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89–723 PDF 2012

S. HRG. 112–899 

THE LOOMING STUDENT DEBT CRISIS: PROVIDING 

FAIRNESS FOR STRUGGLING STUDENTS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ADMINISTRATIVE 

OVERSIGHT AND THE COURTS 

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

MARCH 20, 2012 

Serial No. J–112–64 

Printed for the use of the Committee on the Judiciary 

( 
(II) 

COMMITTEE ON THE JUDICIARY 

PATRICK J. LEAHY, Vermont, Chairman 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

CHUCK SCHUMER, New York 

DICK DURBIN, Illinois 

SHELDON WHITEHOUSE, Rhode Island 

AMY KLOBUCHAR, Minnesota 

AL FRANKEN, Minnesota 

CHRISTOPHER A. COONS, Delaware 

RICHARD BLUMENTHAL, Connecticut 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

JON KYL, Arizona 

JEFF SESSIONS, Alabama 

LINDSEY GRAHAM, South Carolina 

JOHN CORNYN, Texas 

MICHAEL S. LEE, Utah 

TOM COBURN, Oklahoma 

BRUCE A. COHEN, Chief Counsel and Staff Director 

KOLAN DAVIS, Republican Chief Counsel and Staff Director 

SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS

AMY KLOBUCHAR, Minnesota, Chairman 

PATRICK J. LEAHY, Vermont 

HERB KOHL, Wisconsin 

SHELDON WHITEHOUSE, Rhode Island 

CHRISTOPHER A. COONS, Delaware 

JEFF SESSIONS, Alabama 

CHUCK GRASSLEY, Iowa 

MICHAEL S. LEE, Utah 

TOM COBURN, Oklahoma 

CRAIG KALCUT, Democratic Chief Counsel/Staff Director 

DANIELLE CUTRONA, Republican Acting Chief Counsel 
(III) 

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page 

Durbin, Hon. Dick, a U.S. Senator from the State of Ilinois ............................... 1 

Grassley, Hon. Chuck, a U.S. Senator from the State of Iowa, prepared 

statement .............................................................................................................. 34 

WITNESSES 

Witness List ............................................................................................................. 33 

Madigan, Lisa, Attorney General for the State of Illinois, Chicago, Illinois ...... 4 

prepared statement .......................................................................................... 44 

Conway, Jack, Attorney General for the Commonwealth of Kentucky, Frankfort, Kentucky ....................................................................................................... 6 

prepared statement .......................................................................................... 36 

Jokela, Danielle, Chicago, Illinois .......................................................................... 8 

prepared statement .......................................................................................... 57 

Cole, G. Marcus, Professor of Law, Stanford University, Stanford, California .. 10 

prepared statement .......................................................................................... 50 

McCluskey, Neal, Associate Director, Center for Educational Freedom, Cato 

Institute, Washington, DC .................................................................................. 12 

prepared statement .......................................................................................... 76 

Loonin, Deanne, National Consumer Law Center, Boston, Massachusetts ........ 14 

prepared statement .......................................................................................... 59 

QUESTIONS 

Questions submitted by Senator Durbin for G. Marcus Cole .............................. 82 

Questions submitted by Senator Durbin for Deanne Loonin ............................... 83 

Questions submitted by Senator Sessions for G. Marcus Cole ............................ 84 

Questions submitted by Senator Sessions for Neal McCluskey ........................... 85 

ANSWERS 

Responses of Deanne Loonin to questions submitted by Senator Durbin .......... 86 

Responses of Neal McCluskey to questions submitted by Senator Sessions ...... 93 

NOTE: At the time of printing, after several attempts to obtain responses 

to the written questions, the Committee had not received any communication from G. Marcus Cole. ................................................................................... 94 

MISCELLANEOUS SUBMISSIONS FOR THE RECORD 

American Association of University Women (AAUW), Lisa M. Maatz, Director, 

Public Policy and Government Relations, Washington, DC, March 19, 2012, 

letter ...................................................................................................................... 95

Consumer Bankers Association, Washington, DC, statement ............................. 97 

Institute for College Access & Success, Pauline Abernathy, Vice President, 

Oakland, California, March 19, 2012, letter ...................................................... 108 
Page

IV 

American Association of Collegiate Registrars and Admissions Officers; American Association of Community Colleges; American Association of State 

Colleges and Universities; American Association of University Women; 

American Council on Education; American Federation of Teachers; Americans for Financial Reform; Association of Public and Land-Grant Universities; Campus Progress Action; Consumer Action; Consumer Federation 

of America; Consumer Federation of California; Consumer Watchdog; Consumers Union; Demos: A Network for Ideas & Action; The Education Trust; 

Empire Justice Center; The Greenlining Institute; The Institute for College 

Access & Success and Its Project on Student Debt; National Association 

for College Admission Counseling; National Association for Equal Opportunity in Higher Education; National Association of Consumer Advocates; 

National Association of Consumer Bankruptcy Attorneys; National Association of Student Financial Aid Administrators; National Center for Public 

Policy and Higher Education; National Community Reinvestment Coalition; 

National Consumer Law Center (on behalf of its low income clients); National Consumers League; National Council of La Raza; National Education 

Association; Public Citizen; UNCF; U.S. PIRG; United States Student Association, and Young Invincibles, May 25, 2011, joint letter ............................... 109 

Consumer Action, Linda Sherry, Director, Washington, DC, March 16, 2012, 

letter ...................................................................................................................... 111 

American Bankers Association, American Financial Services Association, Consumer Bankers Association, and The Financial Services Roundtable, March 

20, 2012, joint letter ............................................................................................. 112 

Draeger, Justin, President, National Association of Student Financial Aid 

Administrators, Washington, DC, statement ..................................................... 114 

National Council of Higher Education Loan Programs, Inc., Shelly Repp, 

President, Washington, DC, statement .............................................................. 118 

‘‘How Much Ivory Does This Tower Need?’’ October 27, 2011, report by Neal 

McCluskey ............................................................................................................ 120 

‘‘Unbearable Burden? Living and Paying Student Loans as a First-Year 

Teacher,’’ December 15, 2008, report by Neal McCluskey ................................ 144 

‘‘Federal Higher Education Policy and the Profitable Nonprofits,’’ June 

15, 2011, report by Vance H. Fried ............................................................. 168 

Education Finance Council, Washington, DC, statement .................................... 184 
(1) 

THE LOOMING STUDENT DEBT CRISIS: PROVIDING FAIRNESS FOR STRUGGLING STUDENTS 

TUESDAY, MARCH 20, 2012 

U.S. SENATE, 

SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE

COURTS, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10 a.m., in Room 

SD–226, Dirksen Senate Office Building, Hon. Richard J. Durbin, 

presiding. 

Present: Senators Durbin, Whitehouse, Franken, and 

Blumenthal. 

OPENING STATEMENT OF HON. RICHARD J. DURBIN, A U.S. 

SENATOR FROM THE STATE OF ILLINOIS 

Senator DURBIN. Good morning. This hearing of the Subcommittee on Administrative Oversight and the Courts will come 

to order. The title of today’s hearing is ‘‘The Looming Student Debt 

Crisis: Providing Fairness for Struggling Students.’’ I want to 

thank Chairman Leahy of the Judiciary Committee and Senator 

Klobuchar, Chair of this Subcommittee, for allowing me to convene 

this hearing where we will address the important issue of student 

loan debt and a bill which I have introduced, the Fairness for 

Struggling Students Act, which falls within the jurisdiction of this 

Subcommittee because it addresses the Bankruptcy Code. I am 

going to provide a few opening remarks, recognize the Ranking 

Member, Senator Sessions, who we hope will be returning from a 

press conference shortly, and then turn to our witnesses. 

Our Nation faces a serious problem with student loan debt. Last 

month, the National Association of Consumer Bankruptcy Attorneys issued an eye-opening report entitled, ‘‘The Student Loan 

Debt Bomb.’’ The report pointed out that American student borrowing exceeded $100 billion in 2010, and total outstanding student loans exceeded $1 trillion last year. There is now more student loan debt in this country than credit card debt. 

Of course, when used prudently, student loans can be valuable. 

In many instances, student loans help Americans get a quality education and job skills that they need to repay their loans and have 

a rewarding life. Unfortunately, it is clear that too many students 

have been steered into loan arrangements that they will not be 

able to repay and never be able to escape. 
2 

According to an analysis by the Federal Reserve Bank of New 

York, 37 million Americans held outstanding student loan debt as 

of last year, the average balance $23,300. However, only 39 percent 

of those student loan borrowers were paying down their balances 

last year. The New York Fed study found that 14 percent of student loan borrowers—that would be 5.4 million Americans—were 

delinquent on paying their student loans while the remaining 47 

percent of borrowers were either in forbearance or were still in 

school and adding to their debt. 

Last month, Standard & Poor’s issued a report saying that ‘‘Student loan debt has ballooned and may turn into a bubble.’’ And 

Moody’s Analytics recently said, ‘‘The long-run outlook for student 

lending and borrowers remains worrisome.’’ 

While the overall growth in student indebtedness is troubling, 

the most pressing concern are private student loans. According to 

the Project on Student Debt, the most recent national data shows 

that one-third of bachelor degree recipients graduated with private 

loans at an average loan amount of $12,550. These private student 

loans are a far riskier way to pay for an education than federal 

loans. Federal student loans have fixed, affordable interest rates. 

They have a variety of consumer protections built into them, such 

as forbearance in times of economic hardship. They offer manageable repayment options such as income-based payment plans. 

On the other hand, private student loans have high variable interest rates, often two or three times the interest rate that a student pays on the federal loan, hefty origination fees, and a lack of 

repayment options. And private lenders have targeted low-income 

borrowers with some of the riskiest, highest-cost loans. Once a student takes out a private loan, the student is at the mercy of the 

lender. Every week my office hears from students who say private 

lenders will not work with them to consolidate loans or work out 

any manageable repayment plan. And if the student falls behind on 

payments, private lenders are aggressive with collection efforts. 

In many respects, private student loans are just like credit cards, 

except unlike credit card debt, private student loan debt cannot be 

discharged in bankruptcy. In 2005, Congress changed the bankruptcy law and included a provision making private student loan 

debts non-dischargeable in bankruptcy except under very rare circumstances. 

I ask myself: How in the world did that provision get in the law, 

giving to these private loans the same status as a federal student 

loan or payments that are owed for taxes, alimony, and child support? It turns out it was a mystery amendment. We cannot find out 

who offered it. We certainly know who benefited from it. 

While the volume of private student loans is down from its peak 

in 2007 when it accounted for 26 percent of all originated student 

loans, we know that private lending is still being aggressively promoted by the for-profit college industry, and you will hear from the 

witnesses about that industry, particularly the Attorneys General 

who are here. 

The Project on Student Debt reports that 42 percent of for-profit 

college students had private loans in 2008, up from 12 percent in 

2003. For-profit college students also graduate with more debt than 

other students who graduate from public and private nonprofit col-
3 

leges. For-profit colleges have a business model of steering students 

into private student loans, even when they still have eligibility left 

under the federal student loan, which has a fraction of the interest 

payment. And as a result, many students are pushed into taking 

out private loans when they are still eligible for federal loans, even 

when the lenders know the students are likely to default. 

