Chairman Murray, Ranking Member Sessions, and Members of the Committee, thank you for the opportunity to testify today about the potential impact of student debt on the lives of American consumers and the broader economy.
My name is
Over the last decade, policymakers have focused heavily on trying to make college more affordable for students in years to come, which is an important goal. But the financial crisis, which destroyed trillions of dollars in home equity and savings for many families preparing to send a child to college, contributed to substantial increases in the amount of student debt owed by Americans who have since graduated from college. Therefore, it is important to focus on - and act to address - the impact of the
Two years ago, analysis by the
Secretary of the Treasury
Senior executives in the banking industry have also cautioned that the condition of the student loan market "is now having a significantly negative impact on students, the economy, and taxpayers." n5 America's largest automaker has cited the overhang of student debt as a key factor explaining the relatively low levels of car purchases by young people. n6
Student Debt Domino Effect
Last year, the Bureau issued a public notice and held a hearing to gather input on the student debt domino effect, as well as potential policy options to mitigate the damage. We received more than 28,000 responses from experts and individuals impacted by student debt. n7 The responses from industry and consumers identified several potential areas of concern.
Homeownership and Household Formation
Respondents cited research that showed that three-quarters of the overall shortfall in household formation can be attributed to reductions among younger adults ages 18 to 34, the age group disproportionately impacted by student debt. n8 In 2011, two million more Americans in this age group lived with their parents, compared to 2007. n9
Professionals on the front line of the housing industry - from real estate agents to builders to mortgage bankers - have all described the challenges posed by student debt to homeownership. There appears to be a number of specific effects, including: down payment accumulation, mortgage qualification, and move-up purchases.
According to a recent survey by the
One borrower, Heather, told us she owes
The chief executive of the
Another borrower, Michelle, told us that she would be able to pay less per month if she bought a home rather than rented. But she was told her debt relative to her income meant that she could not qualify for a mortgage. n13
With lower levels of first-time buyers in the market, this also poses problems for existing homeowners.
And the impact isn't limited to those who want to buy a home. One realtor told us how she routinely checks credit reports for prospective renters. With student loans soaking up so much of their incomes, many applications end up being denied. With so many young Americans living with parents or roommates rather than forming their own households, this might have a material impact on purchases of other goods, like furniture and appliances.
Small Business and Entrepreneurship
Small business plays a critical role in creating opportunity and wealth in our economy. According to the
One aspiring entrepreneur, Julie, wrote, "I am in the process of starting a business, but am unsure as to whether I can afford to because I have so much student loan debt." n15
In submissions to the Bureau by coalitions of small businesses and startups, groups cited a number of potential negative impacts of student debt on entrepreneurship, such as access to credit and willingness to take financial risks. There has been an increasing amount of evidence to support these hypotheses.
Preliminary research on student debt and small business formation finds a "significant and economically meaningful negative correlation between changes in student loan debt and net business formation" for small businesses employing 1-4 employees. n16 Unlike larger firms with more seamless access to capital markets, small businesses often rely heavily on the owner's personal access to credit used primarily for business purposes.
Longitudinal surveys of small businesses illustrate the outsized role that personal credit cards and personal bank loans play in financing the enterprise's growth and survival. In early years, surviving small businesses rapidly increase their employment, while also heavily utilizing these forms of financing. One of the top reasons for denial of credit to small businesses is attributed to the owner's personal credit profile. n17
In roundtable discussions with entrepreneurs, founders describe that their student debt forces them to take cash out of the business to make their payments, making it tougher to "bootstrap." Those early revenues could otherwise be reinvested to hire employees or to expand their product offerings. Others have told the Bureau that prospective investors are concerned when founders have heavy student debt burdens, since the entrepreneur may be unable to maintain an extended period of negative cash flow or may be tempted to leave for a higher salary at a larger firm.
Retirement Security and Asset Accumulation
The impact of heavy student debt burdens may also have a longer-term effect on the ability of households to save and accumulate wealth for retirement. One borrower, Kristi, was quite straightforward when telling us about saving for retirement, "Don't make me laugh! We can't save for retirement because we need all of our money for these loans." n18
Tabulations of the 2010 Survey of Consumer Finances reveals a large lag in net worth for younger households with student debt. Households headed by a younger college-educated adult had a net worth of just
Student debt can also have more long-term impacts on an individual's financial security. Due to the shift away from defined benefit plans and toward 401(k)s, IRAs and other defined contribution plans, ensuring a secure retirement will be largely self-directed for most young workers. Young workers who are able to make early, sizable contributions to these plans can generate significant retirement assets over the course of their careers.
