Press Center

 Remarks by Deputy Secretary Sarah Bloom Raskin at the National Foundation for Credit Counseling 50th Annual Leaders’ Conference


9/28/2015

I. Introduction

Thank you [Susan] for that kind introduction.  Good afternoon everyone.  I’m happy to be here with you all in Indianapolis.  I’d like to thank the National Foundation for Credit Counseling for inviting me to join your 50th Annual Leaders’ Conference.

The NFCC is an organization with a storied history of working to educate and empower American consumers.  As the nation’s largest and longest-serving nonprofit counseling organization, you have worked tirelessly to provide affordable financial counseling for Americans across our country.  At the same time, you have particular knowledge of what it takes to empower American households to weather financial storms, many of which are related to the turbulence of the larger economic system.

You know, there’s a lot of talk in the finance about “financial stability.” And people instinctively assume that this is a term related exclusively to the strength and profitability of our financial sector. But financial stability is also a household balance sheet issue, an issue of the ability of American households to navigate economic turbulence and uncertainty, especially during times when the financial buffer of many households has been eroded.  The quest for financial stability is one that depends on not just whether a household’s boat is leaky, but the turbulence of the waters and the navigational tools of the household’s boat.  And whether there are lighthouses and other beacons that can shine and guide the way.

NFCC members serve as such lighthouses and beacons, illuminating for Americans the intricacies of our complex credit system and revealing how this credit system interacts with the macro-economy.  You guide individuals, families, and households from the early days of a credit relationship with a lender, and you provide interventions at critical stages from origination to collection.  Your work is integral to financial intermediation—enabling households to access credit and lenders to provide it. Your role is critical to household prosperity and ultimately to our national prosperity.   

Let’s look back a few years to the most damaging economic time in recent history: our nation’s financial crisis.  The crisis was unprecedented in many ways; it was more prolonged and deeper than many anticipated, and its impact was so damaging that we are still dealing with the effects. Millions of people lost their homes or struggled to prevent foreclosure.  The corresponding loss in household wealth and the ripple effects in our communities landed in your laps—you our nation’s credit counselors—who were there—ready, willing, and able to step forward and serve on the front lines. 

Studies have shown that one of the most stressful incidents in life is losing one’s job or home.[1]  As counselors, you answered the calls from people who were losing jobs and homes; you explained to them how foreclosure works; what to do when payments were lost; what mortgage servicers do; you stayed on the phone for endless hours attempting to find the right person to contact; you identified how to analyze and navigate different options for repayment; and the list goes on.  In uncertain and consequential times you brought your expertise to bear for people across our country, and we are thankful for your work. 

II. Navigating Credit Markets

One key lesson learned from the financial crisis and recovery was that financial intermediation—the process that permits people to save and borrow—will break down if it does not work for borrowers.  Financial intermediation must work for borrowers, and to make it work, borrower knowledge—knowing how to navigate a complex credit system—is necessary. Optimally then, wouldn’t we want the design of our financial system to have features that permit borrowers to navigate it? Recent history taught us that that credit markets and our economy function best when borrowers understand how to navigate the system.

The financial crisis exposed the real dangers from having a system with misaligned incentives and shoddy oversight of complex markets.  Those fundamental flaws  took a toll on a crucial wealth-building asset —the home—and in their wake we were left with households with damaged balance sheets and a slow, uneven recovery—indicative of a  slow rebuilding of household wealth. We need to ensure that we design a credit system that can be navigated and that functions efficiently for all participants in all economic environments. 

There are at least two sets of critical actors—beacons, if you will—who help with navigation—credit counselors like yourselves, and loan servicers—who are a critical link between borrowers and lenders. Loan servicers manage borrowers; accounts, process monthly payments, manage modifications, and communicate directly with borrowers, including borrowers in distress.

Given that a lynchpin to individuals’ financial security is navigability, we must design systems with end-users in mind. Systems that work for borrowers. Systems that help borrowers access the credit they need in a way that does not undermine their own financial stability.

III. Student Loan Debt

Today, I draw your attention to another set of consumer credit challenges that strikes equally close to home for millions of Americans—these are the challenges of our student loan financing system. We are seeing far too many student borrowers in distress in recent years, suggesting clear opportunities for improving this system and making it more navigable for borrowers through new tools, better information, and better servicing techniques.  This has been an area of acute focus for me since arriving at the Treasury Department, and is an area where many people across various disciplines have insights to contribute.

