that case, perhaps a
forbearance makes sense for a couple of months.
Ms. Dean. Sure.
Mr. Smyth. But we are talking about multiple consecutive
forbearances where people are in forbearance for 12 months, 18
months. We have even seen people in forbearance for 3 or 4
years. And at that point, there is no way that the servicer can
argue that this borrower is in short-term financial distress.
They are in long-term distress, and they should have been put
into an income-driven repayment plan much earlier in the
process, if not at the very beginning. So that 1\1/2\ million
borrowers who are in 2 or more consecutive forbearances, had $4
billion in extra interest added to their loan principal as a
result of those forbearances.
Ms. Dean. Were they given clear notice that by doing this
over and over again, they were just adding to their interest? I
mean, clear notice, plain-English notice.
Mr. Smyth. I can't speak to every single one of them, but
as I said, I think certainly at the end of the first
forbearance, they would have had to talk to Navient again, and
Navient would have said, okay, let's put you into another
forbearance, is that okay? And we have found through reviewing
caller recordings and in our investigation that Navient often
did not mention income-driven repayment plans at all.
Ms. Dean. Right.
Mr. Smyth. And sometimes they would mention it in a very
cursory way without properly explaining it to the borrower.
Ms. Dean. In your complaint, in the Pennsylvania complaint,
it is alleged that Navient and its agents were incentivized to
push forbearances instead of IDR. Can you explain that?
Mr. Smyth. Sure. So Navient mentioned average call time for
their agents at their call centers, and they rewarded people
with bonuses for keeping their average call time low, among
other metrics.
Ms. Dean. What kind of bonuses?
Mr. Smyth. A couple hundred dollars, gift certificates,
that sort of thing.
Ms. Dean. And if I interrupted you, was there more to that
practice?
Mr. Smyth. There is actually a really good podcast. Michael
Lewis did a podcast about this where he interviewed a woman who
worked at the call center in Wilkes-Barre, Pennsylvania. And
she described the 7-minute rule where basically you were
expected to get off the phone with a borrower in 7 minutes, and
if you did a forbearance, you could achieve that goal. But if
you started talking to the borrower about IDR, there was no way
you were going to meet that metric, and Navient would
eventually fire you if your average call times were too high.
So the people serving the borrowers well were being pushed out
the door, and the agents who were doing a bad job and hanging
up on borrowers and not telling them about IDR were promoted
and rewarded.
Ms. Dean. Again, I just am puzzled that the other side
isn't curious or upset about $2,700 per borrower added to the
top.
Chairman Green. The gentlelady's time has expired.
Ms. Dean. Thank you, Mr. Chairman.
Chairman Green. The Chair now recognizes the ranking member
of the subcommittee for a unanimous consent request.
Mr. Barr. Thank you, Mr. Chairman. I would ask unanimous
consent that we enter into the record four articles: one from
the Consumer Bankers Association that reports 98 percent of
private student loan borrowers are successfully repaying loans,
whereas 1 in 5 Federal student loan borrowers are seriously
delinquent or in default; a letter from the Credit Union
National Association urging attention to the benefits to
borrowers through more private loans; a Wall Street Journal
article reporting that despite the CFPB's allegation that
Navient had a profit motive to place borrowers into
forbearance, in fact, the Department of Education pays loan
servicers 63 percent less for accounts in forbearance than
those in income-based plans; and finally, an article that
reports that despite the CFPB lawsuit, Navient, in fact,
informed borrowers about income-based repayments, but borrowers
opted for forbearance regardless.
Chairman Green. Without objection, it is so ordered.
The Chair now recognizes the gentlewoman from California,
Ms. Porter, for 5 minutes.
Ms. Porter. Thank you. Mr. Buchanan, do servicers act in
the best interest of consumers?
Mr. Buchanan. We absolutely work every day to provide them
all the options that are available to them. And those options,
what is best for them, is really a choice among consumers
because at the end of the day, each of those options is going
to have a different consequence depending upon what job they
take, what life choices they make.