But student debt may be impeding workers from making sizable contributions - or even contributing at all.
Recent analysis by the largest provider of employer-based defined contribution plans indicates that 43 percent of young workers participate in their employers' plans, compared to approximately 70 percent of workers ages 35 to 64. For the greater than two-thirds of employers that do not feature automatic enrollment, participation in these plans by young workers drops to just 23 percent. n20
And according to two industry analyses, 43 percent of young workers do not save enough to receive a full employer match n21 and are more likely to cash out their plans when changing jobs. n22
If student debt acts as a headwind to young worker participation in retirement plans, the opportunity for wealth accumulation diminishes significantly. One recent estimate considered the impact of an average level of student loan debt for a college-educated household compared to a similarly situated debt-free household. The analysis found that student debt could crowd out more than
The impact on retirement security is not limited to younger workers - many older households are forced to reevaluate their retirement plans in light of debt used to finance the education of a child or grandchild.
Health Care, Education and Rural America
The impact of student debt might also skew labor market outcomes. Notably, heavy debt burdens exacerbate the challenges that many communities face when seeking to attract and retain health care professionals and teachers. These problems may be felt even more acutely in rural America.
The impact of rising student debt on graduates' ability to practice in primary care is not limited to physicians. Tara, a nurse working in primary care at a community health clinic told us she "could not in good conscience recommend primary care as a career choice for others" due to her student debt burden. n27
Many graduates pursuing careers in many public service professions share the same concerns. One borrower told us how she was unable to find a repayment plan that made her debt manageable and ultimately chose to abandon her career as a teacher in order to pursue more lucrative work in the private sector. n28 Recent research has shown that for every
Classroom teachers submitted letters detailing the impact of private student loan debt, for which forgiveness programs or income-based repayment options are usually not offered. One school district official wrote to the Bureau noting that programs to make student debt more manageable could lead to higher retention of quality teachers. n30
These trends may pose additional challenges to rural communities, where young graduates with already-strained household balance sheets may have limited access to affordable rental housing and may discover that car ownership is a prerequisite for employment. With many rural medical professionals operating in solo practices, high debt levels might reduce availability to secure initial financing.
Student debt can also impact the availability of other professions critical to the livelihoods of farmers and ranchers in rural communities. According to an annual survey conducted by the
Accountability for Student Loan Servicers
Loan servicers are the primary point of contact on student loans for more than 40 million Americans. High-quality servicing can contribute to an individual borrower's ability to successfully repay their debt, especially through enrollment into affordable repayment plans.
As the recession decimated the job market for young graduates, a growing share of student loan borrowers reached out to their servicers for help. But the problems they have encountered bear an uncanny resemblance to the problems faced by struggling homeowners when dealing with their mortgage servicers. Like many of the improper and unnecessary foreclosures experienced by many homeowners, I am concerned that inadequate servicing has contributed to America's growing student loan default problem, now topping 7 million Americans in default on over
The Bureau has received thousands of complaints from borrowers describing the difficulties they face with their student loan servicers. Borrowers have told the Bureau about a range of problems, from payment processing errors to servicing transfer surprises to loan modification challenges. To ensure that we do not see a repeat of the breakdowns and chaos in the mortgage servicing market, it will be critical to ensure that student loan servicers are providing adequate customer service and following the law.
Canary in the
In the mortgage market, a particularly disconcerting occurrence involved the foreclosures faced by active-duty servicemembers, despite prohibitions under the Servicemembers Civil Relief Act (SCRA). Like in the mortgage market, the treatment of servicemembers by student loan servicers has been quite troubling. Rather than receiving clear and accurate information, many military families have found themselves buried in and blindfolded by red tape from their student loan servicers.
For example, one servicemember who filed a complaint with the Bureau saw his request to his servicer rejected multiple times because his military orders did not include an end date. This is neither a requirement of the SCRA, nor feasible for many military commissioned officers to obtain, as their orders usually do not delineate an end date. Another servicemember with multiple loans sought to reduce the rate on his highest-rate loans, but, simultaneously, the servicer proceeded to raise the rate on the loans that were below 6 percent.
Improper and potentially unlawful servicing errors can cause harm to servicemembers. Admittedly, military families are a small segment of the population. But if a servicer is unable to provide adequate service to those who have special protections under the law, it raises questions about whether it is agile enough to deal with the complexities of the larger population of borrowers facing hardship.
Strengthening Student Loan Servicing
Unlike most markets for consumer products and services, student loan borrowers generally don't get to choose their student loan servicer. And with few opportunities to refinance with a new provider, a consumer cannot easily take his or her business elsewhere. Ordinary market forces won't guarantee reasonable customer service, while potentially magnifying incentives to cut corners.