Over the past year, I have engaged with a wide variety of practitioners who have particular perspective on these challenges—college presidents struggling to deliver high-quality education in the midst of budget cutbacks and shrinking endowments;  macroeconomists concerned about the effects of high student loan debt on economic growth, homeownership, new business creation, consumption, and credit scores;[2]  bankruptcy lawyers and judges concerned about the restrictive nature of student loan discharges in bankruptcy.[3]  I’ve talked with undergraduate and graduate students concerned about finding jobs that will provide them enough to repay high levels of debt.[4]  I’ve met with undergraduate students across our country, just as I did this afternoon at Indiana University, and have heard countless personal accounts from students considering dropping out, uncertain about the total cost of a four-year education and worried about the burden of debt.[5]

I’ve heard from students concerned about a student loan system that does not provide consistent quality servicing of their loans, that falls short in addressing customer service issues and errors, and that fails to adequately assist them in taking advantage of opportunities such as income based repayment. The current student loan financing system generally imposes too little accountability on schools or servicers alike for their outcomes.  I have engaged with student loan servicers concerned about the costs of high-touch servicing, and I have engaged with taxpayers concerned about the cost of student loan repayment plans, expenses paid to servicing and debt collection contractors, and expenses for students who do not complete a quality four-year education.  

Where are we after all of this engagement?  We are certainly at a point where we understand the full dimensions of the challenges, and we are at a point where we can discuss priorities for re-designing a student loan financing system that addresses the challenges that face today’s student loan borrowers.

IV. Today’s Student Loan Borrower

Over the past twenty years we have seen more students go to college than ever before.  Since 1990 college enrollment has increased more than 50 percent.[6]  When I was a student in the 1980s roughly a quarter of us then aged 18-24 went to college. Today, nearly 40 percent of 18-24 year-olds attend college. [7]  25 percent to 40 percent—a huge increase!

During this same window the real cost at four-year public schools has risen about 80 percent, while real disposable income per capita increased only 15.3 percent.[8]

Hence, there is a gap between the cost of higher education and a household’s means to pay for it. And so we come to the need to figure out how to finance an investment in education.

We now know that more that 41 million American collectively owe more than $1.2 trillion in student loan debt, making student loan debt the second-largest class of consumer debt behind mortgages. Most of this loan debt is being repaid. However ten percent of direct loans that have entered repayment are delinquent, 14 percent are in forbearance, and 8 percent are in default.[9]  With these figures, the student loan market continues to show elevated levels of distress relative to other types on consumer debt. Despite recent improvements in the labor market and the near-universal availability of income-driven plans for borrowers, many indebted students—especially those who have not completed their education—feel that they are drowning.   

As we saw in the financial crisis, borrower success is integral to economic success. Given that, how do we design a student loan financing system with the borrower in mind?  Put another way, how do we optimize the ability of students to navigate the student loan credit system?

First, and foremost, to do this right, we have to understand today’s student loan borrower.   Again: if it weren’t for your work dealing with homeowners, we would not have sufficiently understood mortgage borrowers.  We would have been led to believe that the bulk of people facing foreclosure were looking for a free ride, overreaching, and living well beyond their means. We might have seen a crisis of morals, instead of a failure of institutional and regulatory design. Discussions with housing counselors paved the way for a much more nuanced understanding of the context for the household borrower.

Similarly, we need to engage in the same nuanced work regarding student loan borrowers.   If we want a student loan system that is navigable, then we need to understand the needs of student loan borrowers.  We need to understand their needs at all different stages of the credit process; from the time of deciding upon the type of school to attend, to the type of financing to access, to the methods by which the financing is to be repaid. 

Earlier this month, Adam Looney, Treasury’s Deputy Assistant Secretary for Tax Analysis, and Constantine Yannelis of Stanford published a study of the federal student loan portfolio.  The study shows that certain borrowers—particularly borrowers from for-profit schools, two-year institutions, and certain other non-selective institutions—have had materially greater difficulties after they left school.[10]  While borrowers from four-year public and private schools also incurred increased debt, they continued to realize the significant benefits we expect from higher education and in most cases are repaying their loans.  By contrast, nearly half of recent borrowers at for-profit schools had defaulted within five years and many more appear to be falling behind.

Why did these borrowers experience such different outcomes?  There are different possible narratives. For one thing, the borrowers attending these schools tend to be older and to be from lower-income families when they first enroll.  Independent from parents, they are much more likely to work and to juggle multiple roles—employee, spouse, father or mother—and they are far less likely to be enrolled continuously and on a full-time basis while they pursue their degree.  