Ms. Porter. Just one second. So servicers act in the best
interest of consumers? Navient, your former employer, a member
of the organization that you are here to represent today, is
arguing in court that there is no expectation that the servicer
will act in the best interest of the consumer. Did I mishear
you?
Mr. Buchanan. Are you asking a question about the legal
definition of ``fiduciary duty?''
Ms. Porter. No, I asked you a question. I asked you if
servicers act in the best interest of consumers, and you said,
and I quote from 10 seconds ago, ``yes.'' I am now reading to
you from arguments that Navient is making in court. ``There is
no expectation that the servicer will act in the interest of
the consumer.'' And further, servicers ``do not owe borrowers
any specific fiduciary duties based upon their servicer-
borrower relationship.'' Would you like to revise your prior
answer to the question I started with? Do servicers act in the
best interest of the consumer?
Mr. Buchanan. Servicers work for the government to provide
the options that are available, and we disclose them clearly.
Ms. Porter. I am asking you, do you--
Mr. Buchanan. We don't make the choice of what the--
Ms. Porter. I am reclaiming my time, please. I am going to
ask the question again. Do servicers act in the best interest
of consumers?
Mr. Buchanan. I believe by executing what we are asked to
do by the Federal Government, if that is what is in the best
interest of students, then that is what we do is we--
Ms. Porter. So you act in the best interest of the
government, which you believe to be in the best interest of
consumers.
Mr. Buchanan. We work for the government. That is correct.
Ms. Porter. Okay. So, Mr. Buchanan, I read your testimony,
and in it I understood you to say you are ``proud of your
work.'' You are ``proud to talk about the success and making a
difference for consumers.'' So I wanted to try to summarize and
get a handle on some other statements and make sure I
understand your testimony. Would you agree or disagree that
recent media reports about servicing are inaccurate, and that
those claims are counter to the commitment of servicers to help
borrowers?
Mr. Buchanan. I believe there is a lot of rhetoric that has
mischaracterized, pretty meaningfully, what we do in the
performance of what we have achieved, yes. I would talk about
sort of the success rates of improving IDR and other things
that have been--
Ms. Porter. Reclaiming my time, would you agree that you
expect your lawyers to follow all laws, regulations, and
individual rules and policies, and you expect your lawyers to
follow the laws?
Mr. Buchanan. I don't have any lawyers myself, but if you
mean sort of the legal departments of servicers, I think that
is the expectation.
Ms. Porter. Okay.
Mr. Buchanan. And we do comply with the Federal law that is
applicable here.
Ms. Porter. Okay. Would you agree that servicers have been
accused, including by some of the other witnesses, of
intentionally assessing inappropriate fees and costs to
borrowers?
Mr. Buchanan. I believe there have been assertions.
Ms. Porter. Okay.
Mr. Buchanan. I don't think they have asserted fees because
we don't charge fees--
Ms. Porter. Would you agree that those allegations are not
true?
Mr. Buchanan. I'm sorry. Repeat the question?
Ms. Porter. Would you agree that those allegations are
simply not true?
Mr. Buchanan. I don't believe the facts are consistent with
those allegations as best as I have seen. But, again, I am not
privy to the litigation here, so there may be facts I am
unaware of. But all evidence and all performance metrics from
the servicer perspective to--
Ms. Porter. Mr. Buchanan, I am running out of time. With
apologies to Brandi Carlile, my favorite artist, I have been to
this movie and I have seen how it ends, and the joke is on
them, the American people. The statements that I just read to
you are all from the testimony of Countrywide during the
mortgage crisis when I sat where these folks sit as a witness
and listened to the witness from Countrywide say that the media
reports are inaccurate, that they expect their lawyers to
follow the law, that there has not been an intentional
assessment of inappropriate fees and costs.
I already have Netflix, so I don't need another crappy
reboot. These are the exact same arguments that we have heard
before. You sound just like Mr. Mozilo, and you are doing the
same exact kind of harm to our economy. Thank you.
Chairman Green. The gentlelady's time has expired. The
Chair now recognizes the gentlewoman from Massachusetts, Ms.