We need to take steps now to address this looming student problem. It is necessary to help struggling students and help our economy. We are going to have an opportunity come July. The interest 

rate on federal student loans will double without Congressional action. We cannot allow that to happen, but we need to not only use 

that as an opportunity to do the right thing for students in terms 

of interest rates, but also to address this looming crisis of student 

debt. 

I have introduced legislation, the Fairness for Struggling Students Act, to restore the pre-2005 bankruptcy treatment of private 

student loans. There is no reason why private student loans should 

get treated any differently than other private debts in bankruptcy. 

And it is especially egregious that these private loans are non-dischargeable in cases where the student was steered into a loan 

while they were still eligible for safer, lower-cost federal loans. 

I believe we should also require full private student loan certification to ensure that students take advantage of their federal student aid options before turning to private loans. We should push 

for meaningful accreditation for for-profit institutions. Wait until 

you hear the testimony, which I have read, about some of these forprofit schools, even in my State of Illinois, and what they are doing 

to these students. And we should encourage the Consumer Financial Protection Bureau, currently collecting data and complaints 

about private student loans, to use its authority to take corrective 

steps. 

Today we have a distinguished panel of witnesses who will discuss the problems that we face and ways to address them, and I 

look forward to their testimony. 

Senator Sessions has not arrived. We will give him a chance to 

make an opening statement when he does. But I am going to turn 

to our panel of witnesses for opening statements. Each will have 

five minutes for their opening statements, and their complete written statements will be included in the record. 

The tradition of the Judiciary Committee is to swear in the witnesses, and I would like to ask you all to please stand and raise 

your right hand. Do you affirm the testimony you are about to give 

before the Committee will be the truth, the whole truth, and nothing but the truth, so help you God? 

Ms. MADIGAN. I do. 

Mr. CONWAY. I do. 

Ms. JOKELA. I do. 

Mr. COLE. I do. 

Mr. MCCLUSKEY. I do. 

Ms. LOONIN. I do. 

Senator DURBIN. Let the record reflect that all the witnesses 

have answered in the affirmative. 

Our first witness is a great friend and colleague from Illinois, 

Lisa Madigan, Attorney General of my State. In 2010, Attorney 
4 

General Madigan was elected to her third term as Attorney General. Initially elected in 2002, she was the first woman elected to 

serve in this position and is now the seniormost female Attorney 

General in the country. Congratulations. Before her service as Attorney General, she served in the Illinois Senate and worked as a 

private attorney, a teacher, and community advocate. She earned 

her bachelor’s degree from the highly regarded Georgetown University and her J.D. from Loyola University Chicago School of Law. 

Attorney General Madigan, thank you for coming here today. The 

floor is yours. 

STATEMENT OF HON. LISA MADIGAN, ATTORNEY GENERAL 

FOR THE STATE OF ILLINOIS, CHICAGO, ILLINOIS 

Ms. MADIGAN. Thank you very much, Senator Durbin, and let me 

thank the Committee for allowing me to testify on this very important issue of growing student loan debt. 

As the Senator mentioned, I am currently serving my third term 

as Illinois Attorney General, and since the beginning, my focus has 

had to be fighting predatory lending in all sectors of the market— 

mortgage lending, auto lending, payday, and now student loans. 

I have a wealth of experience with unfair and deceptive mortgage 

lending practices, having sued Ameriquest, Countrywide, and Wells 

Fargo. And recently I filed a lawsuit against Westwood College, a 

for-profit school operating in Illinois, for deceptive marketing and 

lending practices in its criminal justice program. 

At the same time mortgage lenders were making unaffordable 

loans to homeowners, other private lenders were making 

unaffordable loans to students. After the financial crisis of 2008, 

third-party lenders stopped offering subprime loans to students, 

but another troubling trend emerged. For-profit schools expanded 

their high interest rate institutional loans. These loans pose a new 

threat to students, young and old, who are looking to gain skills 

and degrees to get ahead in this economy. 

One reason for-profit schools offer private loans is that they have 

to comply with the federal 90/10 rule, which requires 10 percent of 

education funding to come from sources other than Title IV Government funds. These private institutional lending programs are either self-funded by the schools or funded by investors with a guarantee to repurchase by the schools. 

To give you an idea of how exorbitant for-profit tuition costs can 

be, the criminal justice program at Westwood costs a student over 

$70,000. However, criminal justice programs at any number of Illinois community colleges cost a tenth as much. Prairie State costs 

$6,344; Joliet Junior College, $6,901; College of DuPage, $8,448. 

I know we are not here to discuss why a student would enroll 

in a private, for-profit program that costs 10 times as much as a 

public one, but it will come as no surprise that we learned during 

our investigation of Westwood that in order for a student to pay for 

such an expensive program, students receive not only Government 

grants and loans, but Westwood signs students up for private institutional loans called ‘‘APEX loans,’’ which the student piled on top 

of loans from Sallie Mae and government sources. 

APEX loans carry whopping interest rates of up to 18 percent 

and require students to make monthly payments while still in 
5 

school. Compare that with a Government loan with a rate of up to 

6.8 percent or a bank loan with rates between 9 and 11 percent. 

Our investigations also found that students were completely confused about the purpose and the amount of these loans. Most had 

no idea what the interest rate was. Some thought the APEX loan 

was paying off their Sallie Mae loan. And some had no idea that 

they had even taken out an APEX loan. 

In the end, Westwood graduates are left with tremendous debt 

for a virtually worthless criminal justice degree because Westwood 

did not and still does not have regional accreditation for its criminal justice program. 

A regionally accredited degree is what most law enforcement 

agencies require for job eligibility. Yet Westwood graduates who 

had dreamed of becoming police officers learned from police departments that they could not apply because Westwood did not have 

the proper accreditation. So instead of starting the careers of their 

dreams, most Westwood graduates are saddled with over $70,000 

of debt, and over 1,000 such people have contacted my office since 

we filed our lawsuit two months ago. 

To top it off, because Westwood is not regionally accredited, almost none of the students’ Westwood credits will transfer to another school. These abuses have convinced me that ongoing investigations of for-profit schools’ unfair and deceptive practices is absolutely necessary, and I continue to pursue investigations in Illinois. 

If the abuses we have uncovered continue, students should not 

be forced to pay for worthless degrees they cannot afford because 

of expensive tuitions, high interest rates, and inability to obtain 

jobs in their fields. 

In addition, I support Senator Durbin’s bill to allow private student loans to be discharged in bankruptcy primarily because private loans carry none of the protections afforded to students who 

take out federal loans, such as interest rate caps, loan limits, income-based repayment plans, deferment plans, and cancellation 

rights. 

Again, I thank the Committee, in particular the Senator, for your 

interest in this issue, and I appreciate the opportunity to testify 

today. 

[The prepared statement of Ms. Madigan appears as a submission for the record.] 

Senator DURBIN. Thank you, Attorney General Madigan. 

Our next witness is Jack Conway, Attorney General of the Commonwealth of Kentucky. He was re-elected last November to serve 

a second term as the 49th Attorney General of the Commonwealth. 

Prior to his service as Attorney General, he worked as a private attorney and in senior-level Cabinet positions in the administration 

of former Kentucky Governor Paul Patton. He is a graduate of 

Duke University, the National Law Center at George Washington 

University, and he has been actively involved in looking at for-profit schools in the Commonwealth of Kentucky. 

We are glad you are here today, and please proceed. 
6 

STATEMENT OF HON. JACK CONWAY, ATTORNEY GENERAL 

FOR THE COMMONWEALTH OF KENTUCKY, FRANKFORT, 

KENTUCKY 

Mr. CONWAY. Well, thank you, Senator Durbin. I want to go 

ahead and thank Ranking Member Sessions. Thank you for being 

here, Senator Franken. And, General Blumenthal, good to see you 

again. I hope you do not mind I still call you ‘‘General.’’ I appreciate the opportunity to testify before you here at the hearing. 

As you mentioned, Senator Durbin, we now have student loans 

outnumbering credit card debt in this country. The amount of loans 

taken out by parents for the education of their children has tripled 

in the last 20 years. Private student loan volume has tripled in the 

last six years. And you talked a little bit about the 2005 amendment making it so that private loans could not be discharged in 

bankruptcy. You called it ‘‘a mystery amendment.’’ What I say is 

that it was actually a solution in search of a problem since we 

know from the data that far less than one percent of student loans 

are ever discharged in bankruptcy to begin with. The rationale has 

always been maybe the students will take out the loans and then 

default. But I can assure you the young people or anyone just finishing an education that I have talked to do not want to hurry into 

a bankruptcy court for some sanctions that could really damage 

them in the future. 

As Attorney General of the Commonwealth of Kentucky, this 

issue of discharging private loans is linked to our investigation of 

the for-profit colleges. 

I first became aware of the tremendous debt burden carried by 

some students at some proprietary colleges through an investigation of Decker College and the American Justice School of Law, a 

for-profit law school in Paducah, Kentucky. 

Decker College was closed and forced into bankruptcy in 2005 

following its loss of accreditation and its eligibility to receive Title 

IV funds. The students were left in a horrible, horrible situation. 

They had incurred thousands of dollars in debt to pay for certifications as heating and air conditioning technicians, electricians, 

and plumbers. This was an education promised to secure a higherpaying job, but the school closed before the training was complete. 

And to add insult to injury, the credits they had earned and paid 

for did not transfer to another school. 

The American Justice School of Law and its successor, the Barkley School of Law, also closed and filed for bankruptcy. Most students in that institution had not completed their education when 

the school closed. 

Students with federal student loans who are unable to complete 

their degree because a school closes are entitled to have those federal loans discharged. However, the same protection is not available for private institutional loans or loans from other private lenders. Both Decker and Barkley students had millions of dollars in 

those institutional and private student loans that were not dischargeable in bankruptcy under the closed school discharge rule. 

The trustees in the Decker and Barkley bankruptcies began efforts to collect on those private loans that the schools had extended 

to their students. Ironically, these were students who were living 

on the financial edge, saddled with tens of thousands of dollars in 
7 

student loans that they likely could not discharge in personal bankruptcy. 

In both instances, my office stepped in and was able to complete 

some successful work with the trustees to discharge loans that 

were owed directly to the schools. In the case of Decker College, we 

got about $4.5 million in relief for 2,200 students. Likewise, in Barkley, after being contacted by our office, the trustee released the 

student debts to the school. In that particular institution, we found 

that the predecessor to Barkley School of Law had a preferred 

lending arrangement and a questionable relationship with a company called SLX. We were able to put pressure on that particular 

company and get about $3.5 million in debt reduction on loan obligations. The average loan reduction in that case was about $25,000 

per student. 

But we continue to this day to get calls from students from Decker and from the Barkley school of law to help deal with their struggles to pay those student loans. And I ask this Committee: Do we 

understand, do we really understand how close to the line some of 

these borrowers are living? That working car means the difference 

between being able to get to work and keeping a job or losing a job. 