While this profile may conflict with the media image of the traditional college student who enrolls full time after high school on a leafy college campus, the reality is that older, part-time, independent students have come to represent a significant segment of our student population. By 2000, the National Center for Education Statistics estimated that almost 75 percent of undergraduate students had at least one of what they termed “non-traditional” factors, such as attending school part-time or attending while supporting a family.[11]

Over time, these non-traditional students have become the norm. And as their numbers grew, they increasingly turned to non-selective two- and four-year institutions, and particularly to for-profit institutions which market aggressively and focus on offering more flexible schedules to accommodate their needs.  This shift came to a head with the Great Recession.  As unemployment surged in 2008 and 2009, millions of struggling workers sought to return to school to invest in skills they hoped would help them advance up the economic ladder.  Some managed to find seats at community colleges, but with state educational budgets shrinking, capacity was limited and greater cost burdens were passed on, forcing them to borrow to attend.  More significantly, ever larger numbers instead flowed into open enrollment institutions, particularly for-profit schools, where tuition tends to be much higher and where attendance virtually necessitates borrowing.

The impact was dramatic.  As recently as 2000, students at for-profit schools accounted for only 12 percent of federal student loan dollars outstanding while borrowers at four-year public and private institutions and graduate-only borrowers represented more than 80 percent of aggregate loans outstanding.  Community colleges, despite large enrollments, accounted for less than 5 percent of the federal portfolio due to low tuition and limited student borrowing.

In contrast, later, between 2009 and 2011 nearly half of new federal borrowers were students at for-profit or community colleges.  The aggregate share of loan balances outstanding for students that had attended for-profit school grew eight percentage points from 2000 to 2013, while the share attributable to public and private four-year institutions fell by nine percentage points over the same period. Community colleges, with far lower tuitions, grew marginally to account for the difference.

Unfortunately, in spite of so many more students trying to access the American dream via a quality higher education, the dream is being bogged down by inadequate schools, a mountain of debt, and poor labor market outcomes.  Borrowers that attended for-profit institutions have had significantly lower average earnings than those that attended selective four-year public and private institutions.  For-profit attendees were far more likely to have experienced stagnant wages and to be unemployed. those that attended selective four-year public and private institutions that had attended selective institutions increased slightly to $48,000 while in the same period earnings for borrowers that had attended for-profit institutions declined by about 6 percent, or $1,600, to $23,200.

Perhaps worst of all, too many borrowers attending these schools do not to even complete their degrees.  Among borrowers entering repayment in 2011, more than 70 percent of four-year public and private attendees completed their degree while about half of students entering for-profit institutions did not graduate. [12]

The results speak for themselves.  Adjusting for background characteristics, such as family income, the type of institution attended alone explains more than one-third of the increase in default rates from 2000 to 2011.[13]

These students who have defaulted have debts that the federal government pursues through wage garnishment, hold backs on tax refunds, and other collection efforts.  While the federal program provides a number of borrower protections, including income-driven repayment plans, to help struggling borrowers avoid default, it is clear that these options alone are not sufficient.       

V. Servicing Today’s Borrowers

These results suggest that students who could receive some of the greatest benefits from education are seeing the worst outcomes.  They are borrowing more and earning less. Who is advising them? Who is helping them navigate?  

Let’s look at the student loan servicers—as I said earlier, these are the companies that work for the Department of Education and describe for student loan borrowers how they are to make their repayments, that detail the options they have for repayment, and that keep track of applying the payments to outstanding balances so as to avoid delinquency and default. 

What needs to happen to make the servicing process navigable?

To begin with, student loan servicers need to work with borrowers to prevent defaults.  We need to make certain that defaults take place only as a last resort.  This is important both for the borrower and for the U.S. taxpayer. It is critical for servicers to review with borrowers all their payment options.  Certainly default cannot be avoided in every case.  However, many distressed student loan borrowers should qualify for an affordable payment through an income-based repayment plan. These plans offer a path away from delinquency and default, and the negative consequences associated with delinquency and default.  They give borrowers sustainable monthly payments and ultimate forgiveness if a balance is remaining at the completion of the loan term. In other words, borrowers have good options when it comes to repayment, and servicers need to inform borrowers of these options.

Servicers need to be diligent in pursuing these options. Servicers need to know how to communicate with borrowers, what technology to use to reach them, what to say, how to follow up.  When servicers fail at this we see student loan borrowers who, unaware of good options, turn to the scams—the quick-fix approaches advertised on telephone poles. When borrowers are not served by their servicers—when they find the process frustrating and unnavigable, it can leave them in a boatload of trouble.