The past decade offers a useful case study about the potential impact of conflicting incentives. In 2004, the
During the ten years the successor corporation operated, it generated substantial revenue through government contracts for student loan servicing and debt collection. The company also benefitted from several government-supported emergency programs as problems in the capital markets emerged. n34 Despite these benefits received from the public, the corporation was found to be violating the law on multiple occasions by state authorities, n35 banking regulators, n36 and federal auditors. n37
And just last month, after referrals from the
* Unfairly conditioning receipt of benefits under the SCRA upon requirements not found in the law
* Improperly advising servicemembers that they must be deployed to receive benefits under the SCRA
* Failing to provide complete SCRA relief to servicemembers after having been put on notice of these borrowers' active duty status
* Inadequately disclosing its payment allocation methodologies to borrowers while allocating borrowers' payments across multiple loans in a manner that maximizes late fees
* Misrepresenting and inadequately disclosing in its billing statements how borrowers could avoid late fees
While the post-GSE corporation no longer operates in the form it took immediately post-privatization, the challenges it experienced offer a reminder that regulators must be vigilant to protect consumers, since ordinary market forces in the student loan market may not fully align incentives among all market participants.
The Bureau recently finalized a rule that will allow the agency to supervise larger nonbank student loan servicers, closing a significant gap in oversight for compliance with federal consumer financial laws.
In a recent report analyzing student loan complaints related to payment processing and servicing transfers, I recommended that
For example, many consumers who wish to pay down their loans more quickly find that student loan servicers allocate payments in ways that might increase the amount of total interest they will pay, slowing them down on the path to be debt-free. For credit card borrowers with balances at multiple rates, generally, prepayments are allocated to balances at the highest interest rate, facilitating faster repayment of debt with minimal bureaucratic burden.
Refinance and Restructure
For borrowers who graduated into a difficult labor market, high student debt burdens have added insult to injury. Borrowers and industry observers have repeatedly noted that, unlike other markets, refinance opportunities are few and far between. In a report published last May, we discussed ways to jumpstart a student loan refinance market and spur loan restructuring. n41
Among borrowers who have dutifully managed their monthly payments on high-interest student loans, many told us that they would like an opportunity to refinance. When mortgage borrowers see rates plummet, their incomes rise, or their credit profiles improve, they try to refinance. Responsible student loan borrowers rarely have these options. Fortunately, since our
While the vast majority of outstanding student loan debt is guaranteed or directly lent by the federal government, solutions to promote affordability of student loans must consider the role of private student loans. High-debt borrowers graduating amidst the financial crisis disproportionately used private student loans. According to an analysis of borrowers graduating from a four-year college in 2008 with more than
Unlike federal student loans, which include a range of loan modification options to keep payments affordable, private student loan borrowers rarely have these options. The report describes ways to create a uniform framework for borrowers to restructure their private student loans so loan restructuring activity can be dramatically increased, while simultaneously reducing borrower distress.
Demystify with Data and Transparency
Federal Reserve Chair
While there have been major strides to better assemble mortgage data, the opacity of the student loan market remains deeply problematic, adding further uncertainty over the potential spillovers into the rest of the economy. I am quite concerned that financial regulators and the public lack access to basic, fundamental data on student loan origination and performance. Without these data, we will be challenged to understand the complete set of risks posed by student debt burdens.
Most loan-level mortgage origination data is currently subject to public disclosure, stripped of borrower-identifiable information, under the Home Mortgage Disclosure Act. n46 Data from housing GSEs and mortgage-backed securities filings shed significant light on loan-level performance.
We must also seek to better understand how student debt is distributed among various segments of the population.
According to the
The Bureau is coordinating with other regulators on potential ways to enhance the quality of publicly-reported data. Over the longer term, we must aim to reduce the transparency gap between the mortgage and student loan markets. This can lead to more efficient market monitoring and shed light on the linkages between student indebtedness and other sectors of the economy. Better data and transparency will help us to better understand the demographics and professions where borrowers may be experiencing distress, as well as whether lenders and servicers are fairly serving their customers.
Preserving the Dream
Our country was built on the promise that if each of us played our part, contributed our labor, our enterprise and our knowledge, the only limit to our success was our own work ethic. College has served as a gateway to opportunity for millions to climb the ladder and achieve their dreams. And the individual rewards of our hard work - owning a car, buying our first home, and securing a comfortable retirement - continue to define the American dream.
But in the aftermath of the Great Recession, behind all of the facts and statistics, is a much broader question - how do we preserve the drive to succeed for so many who feel that the dream is now out of reach?
