Subcommittee on Higher Education and Workforce Development
Committee on Education and the Workforce
U.S. House of Representatives
2434 Rayburn House Office Building
Washington, D.C. 20515
The Honorable Susan Davis
Ranking Member
Subcommittee on Higher Education and Workforce Development
Committee on Education and the Workforce
U.S. House of Representatives
1214 Longworth House Office
Washington, D.C. 20515
Dear Chairman Guthrie and Ranking Member Davis:
The Consumer Bankers Association (“CBA”)[1] appreciates the Subcommittee on Higher Education and Workforce Development’s interest in improving consumer information in higher education and we would like to take this opportunity to submit the following comments on the hearing entitled, “Empowering Students and Families to Make Informed Decisions on Higher Education.” Empowering students and families to make informed decisions will improve outcomes for students, schools and taxpayers. As the voice of the retail banking industry, CBA membership includes private sector lenders who make the majority of private student loans to help families finance a college education. Applying many of the processes and disclosures from the private sector to federal student loans can help inform students and families.
It Is Time for “Know Before You Owe” for Federal Student Loans
Policymakers and regulators have offered multiple solutions to help borrowers with repayment, but plans to address overborrowing have been much more elusive. The multiple efforts at addressing repayment has led to numerous repayment plans and increased confusion among borrowers. The Committee is to be commended for looking beyond repayment and should continue its focus on efforts to empower students and families to make sound decisions before they take out a federal student loan. In particular, we encourage the Committee to pursue a “know before you owe” initiative for federal student loans.
Understanding the full cost of credit is critical for making an informed decision on how much to borrow. Unfortunately, federal student loans do not include this information in a manner that is easy to understand for borrowers. Private lenders are required by the Truth in Lending Act (TILA) to provide customers with clear and conspicuous disclosures of loan costs and terms throughout the origination process before loans are disbursed. The interest rate, loan fees, annual percentage rate, monthly payment amount, and total cost of the loan, among other important terms specific to the individual borrower are boldly displayed. Conversely, federal loan borrowers must weed through more than a dozen page of disclosures, determine which terms apply to their specific loan, and squint to read fine print to discern key loan terms.
In addition to strong underwriting, the current disclosure regime for private student loans has helped to enhance consumer knowledge and decision-making, improving recent private student loan performance. Delinquencies are at all-time lows, with early stage (30-89 day) delinquencies at 2.7 percent and late-stage (90-day+) delinquencies at 1.9 percent.
Congress should require the Department of Education and Consumer Financial Protection Bureau (CFPB) to work together to provide federal loan borrowers with the same kind of concise, meaningful information about their future obligations that is available in the private loan market. These disclosures should be consumer-tested, as the Federal Reserve did in creating model disclosure forms for private student loans in 2009. Additionally, these disclosures should be provided at application and in coordination with a financing letter from the college or university to enable the borrower to make an informed decision prior to the loan funds being disbursed. They should include key terms of the loan, such as interest rate, fees, monthly payment, total cost of the loan, and the annual percentage rate (APR).
As some loans now carry origination fees as high as 4.3 percent, APR is a particularly relevant loan term for federal student loans, and federal borrowers usually must figure out this data point for themselves. The Transparency in Student Lending Act (H.R. 1283), bipartisan legislation introduced by Representative Randy Hultgren (R-IL), Luke Messer (R-IN), and David Scott (D-GA), would address the APR issues on federal student loans and should be included with the Committee’s efforts to help create informed consumers in higher education.
“Award Letters” and the Importance of Terminology
Today’s so-called financial aid “award letter” provided by colleges and universities needs to be reformed to better serve students and families. First and foremost, if the document contains information regarding loans of any type, it should not be called an “award letter,” as this can increase the chances of confusion regarding what is a grant or scholarship and what is a loan. If the document contains information regarding loans, it should be referred to as a “financing letter.”
Financing letters with information regarding both grants and loans must clearly separate and distinguish between a grant and a loan. Requirements on separating grants and loans would not inhibit financial aid offices from providing information unique to their institution, while assuring policymakers that schools are clearly making this distinction for students and families.
Informed Consumers Should Know All Options
Previous bills aimed at empowering consumers on higher education have often included disclosure or counseling requirements that state borrowers must be told federal loan options are generally better than private student loans. It is often true that federal loans offer the best deal for students, but this is not always the case, particularly in the case of loans for parents and graduate students. Requiring schools or the Department of Education to make general statements on the superiority of federal student loans will not inform or empower students and families. Instead, it will provide misinformation to the millions of borrowers who are better served by the private loan market.
Conclusion
Improving the provision of consumer information in the federal student loan programs is one of the most important steps Congress can take in the upcoming reauthorization of the Higher Education Act. An informed consumer makes better decisions, which is critically important in today’s environment of escalating college costs. CBA appreciates the Committee’s interest in this important topic, and the members of CBA stand ready to work with you in applying concepts from TILA and the private loan market to improve consumer information for federal student loans. On behalf of the members of CBA, we appreciate the opportunity to submit this statement for the record.
Sincerely,
Richard Hunt
President and CEO
Consumer Bankers Association
[1] The Consumer Bankers Association is the only national financial trade group focused exclusively on retail banking and personal financial services – banking services geared towards consumers and small businesses. As the recognized voice on retail banking issues, CBA provides leadership, education, research, and federal representation for its members. CBA members include the nation’s largest bank holding companies as well as regional and super-community banks that collectively hold two-thirds of the total assets of depository institutions. Our members operate in all 50 states, serve more than 150 million Americans and collectively hold two-thirds of the country’s total depository assets. A list of our corporate membership can be found at www.consumerbankers.com.