Are student loan servicers encouraging utilization of alternative repayment plans for borrowers that could benefit? Are they exploring how income-driven repayment plans work? Do they explain to borrowers that there are costs to them in terms of delay in obtaining an income-based repayment plan? Do they forewarn students of payment shock, lost benefits, and increased interest charges for borrowers who do not move into sustainable options? How do they help borrowers seeking to resolve servicing errors?

The GAO recently released a report called “Education Could Do More to Help Ensure Borrowers Are Aware of Repayment and Forgiveness Options,” in which it noted that 70% of borrowers with defaulted loans could be qualifying for income-based repayment, but that these borrowers are not being given the option by their servicers.[14] 

Unfortunately, neither private nor federal student loan servicers have not exactly been wrapping themselves in glory these days.  Federal agencies have entered into numerous recent enforcement actions from payment allocation problems and billing errors, to mistreatment of service members, to illegal collections practices.[15]

Repairing this system before it does further harm to borrowers is a must.  This is primarily the responsibility of the servicing industry and the agencies that contract with them, but regulatory bodies such as the CFPB, which has jurisdiction over student loan servicers, need to be prepared to monitor servicing functions on an ongoing basis and take enforcement actions.  The CFPB also has the authority to issue servicing standards and if it is determined that servicing practices are hurting struggling student borrowers, then strong standards should be promulgated.

VI. Aligning Incentives to Improve Borrower Outcomes

Finally, at the same time that we address the servicing challenges faced by today’s struggling borrowers and enhance the ability of borrowers to navigate the system in pursuit of available options, we must also look to the millions of future students who will start school each semester and will be faced with taking out brand new loans. The President has already proposed expanding free community college so tomorrow’s responsible students will have broader options that may not require them to borrow.

While not taking our eyes off of the necessary focus on servicing, we also have to start to consider how we shift the incentives throughout the system to have schools focus more directly on student success.  Today, schools benefit from tuition payments often made with the support of federal student loan dollars.  Yet these schools feel little impact if students do not complete their education, fail to realize earnings gains, and are unable to repay their loans.  Students and taxpayers end up bearing all of the risk associated with delinquency and default.  

Taxpayers, students, and families should not be on the hook for systematic underperformance while schools are not.  Likewise, critical steps like Pay As You Earn designed to help borrowers must not become tools for schools to avoid accountability for sub-par outcomes.  To empower students and parents, the recently released College Scorecard provides a new tool that highlights how financial outcomes can be shaped by educational choices and hopefully this additional transparency will motive institutions to improve.  The Administration has also finalized gainful employment regulations and proposed strengthening 90/10 requirements to ensure that for-profit schools are not relying nearly entirely on federal funds for their survival.

That said, requiring institutions to have a more direct financial stake in outcomes could change behavior in ways that are beneficial to students.  For example, many states are experimenting with funding public universities based on outcomes as well as enrollment. Members of Congress from both parties have suggested that imposing costs on institutions that produce poor student loan outcomes would improve quality, limit tuition and borrowing, provide greater resources to assist and guide students to complete their degrees, and help their graduates find jobs that pay well. The same can be said for incentive payments or other benefits that could be tied to achieving superior outcomes and serving at-risk students, such as the Administration’s proposal to reward colleges that graduate Pell students.

Determining the right set of measures to align incentives and drive these types of desired outcomes is not simple.  However, our current student loan financing system is not allocating the costs of delinquency and default optimally.

Of course, if we were to adjust the allocation of risk—away from the taxpayer and students and toward the institutions benefiting from the federal dollars—we need to recognize and weigh the potential unintended consequences.  Schools argue that if they face increased financial risk when their students experience poor labor market outcomes and fail to repay loans, they may be less able to enroll low-income students, curtailing access for those most in need.  These arguments need to be evaluated.

That said, the status quo is falling short.  Student loan servicers may not be acting as the beacons we need them to be. And too many institutions are consistently failing to produce positive outcomes for the students who would benefit from a quality higher education. It is critical that we continue to focus on enhancing accountability so that these institutions are not removed from the consequences of unacceptable results. 

VII. Conclusion

Sometimes you have to understand the past in order to understand the future. Credit markets are only as functional as their ability to be navigated by borrowers. The design of consumer credit markets must incorporate some notion of navigation. In the student loan context, navigation is only possible if student loan servicers move borrowers to sustainable payment plans. You have always been beacons in the maze of credit finance. Student loan servicers also have a responsibility in this regard, and I look forward to seeing proof that they are guiding borrowers well, or otherwise adopting standards for the student loan servicing market.  For struggling borrowers, we need to see increased enrollment in income-driven repayment plans, high touch servicing, and counseling that helps borrowers understand their options and sets them on a more secure financial path.