And that apartment that they may have to give up means safety 

and security for a family. 

There are material differences between private loans and federal 

loans. Attorney General Madigan has pointed out the protections 

that are in federal loans, and certainly those protections do not extend to the private student loans. 

After studying the cases of Decker College and the Barkley 

School of Law, I launched an investigation into seven other forprofit colleges in the Commonwealth of Kentucky. The students enrolled in most of these career schools are some of our most financially vulnerable students. They get Pell Grants, and they rely 

heavily on student loans. 

According to most recent data available from the Project on Student Debt, an estimated 96 percent of graduates from proprietary 

schools have loans. That compares to 14 percent—excuse me, 42 

percent of those students also have private loans. That compares 

to 14 percent at four-year public institutions and just four percent 

at public two-year institutions. 

More troubling is that the Senate HELP Committee recently 

found that the for-profit schools account for 10 percent of the higher education body, but they account for about half of all defaults. 

I would like to say that I have been working on this issue also 

with Holly Petraeus from the Consumer Financial Protection Bureau. We have found some troubling instances regarding recruitment at some of our bases, particularly Fort Campbell and Fort 

Knox in the Commonwealth of Kentucky. General Madigan mentioned the 90/10 rule. Because the 90/10 rule only applies to Title 

IV funds, we are seeing extraordinary pressure put on post on 

some of the veterans coming back from Iraq and Afghanistan. And, 

in fact, the Army Times reports that for-profit schools last year received about 37 percent of the cost for the GI bill—37 percent—and 

almost 50 percent of the $563 million spent last year by the Defense Department on tuition assistance for active-duty troops went 

to the for-profit schools. This is an issue that needs to be examined 
8 

to do right by the people who are coming back from these two wars 

abroad. 

As I see, I am out of time, and I am actually over by about 50 

seconds. I have two more pages of testimony that has already been 

entered into the record, but I will be happy to take any questions 

later on. 

[The prepared statement of Mr. Conway appears as a submission 

for the record.] 

Senator DURBIN. Thanks. Thank you, Attorney General Conway. 

The next witness, Danielle Jokela—did I pronounce that correctly? 

Ms. JOKELA. Yes. 

Senator DURBIN. Ms. Jokela was raised in a working family in 

Minnesota, then relocated to Chicago, where she lives today with 

her husband. In 2007, she received a BFA in interior design from 

Harrington College of Design, which is a Career Education Corporation for-profit college located in Chicago. Throughout her life, 

Ms. Jokela has worked tirelessly to establish a productive and fulfilling career. However, like so many other American students, she 

has been burdened with tremendous student loan debt. Ms. Jokela 

reached out to me through my official Web site, where I have invited students and their families from across the United States to 

share their student loan stories. 

Ms. Jokela, thank you for coming today to tell this painful story, 

but it is important that the people who are here and all who follow 

the business of Congress understand what you are going through. 

Please proceed. 

STATEMENT OF DANIELLE JOKELA, CHICAGO, ILLINOIS 

Ms. JOKELA. First, I would like to thank Senator Durbin for inviting me to speak today and thank the Members of the Committee 

for your time and patience while I tell you my story. It is my hope 

that through coming here today, I can serve as a voice for the 

countless students that find themselves in a situation similar to my 

own. 

Both of my parents were high school dropouts. Of the five children that I grew up with, I am the only one who graduated from 

high school on a somewhat traditional path. I say ‘‘somewhat’’ because although I did graduate from a traditional public high school, 

when I was a junior, my mom told me that she could not afford 

to support me and I was out on my own. I finished my last year 

of high school living on my own, working a fast-food job that paid 

my rent and virtually nothing else. The odds were against me, but 

because of the personal value I have for education and my strong 

work ethic, I pushed through and managed to graduate in the top 

third of my class. 

In 2004, I relocated from Minnesota to Chicago to attend Harrington College of Design, a Career Education Corporation school. 

With my background, I could not rely on my family for financial 

support or guidance. As a result, I fully trusted the staff at Harrington to give me the guidance I needed and to work in my best 

interests. They helped fill out the financial aid paperwork for my 

loans, made phone calls on my behalf, and worked diligently to ensure I had the funds I needed to pay for school. There was no dis-
9 

cussion about what my interest rates were or what my actual debt 

load looked like. We never talked about what my monthly payments would be once I graduated. Compound interest was a concept I had never heard of, and of course, it was never explained to 

me. I had no clue what sort of salary I could expect to earn upon 

graduation, and while my school claimed a very high job placement 

rate, nobody told me what percentage of graduates actually were 

working in their chosen field or what their starting wages were. 

In 2007, I graduated with highest honors and received my BFA 

in interior design. I could not have been more proud of my achievements. My pride soon became dismay when I struggled to find 

work as a designer and accepted a position doing admin work for 

a flooring contractor. 

Six months after graduation, all pride was gone when I began repayment on my student loans. I realized then that I had graduated 

with $37,625 in federal loans and $40,925 in private loans for a 

combined total of nearly $79,000 that had ballooned to more than 

$100,000 after interest and fees. My minimum monthly payment 

was more than half of my income. I took a six-month forbearance 

and stretched the payback period from 15 to 30 years to make the 

payments more manageable. After the forbearance, I resumed paying my loans until 2009, when I found myself looking for work. 

When I did find work, it was as an independent contractor doing 

admin work, making far less than my previous salary. At that time 

I took a second six-month forbearance until I could get things stabilized. When I resumed payments, all progress I had made in the 

two years prior had been erased. Fees were assessed and added to 

my balance so that I could take the forbearance, and compound interest kept accumulating, despite my financial hardship. This 

pushed my balance back up to $100,000. 

Today, five years after graduation, I have still not found work as 

a designer, and I still owe more than $98,000 in student loans. I 

have 16 separate private and federal loans with Sallie Mae. Sallie 

Mae will not allow me to consolidate my private loans. I make one 

combined payment each month of approximately $830. Nearly 28 

percent of my current income goes toward student loan debt. Almost all of my loans have variable interest rates. The low interest 

on my federal loans makes them manageable, but my private student loans have interest rates ranging from 8 percent to 11 percent. If interest rates rise, so does my monthly payment and the 

total amount that I will have paid back over the lifetime of the 

loans. Twenty-five years from now, if interest rates hold, when I 

am finally done paying for my student loans, I will have paid nearly $56,000 for my federal loans and nearly $155,000 for my private 

loans. That is approximately $211,000 toward a $79,000 debt, a 

staggering 264 percent. 

I am out of options. I cannot file bankruptcy because the vast 

majority of my debt is student loan and mortgage debt. I cannot 

negotiate a settlement with Sallie Mae, and I cannot stop paying 

my student loans. I do not want to destroy my credit. I do not want 

to have my wages garnished. Even more, I do not want to add more 

fees, interest, and other costs to a debt that is already a burden 

I cannot bear. My only option is to give up my home. I am literally 
10 

losing my home so that I can continue to pay my student loans and 

other monthly bills. It is the only option I have. 

I am here today to advocate on behalf of myself and the rest of 

the students who are trapped in the same situation, carrying an 

unreasonable debt load for the opportunity to try to improve our 

lives. I am asking you to create legislation that will empower us 

to overcome this burden and prevent future students from falling 

into the same trap. I ask that private student loans once again be 

dischargeable in bankruptcy and that all schools be required to 

provide clear and full disclosure to students regarding the amount 

of their loans, interest rates, and expected payments. 

Thank you. 

[The prepared statement of Ms. Jokela appears as a submission 

for the record.] 

Senator DURBIN. Thank you so much for your testimony. 

Our next witness is Professor Marcus Cole, William Benjamin 

Scott and Luna M. Scott Professor of Law at Stanford Law School. 

Professor Cole is a scholar of the law of bankruptcy, corporate reorganization, and venture capital. He has been a national fellow at 

the Hoover Institution. Before joining Stanford Law faculty, Professor Cole worked at the law firm of Mayer, Brown & Platt, and 

clerked for Judge Morris Sheppard Arnold of the Eighth Circuit 

Court of Appeals. He graduated from Cornell University and the 

Northwestern University School of Law. 

Professor Cole, thanks for being here today, and please proceed. 

STATEMENT OF G. MARCUS COLE, PROFESSOR OF LAW, 

STANFORD UNIVERSITY, STANFORD, CALIFORNIA 

Mr. COLE. Thank you, Senator Durbin, for inviting me. Thank 

you, Senators, ladies and gentlemen. 

As Senator Durbin said, I teach bankruptcy law at Stanford University, and I have been asked to comment on the proposed 

changes to the Bankruptcy Code with respect to the 

dischargeability of student loans. 

While I, like most other Americans, am sympathetic to the heartwrenching stories of student borrowers who are in a situation now 

that seems hopeless, I am very concerned with the effects of the 

amendment that is proposed. And I think that what I would like 

to do is raise for your consideration what I think are the likely and 

undesirable consequences of the removal of the exemption from discharge for student loans because I think it is a blunt instrument, 

and I also think it is an unnecessary instrument to get at the problem that you are trying to address. 

So to do this, I want to do three things. First, I want to explain 

why student loans are fundamentally different than any other kind 

of borrowing that takes place in our society. Second, I want to explain why I think the changes to the Bankruptcy Code making student loans dischargeable in bankruptcy would, in effect, raise the 

cost of student borrowing for all student loans and in the end 

would essentially dry up the entire student loan market and the 

availability of higher education for those who cannot afford it without student loans. And then if we have time or in the question-andanswer session, I would be happy to talk about more narrowly tailored alternatives to this amendment that might get at the prob-
11 

lem. So, first, let me explain why student loans are fundamentally 

different. 

In our society, we have essentially two types of borrowing: We 

have unsecured borrowing—credit card debt is an example of 

that—and we also have secured borrowing. A car note that someone takes out or a mortgage on a home is a secured obligation. 

Now, these are two very different things in the sense that creditors who lend on an unsecured basis are lending against a borrower’s ability to repay currently from their income, but also based 

on their current assets. A secured creditor does not want to take 

the chance that there are not going to be assets there or income 

coming in, so they want an asset that they can look to as collateral 

for their loan. 

Student loans are fundamentally different than these other two 

because unsecured loans, credit cards included, look to the existence of a borrower’s current assets and their current income to 

repay the loan. Secured credit looks to a particular asset. But student loans are a situation where the person is borrowing against 

their future income, and that future income is based on the human 

capital that the student loan makes possible. 

Now, if you take away the exemption from discharge for student 

loans, you are essentially saying to the lender that they cannot 

look to that future income for sure because there is the possibility 

that this obligation could be discharged. In essence, you are saying 

to someone who has no assets and no current income because they 

are a student that they cannot credibly commit to a lender that 

they are going to repay this loan in the future. And because of that, 

that increases the risk premium that has to be charged by the 

lender across all loans, and that is going to increase the cost of student loans for everyone. 

Now, a private market for student loans exists because the federal programs simply do not cover all of the demand that is out 

there for student borrowing. 

