The Looming Student Debt Crisis: Providing Fairness For Struggling Students
As Prepared for Delivery
Hearing of the Senate Judiciary Subcommittee on Administrative Oversight and the Courts
Our nation faces a serious problem with student loan debt.
Last month, the National Association of Consumer Bankruptcy Attorneys issued an eye-opening report titled “The Student Loan ‘Debt Bomb.” The report pointed out that American student borrowing exceeded $100 billion in 2010, and total outstanding student loans exceeded $1 trillion last year.
There is now more student loan debt in this country than credit card debt.
Of course, when used prudently, student loans can be a valuable tool. In many instances, student loans help Americans get a quality higher education and the job skills they need to repay their loans and have a rewarding career.
Unfortunately, it is clear that too many students have been steered into loans that they will not be able to repay, and that they will never be able to escape.
According to an analysis by the Federal Reserve Bank of New York, around 37 million Americans held outstanding student loan debt last year with an average balance of $23,300. However, only 39 percent of those student loan borrowers were paying down their balances last year.
The New York Fed’s study found that fourteen percent of student loan borrowers – 5.4 million Americans- were delinquent on paying their loans, while the remaining 47 percent of borrowers were either in forbearance or were still in school and adding to their debt.
Last month, Standard and Poor’s issued a report saying that “student loan debt has ballooned and may turn into a bubble.” And Moody’s Analytics recently said “the long-run outlook for student lending and borrowers remains worrisome.”
While the overall growth in student indebtedness is troubling, the most pressing concern is private student loans. According to the Project on Student Debt, the most recent national data shows that 33 percent of bachelor’s degree recipients graduated with private loans, at an average loan amount of $12,550.
These private student loans are a far riskier way to pay for an education than federal loans.
Federal student loans have fixed, affordable interest rates. They also have a variety of consumer protections, such as forbearance in times of economic hardship, and they offer manageable repayment options such as the income based repayment plan.
Private student loans, on the other hand, often have high, variable interest rates, hefty origination fees and a lack of repayment options. And private lenders have targeted low-income borrowers with some of the riskiest, highest-cost loans.
Once a student takes out a private loan, the student is at the tender mercies of the lender. Every week my office hears from students who say private lenders will not work with them to consolidate loans or work out a manageable repayment plan. And if the student falls behind on payments, private lenders are aggressive with collection efforts.
In many respects, private student loans are just like credit cards- except unlike credit card debt, private student loan debt cannot be discharged in bankruptcy.
In 2005, Congress changed the bankruptcy laws and included a provision making private student loan debts nondischargeable in bankruptcy except under very rare circumstances. That means that students are stuck with these loans for life.
While the volume of private student loans is down from its peak in 2007 when it accounted for 26 percent of all student loans, we know that private lending is still being aggressively promoted by the for-profit college industry.
The Project on Student Debt reports that 42 percent of for-profit college students had private loans in 2008, up from 12 percent in 2003. For-profit college students also graduate with more debt than their peers who graduate from public or private non-profit colleges.
For-profit colleges have a business model of steering students into private student loans – even when it is not in the students’ best interest. And as a result, many students are pushed into taking out private loans when they are still eligible for federal loans- and even when the lenders know the students are likely to default.
We need to take steps now to address this looming student debt problem. It is necessary to help struggling students and to help our economy. There are a variety of proposals that would help.
I have introduced legislation, the Fairness for Struggling Students Act, to restore the pre-2005 bankruptcy treatment of private student loans. There is no reason why private student loans should get treated differently from other private debt in bankruptcy. And it is especially egregious that these private loans are nondischargeable in cases where a student was steered into the loan while the student was eligible for safer federal loans.
I believe we should also require full private student loan certification to ensure that students take advantage of their federal student aid options before turning to private loans.
We should push for meaningful accreditation for for-profit institutions.
And we should encourage the Consumer Financial Protection Bureau, which is currently collecting data and complaints about private student loans, to use its rulemaking authority to take corrective steps.
Today we have a distinguished panel of witnesses who will discuss the problems that we face and ways that we can address them. I look forward to their testimony.