Pressley, for 5 minutes.
Ms. Pressley. Thank you, Mr. Chairman, and thank you for
this critically important conversation this morning. And I want
to thank our witnesses for joining us today and recognize Ms.
Thoman and Ms. Darcus for your work on behalf of struggling
student loan borrowers throughout the Commonwealth. The
testimony shared today underscores the severity of the student
debt crisis taking place in our country. This crisis has placed
an unprecedented financial burden and caused a tsunami of hurt
on an entire generation of young people, hindering their
ability to purchase a home, start a family, and even to save
for retirement.
Across the Commonwealth of Massachusetts, more than 855,000
borrowers owe $33 billion in student debt. Last year alone,
student loan debt in Massachusetts increased by $1 billion.
Despite the fact that this crisis has reached record
proportions, this Administration has either failed to act or
has intentionally worked to undermine State efforts to protect
borrowers. Back in March, I asked CFPB Director Kraninger if
she believed that there was a student debt crisis in our
country. She refused to answer my question, a shocking, but not
surprising, response from the person running the sole agency
charged with protecting student loan borrowers in the financial
marketplace. So I am glad to be at this hearing to talk about
the steps that State policymakers and State attorneys general
have made to protect borrowers.
The student debt crisis is a racial and economic justice
issue as well. Ms. Darcus, tackling student debt is both a
racial and economic justice issue, so how is student debt
exacerbating the racial and gender wealth gap?
Ms. Darcus. We see that in order to afford a college
education these days, people of color disproportionately rely
on debt to make it through. So when we look at what is
happening in repayment, it is disheartening to see that the
very same people who are trying to take advantage of the
promise of education to achieve better economic outcomes for
their families to experience the economic mobility that
education is supposed to promise, end up getting bogged down.
The cost of that education increases through servicer
misconduct and error, and they disproportionately experience
default. And since women bear so much student loan debt, we are
also cognizant that they carry a special burden that we should
be looking at for our outcomes based on gender and repayment as
well.
Ms. Pressley. Okay. Picking up on that, so Federal student
loan borrowers have a right--all of them--to an affordable
monthly payment, regardless of their loan balance through
income-driven repayment, or IDR, correct?
Ms. Darcus. Yes.
Ms. Pressley. Okay. And research is showing that when a
borrower is able to get into and stay in an IDR plan, she is
significantly less likely to default on her student loan,
correct?
Ms. Darcus. Yes.
Ms. Pressley. Okay. So despite the fact that Federal
student loan borrowers have a right to an affordable payment,
research has shown that black and Latinx borrowers face
significantly more challenges as they try to access these
repayment plans. So this reflects many of the disparate impact
terms we see in mortgage redlining abuses. Ms. Darcus, can you
share some of the real-world consequences when a low-income
borrower falls into default?
Ms. Darcus. Unfortunately, the default triggers a world of
hurt for clients like mine, many of whom are people of color
and women. They can have their wages garnished. They can have
their tax refunds, including the earned income tax credit,
seized. And what we end up seeing is that the limited income
and wealth that exists in communities of color get siphoned off
through these government debt collection activities, and that
means that the racial wealth gap is growing due to student
loans.
Ms. Pressley. So, do you believe this is evidence of
potential discriminatory behavior or misconduct in the student
loan market?
Ms. Darcus. We definitely have to look at the disparate
impact in student loan outcomes based on race and gender. And
so we have to look at is discrimination happening in servicing
because the outcomes are stark. People of color fare worse.
Ms. Pressley. All right. Thank you. Ms. Thoman, the
Massachusetts AG's Office under the leadership of Attorney
General Maura Healey has worked diligently to increase
oversight over these servicers. In 2017, your office brought a
suit against the Pennsylvania Higher Education Assistance
Agency (PHEAA) for their egregious servicing failures that
ultimately caused many borrowers to lose eligibility for the
Public Service Loan Forgiveness Program. Can you briefly
explain the major findings of your case?