Now, there are other ways to look at this. If the problem is private colleges taking advantage of people when they are not really 

building up human capital, well, that is a lot like a doctor writing 

a prescription and then selling the prescription drugs, and they are 

essentially profiting from the prescription that they are writing. 

Well, we do not ban prescription drugs because we do not like doctors benefiting from writing prescriptions. Instead what we do is 

we separate the doctor who is making the diagnosis from the pharmacist who is selling the drugs. And so if there is a problem with 

for-profit colleges benefiting from the system, there are ways in 

which we can internalize the costs that they are imposing on student borrowers without having to take the broad brush of eliminating the ability of people like me—I grew up in the Terrace Village housing projects of Pittsburgh, Pennsylvania. I would not have 

been able to go to school without student loans. My father worked 

in a steel mill. But student loans provided me an opportunity to 

get an education, and I am sitting here today because I was able 

to credibly commit to lenders that I would repay from my future 

income. 

Thank you, Senator, for this opportunity. 
12 

[The prepared statement of Mr. Cole appears as a submission for 

the record.] 

Senator DURBIN. Thank you, Professor Cole. 

Our next witness is Neal McCluskey. He is the associate director 

of the Center for Educational Freedom at the Cato Institute, author of the book ‘‘Feds in the Classroom: How Big Government Corrupts, Cripples, and Compromises American Education.’’ His 

writings have appeared in numerous publications such as the Wall 

Street Journal. Prior to working at Cato, he served in the United 

States Army, taught in high school, and was a freelance reporter. 

He received an undergraduate degree from Georgetown, a master’s 

from Rutgers, and a Ph.D. candidate at George Mason. 

Mr. McCluskey, thanks for joining us. Please proceed. 

STATEMENT OF NEAL MCCLUSKEY, ASSOCIATE DIRECTOR, 

CENTER FOR EDUCATIONAL FREEDOM, CATO INSTITUTE, 

WASHINGTON, D.C. 

Mr. MCCLUSKEY. Chairman Durbin, Members of the Committee, 

thank you for inviting me to speak with you today. My name is 

Neal McCluskey, and I am the associate director of the Center for 

Educational Freedom at the Cato Institute, a nonprofit, non-partisan public policy research organization. My comments are my 

own and do not represent any position of the institute. 

As a result of decades of skyrocketing college prices, the Nation 

has begun to focus on the extraordinary cost of postsecondary education. And the Federal Government, as the primary supplier of aid 

to students, has a critical role to play in restoring sanity to college 

pricing: It must greatly reduce student aid. Unfortunately, what 

this Committee is contemplating—changing bankruptcy law concerning private student loans—will do almost nothing in this regard. 

Now, the logic behind seeing federal aid as a primary cause of 

inflation is straightforward. First, subsidies drive increased demand, which increases prices. Second, colleges raise their prices if 

they know students will be able to pay them. 

The facts support this. Between the 1981–82 and 2010–11 school 

years, inflation-adjusted aid per student rose 215 percent. Meanwhile, tuition and fee costs grew 268 percent at four-year public institutions and 181 percent at four-year nonprofit private schools. In 

addition to this evidence, a growing body of empirical research, 

which I itemize in my written testimony, supports this conclusion. 

Perhaps, though, price increases are necessitated by State and 

local funding cuts to public colleges, and there is certainly some 

truth to this. But it is an inadequate explanation for rampant tuition inflation. 

For one thing, of course, it does not explain inflation at private 

colleges. More directly, inflation-adjusted State and local outlays to 

colleges for general operations rose from $57.7 billion in 1986 to 

$74.2 billion in 2011. 

Now, where it does appear that taxpayers have become less generous is expenditures on a per pupil basis, with real appropriations 

declining 22 percent between 1986 and 2011. That said, State and 

local appropriations rise and fall with the business cycle, and the 

overall trend is pretty flat. And over the past quarter-century, pub-
13 

lic institutions have raised tuition revenue by about $2 for every 

dollar in cuts. 

Which brings us to the root problem. Far too many people who 

do not benefit from it are enrolled in college. As much as we want 

to help all people by giving them money to go to college, it is doing 

few any real favors. That is, other than the colleges, which research shows are profiting mightily whether they are officially forprofit or not-for-profit institutions. 

Let us look at completion rates. Only 57 percent of first-time, 

full-time bachelor’s degree seekers finish their degree within six 

years. That is 150 percent of the expected time. At two-year institutions, the three-year completion rate is a puny 28 percent. Many 

enter colleges of all types. Few complete. 

What about those who do finish? Does a degree confer major new 

earning ability? 

That is the case on average, though how much is a matter of 

great dispute, with some estimates as low as $100,000 over a lifetime. And many graduates will not gain even that $100,000, depending on their field. 

It also appears that the value of a bachelor’s degree is shrinking, 

with weekly earnings for people whose maximum educational attainment is a B.A. having dropped about four percent over the last 

decade. 

Now, is this a function of credential inflation or the economy increasingly demanding advanced skills? 

Well, we have no comprehensive measure of what students are 

learning in college, but one of the few longitudinal studies we have 

suggests that the problem is credential inflation. The National Assessment of Adult Literacy shows that the literacy of people with 

at least a bachelor’s degree dropped precipitously between 1992 

and 2003, with generally only a third of those people—these are 

with at least a bachelor’s degree—now considered proficient. 

Finally, it is assumed that almost everyone will need some sort 

of postsecondary training to get a job in the new economy. But according to BLS projections, the large majority of the 30 occupations 

expected to see the greatest employment growth this decade will 

require no more than a high school diploma and on-the-job training. So the Federal Government should get out of the student aid 

business. The aid drives self-defeating inflation and massive overconsumption, and Washington has no constitutional authority to be 

involved. 

Unfortunately, making private loans dischargeable in bankruptcy 

misses this gigantic root problem—federal aid—and would at best 

nibble around its edges. In 2010–11, only about $6 billion was 

originated in private student loans. In that same year, total federal 

loans were almost $104 billion, an amount almost 17 times larger. 

You throw in grants, tax benefits, and work study, and federal aid 

exceeded $169 billion. 

What would changing bankruptcy laws for private loans do for 

affordability? If lenders know that borrowers can escape repayment 

through bankruptcy, they would likely raise interest rates to account for that risk, discouraging use of such loans. However, students might be more apt to take such loans—and pay still higher 
14 

college prices—if they think that they will be able to unload their 

debt without repaying it. 

Both possible outcomes are concerning, but the change would 

still have a negligible effect on affordability because private loans 

are such a small piece of the pie. Ultimately the problem is too 

much aid, and most of that comes from Washington. 

Thank you, and I look forward to your questions. 

[The prepared statement of Mr. McCluskey appears as a submission for the record.] 

Senator DURBIN. Thank you, Mr. McCluskey. 

Our final witness is Deanne Loonin, staff attorney with the National Consumer Law Center and director of the NCLC Student 

Loan Borrower Assistance Project, author of NCLC publication 

‘‘Student Loan Law: A Guide to Surviving Debt.’’ And she also provides direct representation to low-income student loan borrowers, 

served as legal aid representative at numerous Department of Education negotiated rulemaking sessions, graduated from HarvardRadcliffe, and the University of California-Berkeley School of Law. 

Ms. Loonin, the floor is yours. 

STATEMENT OF DEANNE LOONIN, NATIONAL CONSUMER LAW 

CENTER, BOSTON, MASSACHUSETTS 

Ms. LOONIN. Thank you, Senator, and thank you, all of you, for 

inviting me here to testify today. I am here today on behalf of 

NCLC’s low-income clients. We provide direct representation to 

low-income borrowers in Massachusetts, as Senator Durbin mentioned. We also have a Web site where we hear from thousands of 

borrowers every day, and we work with advocates across the country, so we are very familiar with how widespread the problem of 

student debt burdens are across the country. 

Our clients and the people we hear from are a very diverse 

group. I think it is important that we focus on not just the traditional students that we hear a lot about, and they are a very important population of young people who are graduating from college 

having trouble finding jobs in this economy. But our clients are in 

their 20s, 30s, all the way up into their 80s and 90s, all races, and 

all class levels, all of whom share one thing in common, and that 

is that they were all trying to better their lives through education. 

And they also share that they are mired in debt when they come 

to see us. 

When they come in to see us, the focus is on the future at this 

point. We are trying to figure out prospectively what we can do to 

either provide relief and in many cases to help people go back to 

school because it did not work out for them the first time around. 

The first thing we do is look at non-bankruptcy alternatives, 

whether it is a federal loan or private loan. This makes sense both 

because in many cases, particularly for federal loans, those options 

are more accessible, but also because that is what our clients tell 

us they want. I have never had a client tell me that their first 

choice is to file for bankruptcy. They see it as a failure. They see 

it as something that is very humiliating. There is a stigma associated with it, and there are consequences, credit report consequences and other things, that students borrowers are very 

aware of. 
15 

So we look at the non-bankruptcy alternatives which are available in many cases on the federal student loan side—not for everyone, but there are good options for a lot of people. We try on the 

private loan side, and we find that it is virtually impossible to get 

relief outside of the bankruptcy system. 

So bankruptcy is not the first option, not necessarily the best option for everybody, but in many cases it is actually the only option 

that people can consider to get relief. But, again, because of the 

changes in the law, this, too, is not an option for many borrowers. 

So I am here to support the bill, S. 1102, for these borrowers, but 

also because, as I want to go through quickly, the rationales that 

have been mentioned for not restoring bankruptcy relief do not 

stand up. 

The first rationale that we generally hear is that there was a lot 

of abuse of the system and student borrowers were filing bankruptcy more than other debtors. There is simply no evidence that 

that is true, and I can tell you again from my clients, as I mentioned, who are not seeking out bankruptcy, certainly not thinking 

about that when they enter school and optimistically are hoping 

that it is going to improve their situations. And there are safeguards in the bankruptcy system to address these exact problems 

if we think that people with too many assets are trying to file for 

bankruptcy. 

The other rationale that private loans would disappear—again, 

no evidence. And, in fact, if you actually look at the actual experience, the private student loan industry grew the most during a 

time before 2005 when bankruptcy was available for most private 

student loan borrowers. The industry has contracted significantly 

since 2005 when the loans were actually much harder to discharge. 

So the experience in many ways has been the opposite. Fluctuations are due to market forces, not to bankruptcy policy. 

The rationale that the products would be worse if we restore 

bankruptcy relief to borrowers—again, no evidence. The terms have 

essentially been the same over time or fluctuated over time without 

regard to what the bankruptcy policy is. And, further, it is really 

hard to imagine a product much worse than some of those that 

some of the Attorneys General have mentioned, all of which have 

sprung up during a time when, in fact, bankruptcy—private student loans are difficult to discharge in bankruptcy. 

The point that student loans are unique, which is what Professor 

Cole in particular focused on, is, in fact—on the private loan side 

is a little bit of an outdated view of what private student loans are. 

Almost all, nearly 80, 90 percent of private student loans now require co-signers. These are generally parents or older adults, and 

in that case, they are actually the private creditors assessing current ability to pay, not just speculating on future ability to pay. 

