Senator Grassley today introduced his Know Before You Owe Federal Student Loan Act of 2015.
Floor Statement of Sen. Chuck Grassley on
The Know Before You Owe Federal Student Loan Act of 2015
Delivered Wednesday, Sept. 16, 2015
Student debt is a big, and growing concern for millions of American graduates. As we look at ways of addressing this issue, it is important to keep in mind that about 90% of that debt is owed to the federal government. The federal government currently holds more than $1 trillion in student loan debt. That makes the U.S. Department of Education one of the country's largest lenders. As such, any solution to the debt problem needs to examine the federal government's lending practices.
Federal banking regulations require commercial lenders to confirm a borrower's ability to repay the loan. Federal student loans are given out without a credit check or any analysis of the student's ability to repay the loan in the future. This is intentional since many prospective college students have no credit and little to no income, but it also puts all the burden on student borrowers to make sure they don't borrow too much.
As a nation, we have accepted that it makes moral and financial sense to assist low-income Americans in accessing higher education opportunities, and we do that to the tune of billions of dollars through Pell Grants, subsidized student loans, and many other student aid programs. However, while need-based federal student aid is vital to help students who could not otherwise afford to attend college, students are able to borrow well in excess of their financial need and potentially in excess of what they will be able to repay.
College financial aid offices are required to issue federal loans up to the full amount for which the student is eligible even if a financial aid administrator knows a student is borrowing more than the student needs and will likely have trouble repaying. Think about that. Even if the financial aid administrator knows the student plans to put the funds toward an engagement ring or a sports car, federal rules say they must issue the loan. If a bank followed the same rules as the federal government, it would be accused of predatory lending.
There have been lots of suggestions about how to address the student debt issue, but if you don't tackle the root of the problem, it's like closing the barn door after the horse has gotten out. A good place to start is looking at how our current federal student lending practices may be helping to fuel the student debt problem. For example, about 60% of students at the University of Iowa graduate with debt, and their average debt is $25,000. However, the University estimates that of that $25,000 average figure, about $13,000, or 60%, is debt that was incurred to pay for tuition, room and board, books, etc. and the remainder is for what can be called lifestyle expenses. In other words, about 40% of the average student debt taken out by University of Iowa students goes toward lifestyle enhancing extras, like eating out and buying designer coffee drinks.
The Senate Health, Education, Labor, and Pensions Committee will be looking at a number of reforms to the student loan program as it drafts legislation to reauthorize and reform the Higher Education Act. I know Chairman Alexander has in the past proposed giving higher education institutions additional tools to reduce overborrowing. I have worked with Senator Franken on some measures to provide more information about college costs when students are selecting a college in the first place, which will hopefully encourage more price competition to combat rising tuition. There is room for a lot of innovation in higher education and I don't pretend to have the total solution to the problem of college costs and student debt. What I am proposing is some simple, common sense first steps to empower students with the information they need to make sound financial decisions.
The Higher Education Act already contains a requirement for colleges to provide counseling to new borrowers of federal student loans. However, the current disclosures in the law do not do enough to ensure that students understand the scope and impact of the debt they will face after graduation. My "Know Before You Owe Federal Student Loan Act" strengthens the current student loan counseling requirements by making the counseling an annual requirement before new loans are disbursed rather than just for first time borrowers. My bill then adds several key components to the information institutions of higher education are required to share with students as part of loan counseling. Under my bill, colleges would have to provide an estimate of the student's projected loan debt-to-income ratio upon graduation. This would be based on the starting wages for that student's program of study and the estimated total student loan debt the student will likely take out to complete the program. That way, students will have a real picture of the student loan payments they will face and whether they will be able to afford those payments with their likely future income.
We often hear the statistics showing that, on average, a college degree results in higher earnings over a lifetime. However, not all college degrees have the same earning potential and many students are in for a rude awakening when they graduate and find that what they are able to earn with their degree does not match their level of debt. Students deserve to have this information when they are deciding how much to borrow, not after they graduate with unmanageable debt.
My bill will also ensure that students are counseled to borrow only the minimum amount necessary to cover expenses and informed that they do not have to accept the full amount of loans offered. Students will also be given options for reducing borrowing through scholarships, reduced expenses, work-study, or other work opportunities. Also, not graduating on time can significantly increase student loan debt so students will be counseled on the impact of adding an additional year of study to total indebtedness and how they can stay on track to graduate on time.
Crucially, the bill also requires that a student manually enter, either in writing or through electronic means, the exact dollar amount of federal direct loan funding that the student desires to borrow. The current process almost makes borrowing the maximum the default option. If you want to borrow less than is offered, you have to ask for less. Because the amount of federal student loans a student is eligible to borrow is not limited by a calculation of financial need or ability to repay, it is important that the student make a conscious, informed decision about how much to borrow rather than simply accepting the total amount of federal student loans for which they are eligible.
Many schools already make a concerted effort to counsel students against overborrowing, and such efforts are showing signs of success in my home state of Iowa.
My alma mater, the University of Northern Iowa, created a program five years ago with the theme "Live Like a Student". The program includes workshops and courses designed to educate students on the importance of living within their means while they are in school so they need not live like a student later in life. As a result, the university has lowered average student debt from more than $26,000 to $23,163.
Grand View University has a Financial Empowerment Plan where students and families construct a comprehensive four-year financing plan. Under this plan, borrowing is based on the student's future earning potential in the student's field of study. The four-year plan also helps ensure students graduate on time and tuition increases are capped at 2% a year over those four years.
Iowa Student Loan, our state-based nonprofit lender, also has a program called the Student Loan Game Plan, which is an online, interactive resource that calculates a student's likely debt-to-income ratio. It walks students through how their borrowing will affect their lifestyle in the future and what actions they can take now to reduce their borrowing. As a result, in the past year, 18.2% percent of students who participated decreased the amount they had planned to borrow by an average of $3,680, saving students $2.1 million in additional loan debt.
My legislation would also require that students receive regular statements about their loan while they are in school just like they will when they graduate and start repaying. With just about any other kind of loan, borrowers start getting statements right away and are expected to make payments. With federal student loans, payments are not required until a period of time after graduation and no statements are sent out until that time. So, students forget about their amount of debt they are accruing until they graduate and get their first bill. What's more, many federal student loans still accrue interest while the student is in school, which will be added to the loan total when they start repaying. That means that not only do students forget about how much debt they have while in school, making them less conscientious about living like a student, but their loan may actually be growing while they are in school. Students have the option to pay that interest while they are in school so that it isn't capitalized into their loan. However, few students take advantage of this option. The regular statements that my bill calls for would encourage this practice so students get used to paying some amount toward their loans even before they graduate. That will also make students more aware of their borrowing and less likely to overborrow each time they take out a new loan.
A college education generally remains a good investment. However, when students' academic dreams become a nightmare upon graduation because they borrowed more from the federal government than they can afford to repay with the degree they earned, they understandably feel that something is wrong. The federal government, as the lender making these loans, has a responsibility to at least ensure that students know what they are getting themselves into before they get in over their heads. My legislation will do that. I urge my colleagues to support this bill to help prevent more students from drowning in federal student loan debt.
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