Hearing of the Senate Health, Education, Labor, and Pensions Committee - Reauthorizing the Higher Education Act: Exploring Institutional Risk-sharing

Hearing

I would like to thank Chairman Alexander, Ranking Member Murray, and the members of the
Committee for inviting me to testify on what I believe is a critical area of needed reform for our
student aid programs and higher education more broadly -- requiring our colleges and universities
to bear greater responsibility for student loan debt. Chairman Alexander has taken a very
thoughtful approach to looking at this issue -- as have others on this Committee, and I thank you
all for your leadership.

We all know that postsecondary education is required for most family-sustaining, middle-class
jobs, and that an educated workforce is essential to a modern, productive economy.
Yet, just as there is growing recognition that postsecondary education is indispensable in the
modern economy, families are being required to shoulder growing debt burdens that severely
impact the lives of borrowers to the point of threatening access to college and restricting our
nation's economic growth potential.

According to a recent analysis of student loan debt by the Federal Reserve Bank of New York,
between 2004 and 2014, there was an 89 percent increase in the number of student loan
borrowers and a 77 percent increase in the average balance size. Today, over 40 million
Americans have student loan debt, with the outstanding balance exceeding $1.2 trillion.
This is a growing drag on our economy. As student loan debt has grown, young adults have put
off buying homes or cars, starting a family, saving for retirement, or launching new businesses.
They have literally mortgaged their economic future.

We know that student loan borrowers are struggling. And defaults are on the rise. The Federal
Reserve Bank of New York reported that the number of borrowers who default each year has
increased from about half a million 10 years ago to 1.2 million annually in 2011 and 2012. Only
37 percent of borrowers are current on their loans and actively paying down their debt.
We cannot tackle the student loan debt crisis without states and institutions also stepping up and
taking greater responsibility for college costs and student borrowing.

Institutions of higher education can take action to reduce the likelihood that a student will default
on a loan. However, under current law there is little incentive for them to do so until default
rates reach excessive levels such as their three-year cohort default rate exceeding 30 percent for
three years. In other words, nearly one in three students would have to default by their third year
in repayment before an institution would be obligated to take action.

The financial crisis showed us what happens when certain players in the system can reap the
rewards of easy credit without having to bear any of the consequences of making reckless, risky
decisions. The players that created and sold exotic financial products got rich while middle
income families lost their homes and taxpayers had to bail out the financial system.
We only have to look at the collapse of Corinthian Colleges to see that we face a similar problem
in the higher education sector. Students have been left in the lurch and taxpayers on the hook
because of a business model based on maximizing enrollments and student loan revenue -- with
little responsibility for outcomes.

I introduced the Protect Student Borrowers Act with Senators Durbin, Warren, and Murphy to
ensure that institutions take greater financial responsibility when it comes to student loan debt by
setting stronger market incentives for colleges and universities to provide better and more
affordable education to students, which will in turn help put the brakes on rising student loan
defaults.

We introduced this legislation to move the conversation forward -- beyond whether institutions
should bear greater responsibility for student loan debt to how to design a system that puts the
right market incentives in place for them to assume such responsibility.

The Protect Student Borrowers Act would hold colleges and universities accountable for student
loan defaults by requiring them to repay a percentage of defaulted loans. Only institutions that
have 25 percent or more of their students borrow would be included in this risk sharing based on
their cohort default rate. Risk-sharing requirements would kick in when the default rate exceeds
15 percent. As the institutional default rate rises, so too would the institution's risk-share
payment. These payments would be invested in helping struggling borrowers, preventing future
default and delinquency, and reducing shortfalls in the Pell Grant program.

We need to tackle student loan debt and college affordability from multiple angles. And we need
all stakeholders in the system to do their part. With the stakes so high for students and taxpayers,
it is only fair that institutions bear some of the risk in the student loan program.

I commend Chairman Alexander and Senator Murray for putting this topic on the reauthorization
agenda. I look forward to working closely with this Committee and our colleagues on refining
the risk-sharing concept and including tough, fair, and workable provisions in the Higher
Education Act to ensure that we truly have shared responsibility for student success.

Thank you.

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