There is no evidence that in any way bankruptcy policy has affected access to higher education. And, again, private student loans 

in any case are not financial aid. They are private credit products. 

If we have time in the question-and-answer, I can answer more 

questions about the undue hardship issue and why that test has 

also not worked well. But I just want to say finally that we have 

a system that is set up to encourage access to education, and, fortunately, we have done that, but we slam those who fail based on 
16 

really speculation of what might happen as opposed to looking at 

the real experience. It is time to provide relief for student borrowers. 

Thank you. 

[The prepared statement of Ms. Loonin appears as a submission 

for the record.] 

Senator DURBIN. Thank you, Ms. Loonin. 

Let me ask a few questions of the panel. Ms. Jokela, I do not 

know if you are familiar with this, but as of November first last 

year, Career Education Corporation, which owned Harrington College of Design, was found to have falsely claimed that too many of 

its students were getting jobs after they graduated. Like you, many 

of them were not. Because of this fraudulence and falsification, 

they forced the CEO of Career Education Corporation to resign last 

November. The parting gift for this fraudulent misrepresentation to 

the Department of Education was a $4 million parachute that he 

was given as he left, an indication, I am afraid, at the time of some 

inherent problems within that industry, that you would be saddled 

with the debt, with a degree that has not led to the job you thought 

you would get, and he would be getting a parting gift of $4 million 

to leave. 

I would like to ask the Attorneys General who are here, both of 

whom have been engaged, at least through their predecessors and 

perhaps personally, in multi-State efforts to deal with issues initially on tobacco—before your time probably—and then later on 

foreclosure. Is there any effort underway to convene Attorneys General in States across the Nation to discuss addressing this on a national basis? And let me add parenthetically, the reason this is 

being done by Attorneys General is because we do not have the political will to do it here. Please proceed. 

Mr. CONWAY. Well, Senator Durbin, thank you for the question. 

First of all, thanks for your leadership on the issue. The answer 

to your question is yes, there is a move afoot. Each Attorney General typically has at his or her disposal a consumer protection act 

or an unfair trade practices act. In the Commonwealth of Kentucky, it empowers the Attorney General to go after false and misleading and deceptive representations and marketing. We are using 

that as a vehicle in our investigations of seven schools, two lawsuits that have been announced, and additional work that we are 

doing. 

As I got into this issue, after Decker and after the American 

School of Law, I found out we have 141 of these institutions now 

in the Commonwealth of Kentucky. In talking to my colleagues like 

General Madigan, I found out a lot of—you know, Colorado and 

other States had investigations or actions ongoing. 

So we have put together a multi-State effort. I am currently the 

Chair of it. It is bipartisan. There are 23 States that have signed 

on to the multi-State effort. We have executed information-sharing 

agreements that allow us to share law enforcement information 

amongst the States, particularly where we have common targets. 

This effort is very distinct and different than tobacco or the recent mortgage settlement. In the recent mortgage settlement, we 

are looking at the five largest banks. In tobacco, we were looking 
17 

at the four largest producers who turned out to be the participating 

manufacturers. 

Here we have such a diffuse group of schools, some operating 

only in particular States, others being large corporations that are 

traded on Wall Street or owned in part by hedge funds, for example. We are sharing information, but we are having some difficulty 

finding the common targets. 

I can share with you that we in the leadership of the multi-State 

effort have been talking to the new CFPB and to Director 

Cordray—— 

Senator DURBIN. Consumer Financial Protection Bureau. 

Mr. CONWAY. Right, Consumer Financial Protection Bureau and 

Director Cordray, because we are finding more of this institutional 

lending on the part of some of the for-profit schools. The 90/10 rule 

drives everything. So many of these schools are up against that 90- 

percent barrier that you see the extraordinary recruiting of veterans or current people in the military in order to get to the 10 percent to leverage to recruit another nine. We are also seeing these 

schools get into institutional lending, and it is essentially a loss 

leader. They are willing to write off in documents that they share 

with Wall Street that they are going to lose 50 percent of these 

loans just to get to that 10 percent. 

Senator DURBIN. Thank you, Attorney General. 

Mr. McCluskey, I understand the Cato Institute—and I understand you are not speaking for them but probably share their philosophy or you would not be working there. And I understand your 

notion about the role of the Federal Government and where you 

may see it excessive. You stated the Federal Government should 

get out of the student aid business and there are too many students going to college. 

So let me ask you about another aspect of federal subsidy beyond 

student aid, and the Attorney General has just referred to it. We 

had to pass a law to say that these for-profit schools could receive 

no more than 90 percent of their revenue from the Federal Government. They found a way around it when it came to the GI bill. Now 

they are up to 95 percent. They are within 5 percent of being federal agencies, except for one thing: the federal pass-through of 

money to these schools results in these multimillion-dollar giveaways and profit taking by the owners. 

So do you have the same level of outrage about the federal subsidy to for-profit schools as you do to federal student aid? 

Mr. MCCLUSKEY. Yes, the important thing is that we put this all 

in context. The focus has been on for-profit schools, and, of course, 

there are for-profit schools making huge amounts of money through 

taxpayer funding. What we are missing in focusing on for-profit 

schools is that not-for-profit schools—both private not-for-profit and 

public schools—are also making tremendous amounts of money 

through federal student aid as well as, if we are talking about public colleges, through State subsidies. And so we have looked at how 

much profit, meaning how much more money are you bringing in 

than it costs to educate an undergraduate? How much profit are all 

schools making? And what our research has shown is that, depending on whether you include State subsidies on a per pupil basis, 

whether you include endowment funds on a per pupil basis, but 
18 

you will find the normal profit, depending on the type of school, for 

nonprofit schools runs between $2,000 and $12,000 per pupil. 

So this is the point. Yes, for-profit schools are making a huge 

amount of money through federal aid, but so are other schools, and 

most importantly, this is what enables all colleges to raise their 

prices at rates far in excess of inflation. We are giving people 

money to pay for that. 

Senator DURBIN. You may be surprised to know I agree with you, 

and I have said to those who run public universities as well as private universities that they are out of control. Georgetown Law 

School is now $50,000 a year, and to me that is just over the moon. 

And there are many that are very, very close in my home State of 

Illinois. The difference is this: I do not know that anyone at 

Georgetown is going to walk out with a $4 million parachute when 

it is all over, as they did at these for-profit schools. 

So I would agree with you. I would say ratchet down to at least 

the level of private and public schools the federal subsidy to forprofit schools, and let us see if they can survive in that world as 

the private and public schools do. 

My time is up at this point. You will get a chance, I am sure, 

again. 

Senator Franken. 

Senator FRANKEN. Thank you. There is really so much here to 

talk about. It is good to see you again, Attorney General Conway. 

You brought up the 90/10 rule, and, again, on these for-profit 

schools, they have to make sure that at least 10 percent of the 

loans fall into the non-federal loans. But our troops coming back 

who are benefiting from the GI bill are counted in the 10 percent, 

and you said you are working with Holly Petraeus at the CFPB. 

Can you tell about this recruitment even at hospitals? And did she 

tell you about the gentleman with TBI who was recruited? 

Mr. CONWAY. No, she did not. 

Senator FRANKEN. I am sorry. She testified about it, that there 

was these for-profit—one of these for-profit schools went to, I think 

it was San Antonio, where there was a unit for guys and women 

who had TBI, and they recruited there. And one of the students at 

one of these for-profit schools was asked, you know, ‘‘Do you go to 

school here? ’’ And he said, ‘‘Yeah.’’ ‘‘What are you majoring in? ’’ He 

said, ‘‘I do not know.’’ 

Mr. CONWAY. To react to that, we have had instances of people 

with brain injuries signed up in the Commonwealth of Kentucky as 

part of our investigation. We have seen instances where people who 

do not have access to a computer have been signed up for online 

classes. 

Ms. Petraeus wrote a piece for the New York Times recently 

about the for-profit colleges and targeting the military. She and I 

spent a day together with the Attorney General of Tennessee at 

Fort Campbell, which is a large military reservation in Tennessee 

and Kentucky. And the commanding general literally pulled us 

aside as we were talking about consumer protection issues and 

said, ‘‘I need to get my arms around this for-profit college recruitment issue because every Thursday night we have an on-post recruiting seminar where local vendors are able to come in and talk 

about services that they can provide to our military 
19 

servicemembers, and we are being overrun by for-profit college recruiters.’’ And the No. 1 complaint we heard on post that day was 

from students who had been signed up, were not certain they got 

a good deal, and we heard quite a few horror studies. I did not hear 

the TBI story from Ms. Petraeus that day, but it does not surprise 

me. 

Senator FRANKEN. Well, I think that maybe we should consider 

not including those veterans on the GI bill in the 10 but, rather, 

in the 90. I think that might be a good idea. 

Ms. Loonin, or Professor Loonin, Dr. Loonin—Deanne. I am a little confused here. Did the interest rates for non-federal loans or 

private loans go down when they became non-dischargeable in 

2005? 

Ms. LOONIN. No. On average, we did not see any evidence of 

them—— 

Senator DURBIN. Turn your microphone on. 

Senator FRANKEN. Put your microphone on. 

Ms. LOONIN. I am sorry. We did not see any evidence that they 

went down, and, in fact, you know, there are some loan products 

now where the interest rates have gone down, so they fluctuated. 

But there is no pattern that we have seen that is connected to the 

bankruptcy—— 

Senator FRANKEN. So I do not know why both Professor Cole and 

Mr. McCluskey assumed they would go up if they became dischargeable. It does not seem backed up by empirical evidence. I 

know that Mr. McCluskey talked about the inflation at colleges 

being tied to the amount of aid that students got, but he does acknowledge in his written testimony that this creates a major 

endogeneity problem. And I think it really does. I think it is very 

hard to say that the loans are driving the costs of the school. I 

think very often the costs of the school are driving the loans. And 

I think that endogeneity problem includes more than even what 

Mr. McCluskey wrote in his testimony. I think it includes what 

people perceive, anyway, as the importance of college for future income and future progress. 

I see my time has run out. I look forward to another round of 

questioning. Thank you. 

Senator DURBIN. Thank you. 

Senator Blumenthal. 

Senator BLUMENTHAL. Thank you, Senator Durbin. And I want 

to thank Senator Durbin for having this hearing on a topic that I 

consider as important as any we are addressing in the Congress 

today. And I thank Attorneys General who are here for the excellent work they and their colleagues are doing on this issue. 

Senator Durbin made reference to the tobacco initiative and to 

the lack of political will now to address this topic. In fact, the reason that the Attorneys General played a leading role in starting 

the tobacco investigation, as I can tell you from firsthand experience was, in fact, the lack of political will on the part of Washington, D.C., and the Department of Justice at the time, whom we 

requested and, indeed, implored to become involved. So thank you 

for the great work that you are doing in this area really leading 

the way to the Federal Government. 
20 

You know, Senator Durbin used the word ‘‘outrage,’’ and I think 

the present system is an outrage not only because of its impact on 

individual students and consumers, but in the larger sense that 

Professor Cole described very well, its impact on human capital. 

