Last Wednesday, the Senate Budget Committee and the Senate Banking Committee held separate hearings about student loans.  Interestingly, the CFPB was represented in only one of the hearings.

The Senate Budget Committee held a hearing titled “The Impact of Student Loan Debt on Borrowers and the Economy,” which included testimony from the CFPB’s Student Loan Ombudsman Rohit Chopra. A link to the archived webcast of the hearing can be found here.  In his testimony, Mr. Chopra maintained the party line regarding the detrimental repercussions that student loans can have on the economy as a whole. He claimed that “there has been growing consensus that today’s $1.2 trillion [in student debt] can have repercussions that threaten the security of young Americans and broader economic growth.” Mr. Chopra identified several areas affected by the “student debt domino effect”: homeownership and household formation; small business and entrepreneurship; retirement security and asset accumulation; and skewed market effects in rural America. However, as we have previously blogged, this view that student loan debt is having a cascading negative effect on the rest of the economy is hardly universally accepted.

In her opening statement, Chairman Murray emphasized the importance of ensuring that loan servicers are treating student borrowers fairly and responsibly. She referenced “alarming reports of student loan servicers mistreating borrowers,” but did not otherwise identify those reports or cite any independent studies or empirical data to substantiate the anecdotal evidence.  We presume that Chairman Murray was referring to various reports from the CFPB, but as we have previously observed, the CFPB’s practice of treating every complaint as valid can over-represent the scope of any alleged problem. Despite reports that default rates for federal loans are more than triple those in the private market, the hearing focused on the various alleged problems relating to private student loan servicers. Mr. Chopra even stated in his testimony that student loan borrowers generally are unable to choose their servicer, “unlike most markets for consumer products and services.” It remains unclear to us what markets for consumer goods or services offer any opportunity to shop for independent servicing.

Richard Vedder, Director of the Center for College Affordability and Productivity, testified that the current student loan debt crisis would never have happened had college costs increased at the general rate of inflation. He attributed the federal student financial assistance program itself as a major contributor to the increase in tuition fees. Mr. Vedder addressed Senator Warren’s bill to lower interest rates on student loans, calling it “fundamentally flawed.” He asserted that the bill effectively punishes conscientious re-payers of loans, increases the likelihood of irresponsible lending to students not equipped for college, and penalizes those majoring in productive fields, who are less likely to have large loan repayment issues.

The second hearing held by the Senate Banking Committee, titled “Student Loan Servicing: The Borrower’s Experience,” focused on whether regulations were needed to combat the perceived problems with student loan servicers. No servicers testified at the hearing.  Instead, witnesses from Dennison University, the American Federation of Teachers, and the Student Veterans of America discussed the alleged lack of transparency regarding who their federal loan servicers are and what repayment options are available after graduation. In addition, the hearing also discussed the bad acts certain servicers purportedly engage in when interacting with servicemember or veteran borrowers.  A witness from The Heritage Foundation emphasized the need for Congress to focus on the impact on the federal budget of any expansion in federal student loan programs or benefits.

It was clear that both hearings were meant to bolster support for S.2292, Senator Warren’s Bank on Students Emergency Loan Refinancing Act. S. 2292 would amend the Higher Education Act of 1965 to provide for the refinancing of certain federal student loans. The testimony at the Budget Committee hearing did not delve into the cost of S. 2292 to taxpayers, and instead focused on the perceived negative effects that student loans are having on the economy as a whole. We feel it would be unfortunate to pass a bill as a knee-jerk reaction to anecdotal evidence regarding the negative impacts of student loans without fully understanding the consequences the bill would have on taxpayers and the economy.