Thank you.   

 

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[1] Holmes, T.H. & Rahe, R.H. (1967). The social readjustment rating scale. Journal of

Psychosomatic Research.

[2] Federal Reserve Bank of New York, Convening on Student Loan Data Conference (March 4, 2015); Remarks before the Annual Meeting of the National Association of Business Economics (September 29, 2014) 

[3] Meeting with National Association of Consumer Bankruptcy Attorneys (November 20, 2014); US Treasury Collections Roundtable (April 6, 2015)

[4] Student Loan Roundtable at the University of Maryland, Baltimore (April 29, 2014); Texas Student Loan Roundtable at the University of Texas (December 4, 2014)

[5] Student Loan Roundtable at the University of Indiana, Indianapolis (September 28, 2015).

[6] U.S. Department of Education, National Center for Education Statistics (2015).  Digest of Education Statistics, Table 303.10.  Available at <http://nces.ed.gov/programs/digest/d14/tables/dt14_303.10.asp>.

[7] U.S. Department of Education, National Center for Education Statistics (2014).  Digest of Education Statistics, Table 302.60. Available at <http://nces.ed.gov/programs/digest/d14/tables/dt14_302.60.asp>.

[8] College Board, Trends in College Pricing 2014, Table 2.  Available at <http://trends.collegeboard.org/college-pricing>.  Cost includes both tuition and room and board and is calculated between the 1993-1994 and 2013-2014 school years.  Disposable income for 1994-2014 is from the Bureau of Economic Analysis.

[9] U.S. Department of Education, Federal Student Aid (2015).  Federal Student Aid Data Center.  Available at <https://studentaid.ed.gov/sa/about/data-center/student/portfolio>.

[10] The data referenced in the remainder of this section is from the recent paper by Adam Looney and Constatine Yannelis, unless otherwise noted. 

Looney and Yannelis (2015). “A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and in the Institutions they Attended Contributed to Rising Loan Defaults.” Available at <http://www.brookings.edu/~/media/projects/bpea/fall-2015_embargoed/conferencedraft_looneyyannelis_studentloandefaults.pdf>. 

[11] U.S. Department of Education, National Center for Education Statistics (2015).  “Demographic and Enrollment Characteristics of Nontraditional Undergraduates: 2011-12.  Available at <http://nces.ed.gov/pubs2015/2015025.pdf>.

[12] Looney and Yannelis (2015). “A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and in the Institutions they Attended Contributed to Rising Loan Defaults,” page 19. Available at <http://www.brookings.edu/~/media/projects/bpea/fall-2015_embargoed/conferencedraft_looneyyannelis_studentloandefaults.pdf>. 

[13] Looney and Yannelis (2015). “A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and in the Institutions they Attended Contributed to Rising Loan Defaults,” page 26. Available at <http://www.brookings.edu/~/media/projects/bpea/fall-2015_embargoed/conferencedraft_looneyyannelis_studentloandefaults.pdf>. 

[14] Government Accountability Office (2015). ““Education Could Do More to Help Ensure Borrowers Are Aware of Repayment and Forgiveness Options.” Available at http://www.gao.gov/assets/680/672136.pdf.

[15] Federal Deposit Insurance Corporation (2014). “FDIC Announces Settlement with Sallie Mae for Unfair and Deceptive Practices and Violations of the Servicemembers Civil Relief Act.”  Available at <https://www.fdic.gov/news/news/press/2014/pr14033.html>.

U.S. Department of Justice (2015). “Nearly 78,000 Service Members to Begin Receiving $60 Million Under Department of Justice Settlement with Navient for Overcharging on Student Loans.” Available at <http://www.justice.gov/opa/pr/nearly-78000-service-members-begin-receiving-60-million-under-department-justice-settlement>.

Consumer Financial Protection Bureau (2015). “CFPB Orders Discover Bank to Pay $18.5 Million for Illegal Student Loan Servicing Practices”.  Available at <http://www.consumerfinance.gov/newsroom/cfpb-orders-discover-bank-to-pay-18-5-million-for-illegal-student-loan-servicing-practices/>.

Consumer Financial Protection Bureau (2014).  “CFPB Supervision Report Highlights Risky Practices in Student Loan Servicing.” Available at <http://www.consumerfinance.gov/newsroom/cfpb-supervision-report-highlights-risky-practices-in-student-loan-servicing/>.

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