For borrowers like Andrea, student debt is a direct threat. She writes, "How can someone even dream of taking out a mortgage to purchase a home when she is struggling to pay back student debt? How can a person think of starting a family if he already owes so much money? How can a potential entrepreneur take the risk to start her dream business when she knows that failure will not only mean losing that investment, but everything else as well? We go to college to open doors, to pursue what we truly want out of a fulfilling life. Massive student debt debilitates this mission." n52
Ignoring the warning signs may prove to hold back not only the future growth and dynamism of our economy, but also our spirits. Addressing these concerns in the near-term may pay dividends for many years to follow.
Thank you again for inviting me to participate in today's hearing, and I look forward to discussing potential solutions to help borrowers climb the economic ladder and stop the student debt domino effect.
n2 Remarks of Secretary Lew before the
n3 See Minutes of the
n5 See, for example, Meeting minutes of the
n6 Remarks of Mustafa Mohatarem, Chief Economist of
n7 For the full docket of submissions from consumers, industry, and other organizations to this Request for Information, see http://www.regulations.gov/#!docketDetail;D=
n8 See http://www.regulations.gov/#!documentDetail;D=
n11 See http://www.regulations.gov/#!documentDetail;D=
n12 See http://www.regulations.gov/#!documentDetail;D=
n13 See http://www.regulations.gov/#!documentDetail;D=
n14 Remarks of
n15 See http://www.regulations.gov/#!documentDetail;D=
n16 Ambrose, Cordell, and Ma, The Impact of Student Loan Debt on Small Business Formation, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2417676 (March 2014).
n17 See microdata from the
n18 See http://www.regulations.gov/#!documentDetail;D=
n19 See an analysis by
n20 Vanguard, How America Saves 2013: A report on 2012 defined contribution plan data, available at https://pressroom.vanguard.com/nonindexed/2013.06.03_How_America_Saves_2013.pdf (June 2013).
n21 Hewitt, Aon, Navigating the Path to Retirement: 2011 Universe Benchmarks Highlights, available at http://www.aon.com/attachments/thought-leadership/survey_2011universe_benchmarks_es.pdf (2011).
n23 Hiltonsmith, Robert, At What Cost? How Student Debt Reduces Lifetime Wealth, available at http://www.demos.org/sites/default/files/imce/AtWhatCostFinal.pdf (August 2013).
n24 See http://www.regulations.gov/#!documentDetail;D=
n25 See http://www.regulations.gov/#!documentDetail;D=
n26 Elliott, Joy, Who Chooses to be a Family Physician?, available at http://ofpjournal.com/index.php/ofp/article/view/5(2014); See also, Phillips, JP et al, Medical student debt and primary care specialty intentions, available at https://www.stfm.org/fmhub/fm2010/October/Julie616.pdf (October 2010).
n27 See http://www.regulations.gov/#!documentDetail;D=
n28 See http://www.regulations.gov/#!documentDetail;D=
n29 Rothstein, Jesse, and
n30 See http://www.regulations.gov/#!documentDetail;D=
n33 Recently, the successor corporation to the GSE undertook a major corporate restructuring, separating into multiple companies.
n34 For example, according to
n35 For example, the Attorney General of
n36 In 2008, just three years after the successor corporation chartered
n37 In 2009, an audit by the
n42 Some existing lenders are concerned about the impact of more competition, which could lower prices and reduce the net interest margins on their portfolios. Investors have also noted that additional refinancing activity would increase conditional prepayment rates, reducing returns to holders of the riskiest tranches of securitized asset-backed securitizations.
n43 Project on Student Debt, High Hopes, Big Debts, available at http://www.ticas.org/files/pub/High_Hopes_Big_Debts_2008.pdf (May 2010).
n44 Rieder, Rick, "Student Loan Debt and Its Effect on the Housing Market Recovery,"
n45 Testimony of
n47 See, for example,
n48 See http://www.regulations.gov/#!documentDetail;D=
n49 See College Board Advocacy and Policy Center, Who Borrows Most? Bachelor's Degree Recipients with High Levels of Student Debt, available at http://advocacy.collegeboard.org/sites/default/files/Trends-Who-Borrows-Most-Brief.pdf (April 2010).
n51 Jones, J. and Schmitt, J., A College Degree is No Guarantee,
n52 See http://www.regulations.gov/#!documentDetail;D=
Read this original document at: http://www.budget.senate.gov/democratic/public/?a=Files.Serve&File_id=afa81787-e2c6-4a09-a80c-efc6b0b5acb5
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