And you described well, Professor Cole, how student loans are different insofar as the incentives of the lender are different and the 

assets of the borrower are different. 

But it is also different from the standpoint of our Nation and society because we are investing in our human capital, our human 

infrastructure, our human resources for the future. And so that is 

a reason why I think this area is so critically important to our society and why we need to do better. And it is an outrage that we 

are failing to do better. 

We have begun in the Health, Education, Labor, and Pensions 

Committee an investigation of the for-profit college marketing techniques to our veterans and our military service people. But that is 

just a part of the problem, and so I am going to ask you, since you 

offered to do so, what would be your remedies, suggested proposals, 

if we were not to use discharge in bankruptcy? 

Mr. COLE . Well, thank you, Senator. There are various other 

ways of attacking the problem. If the problem is that we have got 

these for-profit entities that are essentially benefiting from what 

might be fraud, essentially selling a growth in human capital that 

is really not taking place, then there are other ways to address 

that other than simply having a blanket removal of the discharge. 

So, for example, there is actually a practice in Europe with— 

there are not a lot of private colleges and universities in Europe, 

but there are some, and because they do not have a lot of foundations and charitable organizations to support them, they are supported largely by tuition. So I can give you an example of Bucerius 

Law School in Germany, which has a reputation of being the best 

law school in Germany. It is both an undergraduate and a graduate 

institution. And it is private, and it is very, very expensive. 

So while students who could go to college for free decide that 

they want to go to Bucerius because they want the reputation and 

the better job prospects of going to Bucerius, what Bucerius does 

is they make a deal with their students. If you come here and you 

get a degree and go out in the world and perform, we will waive 

your tuition now in exchange for a portion of your income over the 

next 10 years. So, in other words, they basically place a bet on 

their graduates that they are going to get some percentage, 13, 18, 

15 percent. 

Senator BLUMENTHAL. And, presumably, they borrow to cover the 

cost of covering—— 

Mr. COLE. Yes. So they are essentially lending, but they are lending in a different way. They are not requiring the payment back 

of their tuition. They are saying, ‘‘We are going to lend you this tuition now in exchange for what we believe is going to be a higher 

income, a growth in human capital.’’ So they really believe that 

they are producing growth in human capital. 

Senator BLUMENTHAL. I just want to say, my time is going to expire shortly, but I would invite you and the other members of the 

panel to add to your response because I think that proposal and 

others may be very promising ways to go forward. But, you know, 
21 

I would just observe that the experience at Decker, where there 

was a questionable relationship between the school and SLX, the 

lender, and at Westwood, where there were outright deceptive and 

misleading practices, you know, ‘‘fraud’’ is the right word, and 

maybe it is that the penalties have to be increased. The penalties 

here have to be more than just a cost of doing business, and there 

is a significant enforcement problem that, Attorney General 

Conway, you described insofar as the targets are more diverse and 

numerous and very often the costs of pursuing them can be substantial. 

So I would welcome any and all ideas that you may have, both 

on the penalty, the substantive prohibition, and the enforcement 

aspects of this problem. 

Thank you. 

Senator DURBIN. Senator Whitehouse. 

Senator WHITEHOUSE. Thank you, Chairman Durbin. First of all, 

thank you for bringing attention to this issue. I know some of the 

witnesses have used— there was nearly $900 billion in student 

loan debt. I have seen figures that show that there were $1 trillion 

in student loan debt in this country. And when you compare that 

to other countries where a student can get a college degree, essentially on the government or at a very low cost, it builds a huge burden in for individuals. And when things do not work out, as they 

sometimes do not in life, usually what you can do is start over. And 

it is a tough process because bankruptcy is not easy, but you get 

a clean shot to kind of the American dream to rebuild again, and 

everybody understands that that is right. It has been something 

that witnesses have described to us as very important economically 

for people to be able to restart and, you know, find a way to create 

value in their lives and build a life for themselves rather than just 

be saddled with this debt forever with no way to get out of it, as 

Ms. Jokela’s testimony showed. 

First of all, we have got a bunch of former colleagues here. It is 

sort of Attorney General Day here in the Judiciary Committee— 

former Attorney General Blumenthal and myself, and both of you, 

Attorney General Conway and Attorney General Madigan. I had a 

consumer protection division in my office. Senator Blumenthal was 

very active with consumer protection in his office. I assume you 

have consumer protection divisions in your office. From a consumer 

protection standpoint, what are the issues that you are seeing in 

your offices related to student loans? 

Ms. MADIGAN. Senator, at this point we are looking at student 

loans as really just the next predatory lending issue that we need 

to contend with. So it has been mortgage loans, auto loans, payday 

loans, and now student loans. Our lawsuit against Westwood goes 

through, really, from the beginning when students are recruited to 

attend all the way through the sign-up, and then the student aid 

meetings that they have and get signed up for these loans. It is 

fraudulent throughout the process. And when people are leaving 

Westwood’s criminal justice program, they have on average $70,000 

in debt, and because the college itself is not regionally accredited, 

these individuals are unable to become the police officers that the 

recruiters told them they could become. And so we find people 

working at Sam’s Club. We have found people who have dropped 
22 

out of the job market because their degree is essentially worthless. 

And there are alternatives. 

They could have, for instance, gone to a community college, spent 

a tenth of what they had to spend at Westwood, and actually gotten a degree that would have allowed them to become a member 

of the Illinois State Police, the Chicago Police Department, or a 

suburban police department. And so what we are seeing is a lot of 

the exact same fraudulent conduct. 

When it specifically comes to the loans, it is the misrepresentations to the students about the fact that, you know, what is the interest rate. We have many students who tell us they never realized 

they had a loan at 18 percent. They were never given documentation. When they asked for documentation, they were told it would 

be sent to them. It was never sent to them. There was no real affordability test ever done. But they were constantly being told that 

this degree is accredited, you will be able to become a police officer, 

we have got good contacts with police departments, you know, do 

not worry, you will be fine. And the next thing people know, they 

graduate and they cannot get a job, and they are left with extraordinary amounts of debt. And so we are pursuing them through the 

consumer fraud act. 

Senator WHITEHOUSE. And, Attorney General Conway, it seems 

as if there is room here for common schemes to develop between 

lenders and from for-profit higher education where you draw the 

victim in, you loan them enormous amounts of money. The institution gets paid through tuition and it makes its money. The lender 

has these people on the hook forever because there is no protection 

in bankruptcy for the individual. And at the end, somebody leaves, 

as Attorney General Madigan said, with very limited career options 

and an enormous amount of debt that they can never get out from 

under for the rest of their lives. 

Have you seen that kind of—how frequent does it seem that 

there is a common scheme emerging between lenders and for-profit 

higher education institutions? 

Mr. CONWAY. We have seen it. We certainly saw it in the instance of the for-profit law school in western Kentucky and their 

arrangement with SLX. We see it in one of two ways, Senator. We 

see it either in some sort of arrangement like that, some sort of 

preferred lender arrangement, or increasingly, we have seen a significant increase in institutional loans where the institution makes 

the loan itself, is willing to anticipate they are going to have a loss, 

just so that they meet the minimum criteria for non-federal revenue into their stream under the so-called 90/10 rule. So we are 

seeing it both ways. 

To sort of follow up on what General Madigan said, we have 141 

of these schools in Kentucky, and we have subpoenaed and are investigating seven. We let the data take us to where we thought we 

needed to be with those seven. We are looking at where we have 

the most complaints to our office or our council on postsecondary 

education. Where are we seeing—where do we have documents of 

the high-pressure sales tactics claiming 98 percent job placement 

or something like that? And then where do we cross-reference that 

with federal student loan default rates? 
23 

If you are seeing a school claiming 96 percent job placement and 

they have got a 40 percent federal student loan default rate, something is wrong. But we had a school like that in the Commonwealth of Kentucky. In one particular case, we had a school claiming 96 percent job placement, but then we found the information 

they sent to their accreditor—which was national accreditation, not 

regional—and they were claiming 60 percent in that. Now, that 60 

percent may have been someone working in fast food who was still 

working in fast food after getting the so-called career education. 

But it is a simple consumer protection case to make out when you 

are claiming 96 percent job placement and what you are reporting 

to your accreditor does not even meet that. 

So for the Federal Congress, we could use a lot of help. I know 

the gainful employment rule was a big right up here. But we need 

some help in understanding what for-profit schools need to report 

to accreditors regarding job placement, whether that is regional accreditation or national accreditation, because what we are seeing 

are high-pressure sales tactics, oftentimes going after single parents or people that have real problems making ends meet in this 

difficult economy. In fact, we have seen documents coming out of 

the Senate HELP Committee called ‘‘the pain funnel.’’ Try to find 

the people that you can sign up today for these loans, and we have 

just seen some really remarkable practices. 

One school in Kentucky in particular, they would not allow students access to their federal funds until they bought books at a premium, new from that very for-profit college’s bookstore. That is the 

type of scams we are seeing and that we are fighting on a daily 

basis as AGs. 

Senator WHITEHOUSE. Thank you very much, Chairman. 

Senator DURBIN. Thank you, Senator Whitehouse. 

Professor Cole, I am going to take exception to your theory about 

secured loans, unsecured loans, and student loans being sui generis. If this were so compelling and spot on that these were really 

different kinds of loans and needed to be treated differently, there 

might have been all of at least five minutes of testimony on the 

bankruptcy reform bill about this. No. This was slipped in. This 

was not even discussed, and no one knows. How did this get in 

there? How did we say that private loans are not dischargeable in 

bankruptcy? 

And I might also say that I appreciated the refresher, I needed 

it, on the different kinds of loans. But if a person goes out and 

crosses North Capitol here and gets hit by a car and is taken to 

the local hospital and needs emergency surgery and ends up with 

a $200,000, $300,000 medical bill, I think that might qualify the 

same argument that you made for student loans. They did not operate on that person because of a security that they have in their 

body. They did not operate on them because they checked their net 

worth. They did their operation and then set out to collect it. You 

could make a similar argument to what you made that medical 

loans should not be discharged in bankruptcy on the same theory. 

It is based on getting well, right? Student loans are based on getting educated. 
24 

So I do not buy it. I do not buy the premise on what you are saying, and if it really was so compelling, it would not have been 

slipped in as it was in this circumstance here. 

I do want to say, Ms. Jokela, would you be kind enough to tell 

us what the impact of all this debt has had on your ability to go 

back to school or borrow money or make plans for your own life? 

Ms. JOKELA. Yes, absolutely. You know, ultimately I have a 

dream of operating my own design firm, but just, you know, thinking about the cost of starting your own business is just—you know, 

how could I even consider taking on any additional debt to try to 

do that? I certainly could never go back to school to even achieve 

an MBA or a master’s degree because, you know, how would I pay 

for it? I definitely do not want to take out any more student debt. 

