Transcript: Sen. Elizabeth Warren’s Q&A w/ Federal Student Aid COO James Runcie on strengthening the federal student loan program for borrowers

Partial transcript of Sen. Elizabeth Warren’s (D-Massachusetts) Q&A with James W. Runcie, Chief Operating Officer of the Department of Education’s Federal Student Aid, on strengthening the federal student loan program for borrowers. The Senate Health, Education, Labor & Pensions Committee hearing was held on March 27, 2014:

Sen. Elizabeth Warren (D-Massachusetts):
So, Mr. Runcie, in January, the Government Accountability Office released a report on the cost of operating the federal student loan program, and the report calculated that the break-even interest rate on student loans – that is the interest rate necessary – to cover the cost of the program without making a profit – for the upcoming student loans would be about 2.5%. But instead, we’ll be charging students nearly twice that amount for undergraduate loans and about 2.5 to 3 times that amount for graduate loans and for-plus loans. Now, the GAO acknowledged that this is only an estimate and estimates can change. But that is the best estimate we have – at least twice as much – we’ll be charging at least twice as much as we need to charge to cover the cost of the loans.

So when we set interest rates higher than we need to cover the costs, that generates revenues for the government. My question, Mr. Runcie, is where do those profits go? Do they get refunded back to the students who paid more than was necessary for the cost of their loans? Or are they just used to fund government generally?

James W. Runcie, Chief Operating Officer, Federal Student Aid, Department of Education:
Sen. Warren, they do not – they’re used to fund government generally. They do not come back specifically into the program.

Sen. Elizabeth Warren (D-Massachusetts):
All right. That’s the key point I wanted to make here. We’re charging more interests than we need to to run the student loan program and there’s no mechanism to refund that money to the students. It seems to me we’re just taxing students for the privilege of borrowing money to try to get an education. I think that’s obscene. I don’t think the student loan program should be designed so that it’s making profits for the federal government.

As a first step, we can wring some of those profits out of the system by refinancing those loans and bringing them down to a break-even point for the government.

Mr. Runcie, I also want to ask about servicer contracts. I want to pick up where Chairman Harkin went to ask about the relationship with Sallie Mae.

The Department of Education has multiple contracts outstanding with Sallie Mae. Sallie Mae has repeatedly broken the rules and violated its contracts with the government.

I’ll just give you a few examples. In 2007, Sallie Mae agreed to a multi-million dollar settlement with the New York Attorney General on claims related to improper marketing of student loans.

Both the Treasury Department and the Department of Education have cited Sallie Mae for failure to abide by the terms in its federal contracts.

Sallie Mae is currently under investigation – let’s make a list here – by the FDIC, the Department of Justice, the Consumer Protection Bureau, and the Utah Department of Financial Institutions.

And yet, Sallie Mae continues to make millions on its federal contracts with the Department of Education. Between 2009 and 2011, it made almost $100 million on just servicing federal student loans even while it broke the rules.

So my question is I understand that the Department of Education has already notified Sallie Mae that their contract will be renewed. Why did the Department of Education decide to renew Sallie Mae’s contracts when it clearly violates the rules and has done so repeatedly?

James W. Runcie, Chief Operating Officer, Federal Student Aid, Department of Education:
In terms of the extension of the contract for Sallie Mae, it was part of the extending the contracts for all of the TIVAS. In extending the contract, the contracting officer looked at a number of different things.

Sen. Elizabeth Warren (D-Massachusetts):
Including that they have been – they’ve broken the rules repeatedly and they’re under investigation in multiple places for breaking the rules. Have you done something different with these contracts to ensure greater accountability, to make sure that they’re not going to continue to break the rules in the future? I just don’t understand this, Mr. Runcie.

James W. Runcie, Chief Operating Officer, Federal Student Aid, Department of Education:
You know, we strictly monitor their compliance to the contracts, and we’re very open to looking at those contracts and seeing if there’s additional terms and things that we should put in there. But in terms of their performance under the contract, there may be some instances where they are asked to remedy certain situations, whether it’s an employee that provides the wrong information. But in terms of a wholesale breach of the contract, that has not been determined as far as I know. And again, I’m speaking about the direct loan servicing contract, not about private loans or state laws that they might be breaking.

So based upon our current assessment of all the servicers, we felt that based upon their performance under the terms of the contract and we also felt in terms of dislocations to the borrowers because we would have to transfer 24 plus million borrowers if we didn’t extend the terms of the TIVAS contracts. So there are a number of things that we looked at in terms of extending the contract.

Of course, if they’re found to be in violation of any of the laws specific, it would be a breach of the contract, we would address that by taking whatever appropriate actions, including termination.

Sen. Elizabeth Warren (D-Massachusetts):
I just want to suggest that we know that there are problems with Sallie Mae. It has become public. And the actions that you’re taking and the oversights that you’re exercising has obviously not been enough to correct the problem, and I’m very concerned about re-upping a multi-million contract with Sallie Mae when Sallie Mae has demonstrated time and time again that it’s not following the rules.


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