Ms. Thoman. Our allegations include that PHEAA has denied
borrowers the opportunity to make qualifying payments for
public service loan forgiveness and income-driven repayment
forgiveness by failing to properly and timely process
applications for income-driven repayment plans. We have also
alleged that the company failed to properly count borrowers'
public service loan forgiveness qualifying payments. Further,
we have alleged that they have failed to properly process TEACH
grant certification forms, leading grants that were given to
teachers to be converted to loans. Finally, we have alleged
that PHEAA has collected amounts not legitimately due and
owing, and failing to refund them to borrowers.
Chairman Green. The gentlelady's time has expired.
Ms. Pressley. Thank you, Mr. Chairman. Thank you.
Chairman Green. The Chair now recognizes himself for 5
minutes. Ms. Darcus, is it true that the Department of
Education is withholding information and encouraging others to
withhold information that is relevant and is, in fact, being
done to the detriment of the borrowers?
Ms. Darcus. Those are the reports that I have heard, and
you have heard testimony today from Mr. Smyth, for instance,
who explained that their work in the Navient case has been held
up by the Department's efforts to prevent the servicer from
disclosing important information.
Chairman Green. Thank you. Mr. Smyth, would you care to
comment, please?
Mr. Smyth. Yes. The Department of Education is telling
servicers not to turn over information regarding Federal loans,
and that is hampering our efforts and the efforts of other
States.
Chairman Green. I regret to see this happening, but it does
not surprise me given that the Trump Administration by and
through the President himself refuses to honor subpoenas,
refuses to encourage witnesses to testify, and, in fact,
encourages witnesses not to testify. It seems that the Trump
cover-up mentality is permeating other areas of the government
to the extent that consumers are going to be harmed.
Regrettably, this mentality is something that we will have
great difficulty dealing with unless we decide that we are
going to deal with the chief executive officer who is the chief
sponsor of the cover-up mentality.
Let's move on. There have been those today who seem to
think that poor people, many of whom happen to be people of
color, make bad decisions when they acquire loans. Is it true
that most poor people need the loans to get the education so as
to extricate themselves from the adversities of poverty? Mr.
Smyth, would you care to comment?
Mr. Smyth. It is true that poor people, if they wish to
attend college, must take out loans because generally their
families have very little savings to help with college. And
State legislatures have reduced the amount of money that they
have put into the public university systems over the past
decade, so families are having to borrow more now than they
ever have before.
Chairman Green. Thank you. Ms. Darcus, is it true that if
you are poor and the loan is the only option for you, and the
amount is what is necessary for you to get an education, that
you really don't have any option other than to take out the
loan? What other options do people with little wealth have?
Ms. Darcus. You are right to point out that these aren't
really good choices, debt or education. You have to get both in
order to get either at this point. So while they were financing
higher education through debt, it is not surprising that the
people who have the least means rely on that debt more. We need
a system where we are not relying on people who have very
little to take on the most in order to get the education that
they seek.
Chairman Green. I heard a colleague across the aisle
indicate that we should get to the root of the problem. Well,
the root of the problem doesn't start with the birth of a poor
person today. It doesn't start with the adversities that they
encounter today. It starts with a system of systemic
discrimination, invidious discrimination, that has been in
place in this country from its inception. If you differ with
me, kindly raise your right hand?
[No response.]
Let the record reflect that we have no hands raised, and
the Chair concludes that the comment made is correct. If we
want to truly get to the root of the problem, is it fair to say
that we have to deal with systemic, invidious discrimination?
If you agree, kindly extend a hand into the air.
[Hands raised.]
Let the record reflect that all have extended hands into
the air. And let the record further reflect that my time has
expired, but my desire to end invidious discrimination will
only expire when I expire.
I want to thank the witnesses for their testimony and for
devoting the time and resources to travel here and share their
expertise with this subcommittee. Your testimony today has
helped to advance the important work of providing meaningful
oversight of the CFPB and the student loan servicing industry.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
Without objection, the hearing is now adjourned.
[Whereupon, at 12:12 p.m., the hearing was adjourned.]
A P P E N D I X
June 11, 2019
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