So I am in this place right now where I just have to keep working and working and working and trying and trying to trying to 

pay this debt down and not really making any progress. And then 

sort of long term, even if I did not have these other aspirations, because of this student debt, I am not even in a place where I can 

have, you know, an emergency savings account or contribute to any 

kind of IRA for my long-term retirement. And, really, when I am 

facing retirement is the point that I am going to be done paying 

these student loans. 

Senator DURBIN. How old are you now? 

Ms. JOKELA. I am 32. So I have got 25 more years left, and then, 

you know, I will be a few years away from retirement, and that is 

not going to be enough time for me to really build the life that I 

want to have for myself in the future. 

Senator DURBIN. Attorney General Madigan, I take the Kennedy 

Expressway out to O’Hare a lot, and I do not get on the plane with 

any trepidation, but usually with anger because I have just passed 

that building that has the big sign on it that says, ‘‘Westwood College.’’ And every time I see it, I think of the worthless diplomas 

that they are peddling. 

I had a situation in my office with a cleaning lady who was nearing retirement. Her daughter was accepted at Westwood, signed 

up. Her mom has to co-sign. After the Pell grant worth $5,000-plus, 

they signed up for $17,000 more in debt for the same worthless degree that you are now investigating. I wish these crime shows 

would get off television for a while so kids could start thinking 

about other things to do with their lives other than being a super 

chef or a forensic crime scene investigator. 

But let me ask you, the incidents of parents co-signing and the 

impact that has had, you said you have had about 800 Westwood 

students who have contacted you. Have you found instances of the 

parents being brought into this kind of situation? 

Ms. MADIGAN. We have. In terms of the APEX loans that I talked 

about, 40 percent of the Westwood College student end up taking 

out those APEX loans, whether they know it or not. And in many 

circumstances we have found—and I think as Ms. Loonin testified 

to—an increasing number of private loans requiring a co-signer. 

And so we are seeing that. 

As I said, in the past few months, we have had over 1,000 people 

contact our office, and so they are now sending in paperwork and 

filling out questionnaires so that we are gathering more and more 
25 

information. But it is just clear from the beginning that people are 

being put into loans and, again, they have no idea—and it is not 

just being put into loans at the outset. It is that they are pressured 

while they are in school. We in our complaint have testimony from 

students saying that they were literally pulled out of class and told 

they had to sign up for another loan if they wanted to continue 

their enrollment in the school. And, again, they are kind of forced 

to because those credits cannot be transferred anywhere. I mean, 

it is just egregious, unconscionable situations. 

Senator DURBIN. I might tell you, my cleaning lady’s story has 

a happy ending. She had told me she was prepared to defer her retirement because her daughter was finally in college at Westwood. 

And when we found out the details, we called them and said, 

‘‘There will be a press conference right outside your front door tomorrow morning with this lady and me if you do not tear up the 

paper.’’ And they did. I wish I could do that for the thousands who 

have been exploited by this worthless Westwood College and so 

many like it. But I am glad you are pursuing this. 

Are they being investigated by other States as well? 

Ms. MADIGAN. Yes. 

Senator DURBIN. Thank you. 

Senator Franken. 

Senator FRANKEN. Thank you, Mr. Chairman. 

Let us follow up a little bit with Westwood, Attorney General 

Madigan. Your suit against them was for deceptive marketing practices, and I think that highlights a huge problem for the for-profit 

sector: the accreditation process, and the fact that many of these 

programs may not have the regional accreditation and, therefore, 

may not have their credits or degrees accepted by other local institutions or employers. 

Ms. MADIGAN. Right. 

Senator FRANKEN. What does the Federal Government need to do 

to strengthen and improve the accreditation process? And what can 

it do to make students more aware of the importance of the type 

of accreditation of their programs? 

Ms. MADIGAN. Senator, it is a great question, and let me start 

by telling you something that one of the students told me from 

Westwood who was savvy enough to know to ask the question of 

the recruiter: ‘‘Are you accredited? ’’ And they were told, ‘‘Yes, we 

are accredited.’’ But that student would have had to know to ask 

more specifically, ‘‘Are you regionally accredited or nationally accredited? ’’ Because most people have no understanding of the difference. And believe it or not, it is regional accreditation that is 

really the gold standard when it comes to accreditation and not national accreditation. 

This is obviously work that can be done on the federal level to 

make sure that the accreditation process is something that is 

meaningful. You can do that, obviously, by looking at job placement 

rates. You do that by looking at default rates. And those are certain things that, when, for instance, Westwood was going through 

an accreditation process at one point, when they went on campus, 

interestingly enough—and this is just to add some more color to 

this story—administration actually told students that they were 

not allowed to complain or talk to the accreditation people who 
26 

were on campus and that they may be thrown out of school if they 

did talk to them. 

So, obviously, there is a lot that can be done to ensure that, you 

know, there would be whistleblower provisions put in place, and 

that could be done both at the State level and at the federal level 

to protect students from ending up in programs where they end up 

with an enormous amount of debt and worthless degrees. 

Senator FRANKEN. Ms. Jokela, thank you for your moving testimony. It reminds us all of how this impacts the lives of those who 

go through this and why it is so important to improve the student 

loan policy in this country. 

Attorney General Madigan just talked about at Westwood that, 

I guess, 40 percent of the students got APEX loans, and a lot of 

them were not even aware that they did have APEX loans. I am 

very interested in working on ways to improve information that 

students receive before they decide how to pay for their college. Do 

you think that it would have helped in your case if you had been 

given a simple single sheet explaining your financial aid? 

Ms. JOKELA. Well, I think it would have been somewhat helpful, 

but one of the staff members in Mr. Durbin’s office had forwarded 

me a document that my school, Harrington, issues and the information that they are sort of saying as far as, you know, what students 

are taking out in private loans versus public loans and what the 

total overall debt is does not really reflect my situation nor the situation of many, many of the students that I graduated with. 

I think what really would be helpful, what information needs to 

be presented up front, is how much is this particular loan, what 

is the interest rate on this particular loan; at this point, as they 

are going through your education, what is the total of your loans 

and sort of what you can reasonably expect to have to repay once 

you are done and graduated. 

Senator FRANKEN. So a certain level of transparency might be required. 

Ms. JOKELA. Yes, and not just putting it into a document that 

the student signs and takes home or gets filed away, but just really 

having a clear and concise discussion about it so that the students 

absolutely understand what it is that they are getting into before 

they make that decision and sign that paperwork. 

Senator FRANKEN. Thank you. 

Ms. Loonin, many commentators have equated the abuses in the 

private loan industry with the abuses that went on in the housing 

industry. I know that Attorney General Madigan said that this is 

really kind of an extension in her consumer bureau of what went 

on in the mortgage industry and the credit card industry. 

The Dodd-Frank Act now requires institutions that securitize 

mortgages to retain some of the risk. Most institutions of higher 

education currently do not carry any risk associated with either 

federal or student loans. I think Professor Cole talked about this 

German institution that does. And that is, if students are unable 

to pay back their student loans, it does not really harm the institutions. Perhaps this should change so that institutions have more of 

a stake in what happens to their graduates. 

How could the Federal Government require colleges to bear some 

of the risk students take on when they take out federal or private 
27 

student loans? In other words, can the Federal Government require 

institutions of higher learning to have some skin in the game? 

Ms. LOONIN. Yes, thank you, and that is something that we are 

very interested in looking at some options. 

First, the parallels really in the private student loan market and 

the subprime mortgage are very clear. A lot of the same things 

happened. But even on the federal loan side, here is an example, 

I think, of where you can incentivize schools by holding them more 

accountable when they commit fraud or other things. There are 

some limited relief options, discharge options, false certification, 

closed school, unpaid refund. This is on the federal student loan 

side, and the closed school is difficult. If the schools are closed, it 

is difficult to have them pay anything back. But the false certification is based on, you know, bad acts essentially that the schools 

did. The relief goes to the borrowers, which is great. We are able 

to get that for a lot of our clients. The Department of Education 

has the authority now to then seek reimbursement from the 

schools, and as far as we know, they have not been doing that even 

though the authority already exists. But something like that is an 

example where, if the school was actually held accountable, the 

borrower was made whole, the relief was paid out, and the taxpayer could be more whole also by seeking reimbursement. 

Senator FRANKEN. I think most taxpayers would be for that. 

Mr. Chairman, thank you. 

Senator DURBIN. Senator Whitehouse. Senator Whitehouse defers 

to Senator Blumenthal. 

Senator BLUMENTHAL. Thank you. 

Since we are on the second round of questioning, I want to thank 

the Chairman again for having—— 

Senator DURBIN. Take all the time you need. 

Senator BLUMENTHAL. Thank you. 

[Laughter.] 

Senator BLUMENTHAL. You know, I am struck by some of the discussion here because we are talking about the bankruptcy process 

for people about the age of the group that just entered this room. 

They are about the age of my four children who are in school, and 

they are at the start of their lives. And Senator Whitehouse rightly 

described the bankruptcy process as giving people a new start. 

My goal here is really to enable people to avoid bankruptcy because it is a searingly painful and sometimes disabling process. As 

much as it may be a new start, it is also a public confession of financial failure that will follow people for the rest of their lives. And 

so the more we can do to avoid bankruptcy in the first place, in 

my view, that ought to be the objective here. 

And so, you know, I am also struck by the experience, General 

Conway, at Decker. Decker failed. People went into bankruptcy because the school failed to deliver their education. They were unable 

to discharge themselves in bankruptcy from a debt they had because of the school’s failure and its bankruptcy. What an anomaly 

in American life that the students were unable to get the same relief that the school did after it failed them, again, people not much 

older than college students in the case of law school, but also undergraduates at Decker. 
28 

You very rightly suggested two much more limited means of 

avoiding bankruptcy, for example, providing the opportunity for 

students to avoid repayment if they are unable to get the education 

that they took the loan to receive, which is provided under the federal loan program, and, again, also enabling people to avoid having 

to repay while they are still in school. 

I want to ask you, and perhaps the other members of the panel, 

whether the protections under the federal student loan program 

should not be applied to the private loans, as you have suggested, 

General Conway, in two instances. 

Mr. CONWAY. Well, I think going back, Senator Blumenthal, to 

the example of Decker, as I said, we approached the bankruptcy 

trustee in the Decker case because we had these students with 

these problems, and yet we had the trustee going after the students. And that is sort of—as you said, I think you called it an 

‘‘anomaly,’’ a situation like that. We were able to get $4.6 million in very tangible debt relief for 

those students in the instance of Decker. And Decker is interesting 

because it was happening at about the time that Congress was 

going through bankruptcy reform and this mystery amendment 

that Senator Durbin has talked about was put in place. But the filing of bankruptcy happened after the changes, so this really was 

one of the cases of first impression how this was going to work out. We were able to get that $4.6 million forgiven because they were 

institutional loans. What we basically said is, ‘‘Listen, you failed, 

and you cannot be going after these students.’’ But what is still 

hanging out, and hanging out there to this day, is the roughly $13 

million in private loans. We have had some success in saying, ‘‘Listen, okay, you did not have the right kind of lending relationship. 