May 24, 2017
The Honorable Brett Guthrie
Chairman
Subcommittee on Higher Education and Workforce Development
Committee on Education and the Workforce
U.S. House of Representatives
2434 Rayburn House Office Building
Washington, D.C. 20515
The Honorable Susan Davis
Ranking Member
Subcommittee on Higher Education and Workforce Development
Committee on Education and the Workforce
U.S. House of Representatives
1214 Longworth House Office
Washington, D.C. 20515
Dear Chairman Guthrie and Ranking Member Davis:
The Consumer Bankers Association (“CBA”)[1] appreciates the Subcommittee on Higher Education and Workforce Development’s interest in improving consumer information in higher education and we would like to take this opportunity to submit the following comments on the hearing entitled, “Empowering Students and Families to Make Informed Decisions on Higher Education.” Empowering students and families to make informed decisions will improve outcomes for students, schools and taxpayers. As the voice of the retail banking industry, CBA membership includes private sector lenders who make the majority of private student loans to help families finance a college education. Applying many of the processes and disclosures from the private sector to federal student loans can help inform students and families.
It Is Time for “Know Before You Owe” for Federal Student Loans
Policymakers and regulators have offered multiple solutions to help borrowers with repayment, but plans to address overborrowing have been much more elusive. The multiple efforts at addressing repayment has led to numerous repayment plans and increased confusion among borrowers. The Committee is to be commended for looking beyond repayment and should continue its focus on efforts to empower students and families to make sound decisions before they take out a federal student loan. In particular, we encourage the Committee to pursue a “know before you owe” initiative for federal student loans.
Understanding the full cost of credit is critical for making an informed decision on how much to borrow. Unfortunately, federal student loans do not include this information in a manner that is easy to understand for borrowers. Private lenders are required by the Truth in Lending Act (TILA) to provide customers with clear and conspicuous disclosures of loan costs and terms throughout the origination process before loans are disbursed. The interest rate, loan fees, annual percentage rate, monthly payment amount, and total cost of the loan, among other important terms specific to the individual borrower are boldly displayed. Conversely, federal loan borrowers must weed through more than a dozen page of disclosures, determine which terms apply to their specific loan, and squint to read fine print to discern key loan terms.
In addition to strong underwriting, the current disclosure regime for private student loans has helped to enhance consumer knowledge and decision-making, improving recent private student loan performance. Delinquencies are at all-time lows, with early stage (30-89 day) delinquencies at 2.7 percent and late-stage (90-day+) delinquencies at 1.9 percent.
Congress should require the Department of Education and Consumer Financial Protection Bureau (CFPB) to work together to provide federal loan borrowers with the same kind of concise, meaningful information about their future obligations that is available in the private loan market. These disclosures should be consumer-tested, as the Federal Reserve did in creating model disclosure forms for private student loans in 2009. Additionally, these disclosures should be provided at application and in coordination with a financing letter from the college or university to enable the borrower to make an informed decision prior to the loan funds being disbursed. They should include key terms of the loan, such as interest rate, fees, monthly payment, total cost of the loan, and the annual percentage rate (APR).
As some loans now carry origination fees as high as 4.3 percent, APR is a particularly relevant loan term for federal student loans, and federal borrowers usually must figure out this data point for themselves. The Transparency in Student Lending Act (H.R. 1283), bipartisan legislation introduced by Representative Randy Hultgren (R-IL), Luke Messer (R-IN), and David Scott (D-GA), would address the APR issues on federal student loans and should be included with the Committee’s efforts to help create informed consumers in higher education.
“Award Letters” and the Importance of Terminology
Today’s so-called financial aid “award letter” provided by colleges and universities needs to be reformed to better serve students and families. First and foremost, if the document contains information regarding loans of any type, it should not be called an “award letter,” as this can increase the chances of confusion regarding what is a grant or scholarship and what is a loan. If the document contains information regarding loans, it should be referred to as a “financing letter.”
Financing letters with information regarding both grants and loans must clearly separate and distinguish between a grant and a loan. Requirements on separating grants and loans would not inhibit financial aid offices from providing information unique to their institution, while assuring policymakers that schools are clearly making this distinction for students and families.
Informed Consumers Should Know All Options
Previous bills aimed at empowering consumers on higher education have often included disclosure or counseling requirements that state borrowers must be told federal loan options are generally better than private student loans. It is often true that federal loans offer the best deal for students, but this is not always the case, particularly in the case of loans for parents and graduate students. Requiring schools or the Department of Education to make general statements on the superiority of federal student loans will not inform or empower students and families. Instead, it will provide misinformation to the millions of borrowers who are better served by the private loan market.
Conclusion
Improving the provision of consumer information in the federal student loan programs is one of the most important steps Congress can take in the upcoming reauthorization of the Higher Education Act. An informed consumer makes better decisions, which is critically important in today’s environment of escalating college costs. CBA appreciates the Committee’s interest in this important topic, and the members of CBA stand ready to work with you in applying concepts from TILA and the private loan market to improve consumer information for federal student loans. On behalf of the members of CBA, we appreciate the opportunity to submit this statement for the record.
Sincerely,
Richard Hunt
President and CEO
Consumer Bankers Association
[1] The Consumer Bankers Association is the only national financial trade group focused exclusively on retail banking and personal financial services – banking services geared towards consumers and small businesses. As the recognized voice on retail banking issues, CBA provides leadership, education, research, and federal representation for its members. CBA members include the nation’s largest bank holding companies as well as regional and super-community banks that collectively hold two-thirds of the total assets of depository institutions. Our members operate in all 50 states, serve more than 150 million Americans and collectively hold two-thirds of the country’s total depository assets. A list of our corporate membership can be found at www.consumerbankers.com.