Harrison M. Wadsworth III, Special Counsel's Office Consumer Bankers Association
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1101 Vermont Ave., N.W.
Washington, DC 20005
Good afternoon. Thank you for the opportunity to testify on behalf of the Consumer Bankers Association at this Department of Education public hearing. My name is Harrison Wadsworth. I am a special counsel to CBA for higher education issues at the firm Washington Partners, LLC.
CBA has submitted proposals for Higher Education Act reauthorization to the Department in conjunction with four other organizations of student loan providers on February 28, 2003. Similar proposals were also submitted on December 31, 2002, to the House Committee on Education and the Workforce. In addition, CBA submitted three supplemental proposals to the Department and to the Committee. I would refer you to those proposals, which I have submitted for the record, for details on the CBA views.
The fundamental purpose of the federal financial assistance programs is to ensure that every qualified American can pay for higher education. CBA members are among the longest-standing participants in the federally guaranteed student loan programs, which today play the most important role in ensuring access to education. CBA supports the Pell and other grant programs, but the fact is that many students depend on loans.
CBA believes that the student financial assistance programs are working reasonably well, providing approximately $50 billion per year in assistance to students and their families for higher education. CBA members are proud to be among the leaders in the offering of low-cost loans to students and their parents through the Federal Family Education Loan Program (FFELP). The program has served 62 million students since 1965, providing more than $350 billion in education loans. It will provide about $31 billion in new loans during the current year to some 6 million borrowers, not counting consolidation loans. By some measures, the cost to the federal government has been dropping; however one looks at the loan programs they are a tremendous bargain, using relatively modest amounts of federal resources to leverage large volumes of loans at remarkably low interest rates for borrowers. We believe the federal subsidies in the FFEL Program, which go to reduce borrowers' interest rates and to make loans universally available to students without regard to credit history, are dollars well spent.
Today's student loan marketplace is, for the most part, healthy, but there are serious warning signs that must be heeded. There is intense competition for business among the private sector participants in the FFEL Program, but there are major market distortions that have grown up in part because of unintended consequences of Higher Education Act modifications.
The submissions by the FFELP student loan community and by CBA provide an overview of the many improvements that we believe should be made to the Act. Today, I would like to focus on the top priorities for CBA, priorities that key off of the market distortions I just mentioned.
Chief among today's market distortions is the Consolidation Loan Program, which has morphed from a means of assisting borrowers experiencing duress in repaying their loans, into a monster that is fast becoming THE loan program. CBA members, like most lenders, make Consolidation Loans. But we recognize that a program established so that borrowers with more than one lender could avoid having to make multiple payments, as well as to extend repayment and reduce monthly payments, has become instead a convenient refinancing mechanism.
Although some are suggesting that the Consolidation Loan program is the equivalent of mortgage lending, with unlimited refinancing available when interest rates fall, there are major differences that rebut this. Mortgages, including "no closing cost" mortgages, require payment of numerous fees and sometimes taxes that normally run over $1,000. Student loan consolidations require none. Mortgage and other lenders also charge more interest for a fixed rate loan than for a variable rate in order to reduce their risk. In the case of education Consolidation Loans, the federal government absorbs all the interest rate risk, a huge potential cost that will divert extremely scarce federal resources from encouraging access to college to subsidizing the lifestyles of college graduates.
CBA and its loan community colleagues have proposed matching the interest rate systems for Stafford, PLUS and Consolidation loans - all either fixed or variable rates.
CBA also believes strongly that federal subsidies should go to those who need them in order to promote college access. Therefore, CBA proposes that Consolidation Loans go to those who need them; for example those with a debt-to-income ratio above a reasonable level. These steps will return the Consolidation program to its original intent, including to permit borrowers with too-large monthly payments to stretch them out over more time.
The enactment of these changes will represent positive steps in restoring Consolidation lending to a more legitimate role in the FFEL program. In reauthorizing the Act, however, Congress and the Administration should address the issue of whether borrowers should have to go through the consolidation process in order to stretch out their payments in the first place. Frankly, there is no good reason borrowers should have to refinance their loans to get relief from high monthly payments. The standard Stafford and PLUS loan repayment term of 10 years has not been modified for decades, even though college costs have soared. We are proposing, with our colleagues, that Stafford and PLUS borrowers be able to extend repayment for up to 25 years without having to go through the process of switching lenders.
I would like now to touch on what may be considered a controversial subject, a relatively new area of major potential danger to the long-term health of student loan programs: the so-called "school as lender" business. For many years, institutions of higher education have been able to make FFELP loans to their graduate students as well as to undergraduate students as a lender of last resort. This practice has been relatively uncommon, and was generally regarded as a means to make sure that all graduate students have access to loans.
But recently, commercial entities have been working with a number of schools to set up school-as-lender programs, even publishing RFP's seeking lending partners to purchase the loans after origination and perform various administrative services. In today's harsh economic environment for many schools, the prospect of money for scholarships and other activities is an understandably irresistible siren call.
CBA members, and many of our colleagues and customers in the higher education community, are concerned that these programs will put schools in the uncomfortable position of profiting from increased borrowing by their students. We believe that financial aid administrators almost always have the best interest of their students in mind, but we recognize the reality that faces financially strapped institutions. For example, once the administration of an institution finds out that the financial aid office can generate additional profits, the administration will simply shift institutional aid to other critical needs. Even more troublesome, state legislatures may come to view school as lender programs as a way to avoid meeting their responsibilities to fund their public university systems.
For these reasons, CBA strongly opposes expansion of school as lender to the undergraduate level. CBA also believes that there is no longer a need for graduate level lending, which should be phased out and eliminated.
Finally, turning to what has been a top priority for many, but not all, in the school community, CBA notes that the annual and cumulative limits on Stafford loans have not been raised since 1992. Given the increased need for loans, it seems logical that loan limits, especially in the early years of undergraduate study, should be increased. CBA is working with our colleagues in the school community on developing acceptable proposals that are fiscally responsible.
Again, I would refer you to the student loan community and the CBA submissions to the Department for additional proposals and more detail on the reasoning behind them. As I said before, we believe the student loan system is working, but with the correction of certain market distortions and administrative difficulties, it could work better.
I appreciate the opportunity to participate in this public hearing, and would be happy to entertain any questions you might have.