Transcript: Sen. Patty Murray’s Q&A on strengthening the federal student loan program for borrowers

Partial transcript of Sen. Patty Murray’s (D-Washington) Q&A on strengthening the federal student loan program for borrowers. The Senate Health, Education, Labor & Pensions Committee hearing was held on March 27, 2014:

Sen. Patty Murray (D-Washington):
…It’s just so telling when we have so many people in our country today who are spending all of their extra income paying back student loan, and they’re not buying clothes, houses, cars, you know, contributing to our economy in other ways. And it is really prohibiting young people from even thinking about a future in a college. So I think this is extremely important and I really appreciate all of our panelists for being here.

One of my priorities during the negotiations last winter on the Bipartisan Budget Act was to maintain our investment in student aid and not ask our students to contribute even more towards deficit reduction. And fortunately, as you know, Congressman Ryan and I were able to work together and provide some relief to struggling borrowers. The way we did it was by reducing the collection fees that guarantee agencies charged on default of loans.

Ms. Loonin, I’m really glad you’re here, and I want you to talk a little bit more about how these guarantee agencies collect fees on student loans. And do you have any estimates on how many struggling students will save because of the changes that we all did put in place because of that budget agreement?

Deanne Loonin, Director at National Consumer Law Center:
Yes, thank you. It was a very sensible idea among many to save some money and I believe the New America estimate of that particular reduction in the amount of guarantee agency collection fees as well as both the amount that’s charged to the borrower and the amount that’s charged to the government would save somewhere about $2.5 billion. And specifically on the point of reducing the 18.5% that is, frankly, automatically – guarantee agencies automatically put that onto the loan balance, so it’s capitalized, and so the borrower coming out of rehabilitation actually has a very much higher balance, which makes it even harder for them to repay the loan. And as was mentioned earlier, it’s not tied at all to sort of amount of time or work that the collection agency has actually put into that account.

I actually – just very briefly – have a client right now, for example. I can’t get the collection agency to call me back to do a rehabilitation. I’ve been working on it for the last couple of weeks. Even the ombudsman’s office actually has been involved. Eventually, I’m going to do most of the work. I think we’ll get this rehabilitation done. This borrower really wants to work. You know, she’s had a stroke; she’s doing her best. But that collection agency will automatically put 18.5% onto about a $40,000 balance.

Sen. Patty Murray (D-Washington):
Describe to me – I want to understand – how these guarantee agencies actually collect these fees?

Deanne Loonin, Director at National Consumer Law Center:
So most of them use third-party collection agencies, and just like the Department of Education does as well. And then the fees are actually charged to the borrower as payments are made. So it’s on a commission system essentially whether a borrower makes a voluntary payment or, as in this case, in post-rehabilitation.

Sen. Patty Murray (D-Washington):
How much the guarantee agency actually does?

Deanne Loonin, Director at National Consumer Law Center:
Again, it’s third party declarators, and it’s not tied to how much work is actually done…

Sen. Patty Murray (D-Washington):
Thank you very much. Mr. Chairman, the other issue that I’m extremely interested in is this issue financial literacy. It’s something that I’ve talked and worked a lot about and authored legislation to help ramp up some financial and economic education efforts for students, beginning a lot younger than when they get to college. But I think the more you know, the more you can make reasonable decisions and we just do a very bad job in this country of doing financial literacy. But several of the panelists here have talked about strengthening loan counseling, and I want some of you to comment on how much loan counseling is done right now. Is it done by colleges? Or do the servicing agencies do it? How do most students get the information about the interest rate that they’re paying or how they’re going to have to pay it off or what all this means to them?

Roberta L. Johnson, Director of Student Financial Aid, Iowa State University, Ames:
With our institution, this happens through a variety of mechanisms. And primarily, we started this because our average indebtedness has hovered near $30,000 for about the last five years. And as a large public institution, I’ve continually questioned why as public institution your debt is as high as it is, and there are a variety of reasons. But we’ve implemented some counseling. The first primary mechanism for counseling is the entrance loan counseling that borrowers can do prior to completing the promissory note.

Sen. Patty Murray (D-Washington):
Can do?

Roberta L. Johnson, Director of Student Financial Aid, Iowa State University, Ames:
They are required to do it. And so if they haven’t done entrance counseling, we don’t –

Sen. Patty Murray (D-Washington):
Is this a university requirement?

Roberta L. Johnson, Director of Student Financial Aid, Iowa State University, Ames:
No, this is a federal requirement. So they can do the master promissory note and then do entrance counseling all as one process on studentloans.gov. We put a hold on any disbursement of funds until that entrance counseling has occurred.

The challenge with the entrance counseling is that like many other things that are internet-based, it’s text heavy. So you can, you know, scroll through, scroll through, click, click, click, and it doesn’t take you very long to do all the clicks and get through that process.

Sen. Patty Murray (D-Washington):
Without really reading it.

Roberta L. Johnson, Director of Student Financial Aid, Iowa State University, Ames:
Without really reading it. Anecdotally, we’ve also heard that there are parents that are doing this on behalf of their children that make us shudder because the borrower is not getting that information.

We are utilizing a financial awareness counseling tool on our campus for our private loan borrowers. We are mandating that they come in and visit with us in person before they borrow through a private loan program and using that tool to assist them to make sure that they understand things like interest rates, and we’ve been very successful in reducing or even averting some of that loan borrowing that has occurred.

One of the pieces that we’re most pleased with is that five years ago, 71% of our students who graduated with debt were undergraduate students were graduating with debt. We’ve dropped that to about 61%. So over a five year period of time, 10% fewer students are leaving our institution with debt.

Now, they’re still leaving – those that are borrowing are still borrowing the same amount of debt, but there are fewer of them that are borrowing. So we’re making some progress, we think.

Also, exit counseling is mandatory for borrowers. So prior to their departure from our institution, they must go through the exit counseling. But you don’t have a lot of teeth in that because if a student does not do their exit counseling, you don’t withhold their diploma or put a hold on their transcript for getting a job. So we tell them it’s a requirement but they may not do it.

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