Student loans set up to fail? Panel to decide.

 

The Senate Budget Committee will hold hearings Wednesday to decide whether the student loan industry is "set up to make borrowers fail."

"I'm concerned that student loan servicers see that they can maximize their profits by cutting corners, rather than giving proper customer service," Chairman Sherrod Brown (D-Ohio) will say, according to an advanced copy of his opening remarks. "Among the questions to consider: Have servicers created an intentionally opaque repayment process, set up to make borrowers fail?"

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Brown and others on the Banking Committee, including Sen. Elizabeth Warren (D-Mass.), have criticized Sallie Mae and other financial institutions for overcharging borrowers with high interest rates.

In an interview Tuesday, Brown doubled down: "The system is so slanted toward the servicers against the borrowers on student loans."

While Brown's hearing will look at the borrower's experience, the Senate Budget Committee will have a full committee hearing Thursday on how the nation's $1.2 trillion student loan debt impacts the economy. 

Warren's first standalone legislation proposal has seen little traction in the Senate, which would allow students who are eligible for Stafford loans to borrow at the same interest rate that banks receive when obtaining low-interest, short-term discounted loans from the Federal Reserve.

The measure would allow students who are eligible for federally subsidized Stafford loans to borrow at the same rate that banks get from the Federal Reserve when they need a short-term infusion of cash from the central bank’s discount window.

Richard Vedder, director of the Center for College Affordability and Productivity, is expected to criticize Warren's student loan proposal at Wednesday's Senate Budget hearing Wednesday. 

In his submitted testimony for the Budget Committee, Vedder said Warren's bill is "fundamentally flawed" and "punishes those who have who have responsibly paid back their loans."

"The Warren proposal increases the likelihood or irresponsible lending to students not equipped for college who face a high probability of dropping out," Vedder submitted in his testimony. "If the Warren bill were to pass, students will likely be told by counselors 'if it gets too tough for you to pay off your loan, Congress will likely either forgive the loan or reduce your burden by lowering interest rates.'

What economists call a moral hazard problem will be worsened."

Vedder, whose organization compiles Forbes's Best College rankings, warns Democrats: "Those of you on the left that are worried about excessive accumulations of wealth and privileges, you are making a big mistake in pushing federal financial aid policies that have been historically associated with reductions, not improvements, in income equality."

And while Warren has repeatedly criticized the government for profiting from student loans, Vedder directs the criticism back at the institutions.

"The overexpansion of federal financial assistance programs have contributed to a number of other problems, such as the current massive underemployment of recent college graduates and the decrease in academic quality in our schools," Vedder argued.

He describes the federal financial aid programs as "colossal failures — raising costs, reducing access and quality, and leading to overinvestment of federal resources in higher education."

Last month, Sallie Mae reached a $60 million settlement with the Justice Department for overcharging student loan interest rates to military members. According to the Consumer Financial Protection Bureau's Consumer Complaint Database, there are 3,664 formal complaints filed against Sallie Mae, 50 percent of the total complaints filed within the database.

Brown's hearing will feature student loan experts as well as Will Hubbard, vice president of external affairs for Student Veterans of America.

Hubbard will describe the Veterans Affairs Department's practices as outdated and impractical, causing veterans a bureaucratic headache, where VA officials aren't communicating with the Department of Education, with policies requiring deployed soldiers to certify military status "on an annual basis or more frequently," despite Department of Education officials having access to Defense Department databases already.

"Given the volume of complaints reported about the company’s practices, it should have come as no surprise that they were taking advantage of the military and veteran community systematically," Hubbard wrote in his testimony. "Though the case of Sallie Mae highlighted explicit misconduct, there are also situations involving practices that are less obvious."

Hubbard will argue that if the Department of Veterans Affairs designates a service member or veteran as disabled, the Department of Education should automatically carry over such information, which can qualify the individual for certain repayment policies.

"To require recertification of an individual's disability rating is shameful," Hubbard wrote in his submitted testimony, "[it] causes unnecessary paperwork and may also result in inaccuracies."