We are going to advocate on behalf of the student.’’ But we have 

not been successful in all those cases. And because the school failed 

and because federal protections—federal law has protections in the 

instance when a school fails, we have had some success in about 

$21 million worth of federal student loans that are involved in 

Decker. But we do still have this $13 million in private loans hanging out there, and I would argue, as you said in your remarks, that 

those people from Decker still facing those loans ought to have the 

same kind of protections that we were able to get either for the institutional loans or the federal loans. 

Senator BLUMENTHAL. Professor Cole, what do you think about 

applying the federal protections to private loans? 

Mr. COLE. Senator, I think that would be an appropriate thing 

to do. I think that it treats private loans, private student loans, as 

student loans, and in that sense it is an appropriate thing to do. 

I do want to respond, if I may, to Senator Durbin’s comment 

about—I almost feel as though I am being held responsible for the 

processes of Congress with the way the bill was—the Bankruptcy 

Code was amended. If I had been there, I would have made a comment similar to what I have made today. I do think that the rationale for exempting student loans is to be able to make students able 

to credibly commit. But I do think that there has to be a way to 

internalize the costs that some of these private for-profit colleges 

are imposing on people. And one of the ways to do that—the States 

can do that without bankruptcy, for example, by extending fraudu-
29 

lent conveyance reach-back periods for college tuition only. If you 

are giving value and getting none in return, there ought to be a 

way in which individuals and their other creditors ought to be able 

to address that, and that can be done under State law without the 

stain of bankruptcy. 

If you want to do it through the Bankruptcy Code, another way 

to do it is to allow for discharge for all but a percentage of future 

income, and that way the lenders are going to take more responsibility in investigating the colleges that are receiving these funds to 

make sure that they are giving an education, because no lender is 

going to want to lend against an education that is only going to 

generate a small amount of income in the future if they are worried 

that the rest of it is going to be discharged in bankruptcy. 

So those are options that do not necessarily implicate the Bankruptcy Code or the bankruptcy process. 

Senator BLUMENTHAL. Thank you. 

Thank you, Mr. Chairman. 

Senator DURBIN. Thanks. 

Senator Whitehouse. 

Senator WHITEHOUSE. Thank you, Mr. Chairman. 

Let me ask Ms. Loonin: The National Consumer Law Center 

looks at this sort of from the 50,000-foot level as well as at the individual level. Have you made any determinations as to what the 

effect of the 2005 change in the law was on student loan interest 

rates? Is there a report of some kind that shows a categorical shift 

to the benefit of students as a result of the 2005 law? 

Ms. LOONIN. Thank you. We have not done a report on that. The 

Project on Student Debt has done some analysis of that. We have 

done some—not an actual report. We have done some internal 

analysis as well as a report that we did in 2008 looking at private 

student loan products, and in all of those cases, we have not found, 

again, that the interest rates were—they fluctuated, but you cannot 

see any pattern that is tied to bankruptcy. 

Senator WHITEHOUSE. Cannot attribute. 

Ms. LOONIN. Right. 

Senator WHITEHOUSE. Okay. Professor Cole, the history of this, 

as I understand it, was that, you know, the baseline is that debt 

is dischargeable in bankruptcy. Is that correct? 

Mr. COLE. Yes, that is correct. 

Senator WHITEHOUSE. And the baseline for student loans until 

2005 was that they were dischargeable in bankruptcy? 

Mr. COLE. For private student loans. 

Senator WHITEHOUSE. Private student loans, correct? 

Mr. COLE. That is right. 

Senator WHITEHOUSE. And then the 2005 law, as our Chairman 

said, magically appeared without a lot of testimony to support it, 

but somehow it got into the law. And when it got in, it applied not 

just to loans that were originated after the change in the law. It 

applied to all student loans, did it not? 

Mr. COLE. Yes, it did. 

Senator WHITEHOUSE. So if you took out a loan in 1995 with the 

expectation that you would be able to discharge in a bankruptcy, 

you had that expectation disrupted by this law, correct? 
30 

Mr. COLE. Yes, that is correct. And if I can add, that is inappropriate. It is inappropriate for that to have been the case because 

you are changing the expectations in the middle of the game in the 

same way that this would change expectations—— 

Senator WHITEHOUSE. And the loaner never went back and said 

to that student who had the 1995 loan, ‘‘Hey, you know what? We 

are operating in a new environment in which you cannot get out 

from under this debt. I am going to be able to chase you to your 

deathbed and, therefore, I am eliminating a little bankruptcy risk 

to myself, and so I am going to reduce your interest rate.’’ That student pre-2005 just plain lost something and got no value. 

Mr. COLE. That is right. That is a windfall to the lenders. 

Senator WHITEHOUSE. It is a windfall. 

Mr. COLE. Yes, it is a complete windfall to the lenders. 

Senator WHITEHOUSE. So in your testimony, where you express 

concern that to go back to the status quo ante of the 2005 bill, 

what existed beforehand, that would be a ‘‘change in the rules.’’ 

Mr. COLE. That is right, but—— 

Senator WHITEHOUSE. It would be just as bad to change the rules 

against the interests of the students. 

Mr. COLE. Yes, Senator. But—— 

Senator WHITEHOUSE. As it is to change it against the interests 

of the loan companies, correct? 

Mr. COLE. Yes, Senator. My response to that would be that two 

wrongs do not make a right. It is—— 

Senator WHITEHOUSE. Well, it does go back to the status quo 

ante, right? 

Mr. COLE. It does. It does, but—— 

Senator WHITEHOUSE. So it puts everything back on the level 

playing field it was before. 

Mr. COLE. But I also want to explain that you cannot really compare interest rates from before the change to after the change because interest rates, as I explained in my written testimony, are 

made up of at least three different components: There is a natural 

rate of interest; there is an industry rate; and then there is a borrower-specific rate of interest. And so just looking at the surface—— 

Senator WHITEHOUSE. I understand. You get into a huge attribution problem. 

Mr. COLE. Right, exactly. 

Senator WHITEHOUSE. But if your position is correct that this has 

a beneficial effect on the interest rate market, you have this exemption from bankruptcy to deny people the right to start again. 

Mr. COLE. Yes. 

Senator WHITEHOUSE. If it has that benefit, then clearly that is 

a benefit that was taken away from everybody pre-2005. 

Mr. COLE. I agree completely. 

Senator WHITEHOUSE. And so they got basically—I am not going 

to use the word in a Senate hearing, but you know what I mean. 

It was a plain consumer—they had something that they were entitled to, they had an expectation. It was taken away from them. It 

was taken away from them by something slipped into a bill in Congress. They lost as a result. And setting aside the market issues, 

it would be fair to at least put them back in the situation where 
31 

they were before some lobbyist snuck this into the bill and took 

away their rights, correct? 

Mr. COLE. You could not have more agreement from anyone than 

I have with regard to that statement, although I would add—— 

Senator WHITEHOUSE. Thank you. I am way over my time. 

Mr. COLE [continuing]. That this amendment does not do that. 

Senator WHITEHOUSE. I appreciate you letting me go over my 

time. Thank you, Chairman. 

Senator DURBIN. You are welcome, and thank you for being here. 

And the amendment is a work in progress, and some ideas have 

come up during the course of this hearing that I think should be 

brought into play. 

Professor Cole, you gave a good written statement here, and I am 

glad you came a long way to be here to testify. I was stopped cold 

on the first page by two words when you described ‘‘innocent lenders.’’ 

Now that you have listened to what happened to Ms. Jokela, 

after you have heard the Attorneys General talk about the schools 

that are lending money, do you still consider them innocent? 

Mr. COLE. No, Senator, I do not. But I want to say that the proposed amendment lumps in innocent lenders with guilty, fraudulent lenders. And what I am suggesting is that you can address 

those fraudulent lenders without undermining the student loan 

market. 

Senator DURBIN. I do not quarrel with that premise. 

I might also add for the record that the largest for-profit school 

in the United States of America makes no private loans. You will 

probably be able to guess which one that is, but I was surprised 

to learn that. This seems to be a little sidelight, kind of a juice loan 

deal, a little, you know, title loan company that goes with some forprofit schools. So I do not think there is a lot of innocence. 

You know, one of the things that I think should be disclosed to 

the student is before you borrow private loans with three times the 

interest rate, you incidentally still are eligible to borrow more 

under the federal loan. Wouldn’t that be a pretty reasonable thing 

to disclose? 

Mr. COLE. I think it would be an absolutely appropriate disclosure. 

Senator DURBIN. Ms. Loonin, one of the things you talk about 

here is the statute of limitations. Do you want to address that for 

a moment? 

Ms. LOONIN. On the federal loan side, the fact that there is 

no—— 

Senator DURBIN. I do not think your microphone is on. 

Ms. LOONIN. Oh, I am sorry. On the federal loan said, there is 

no statute of limitations. It was eliminated in 1991. So that is a 

major reason why I have clients who are in their 80s and 90s still 

being hounded on the federal loan side. 

But one of the connections we have seen on the private loan side 

on the debt collection side, the debt collectors collecting private 

loans take advantage, frankly, of borrowers and of borrowers’ confusion about what type of loan they have and will often say, you 

know, there is no time limit, we can come after you forever on the 

private loan side, even though that is not the case. 
32 

Senator DURBIN. I am going to bring this hearing to a close. It 

has been a good one and a great panel. I thank you all for coming 

because I know there was some personal sacrifice to your being 

here. It is an issue which has been taken up in the authorizing 

Committee by Senator Harkin with a number of hearings. We have 

had several hearings through the Judiciary Committee, and they 

will continue. 

As I mentioned at the outset, come July there will be a moment 

of reckoning when we decide whether to address the interest rate 

to be charged on federal student loans. As I understand it, it doubles from 3.4 percent to 6.8 percent, a burden which I do not want 

to impose on students across this country. But it also creates an 

opportunity for us, if we are up to it, to have an honest discussion 

about what is happening to student debt in America. The student 

debt crisis in this country is largely ignored by Congress. We are 

not paying any attention. And, unfortunately, there are a lot of 

lives of individuals—Danielle Jokela is one—who are being 

changed dramatically by laws that we pass or fail to pass. 

And going back to the point made by Senator Blumenthal, it is 

hard to imagine a young person who thinks they are doing the 

right thing—an education, for goodness’ sake—borrowing money to 

get that degree which they have been told is the most important 

thing in life, making a decision before they are 25 or 26 years old 

that ends up haunting them for a lifetime. And that is literally 

what we are talking about here. When it is not dischargeable in 

bankruptcy, it is there to the grave, and that is why it is so important we continue to work on this. 

Thanks again to the panel. Members may send you some written 

questions. It is rare, but occasionally they do. And if you receive 

one and could respond promptly, we would appreciate it. Thank 

you. 

This meeting will stand adjourned. 

[Whereupon, at 11:41 a.m., the Subcommittee was adjourned.] 
(33) 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
34 

PREPARED STATEMENT OF RANKING MEMBER CHUCK GRASSLEY
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36 

PREPARED STATEMENT OF JACK CONWAY, ATTORNEY GENERAL FOR THE

COMMONWEALTH OF KENTUCKY, FRANKFORT, KENTUCKY
37 
38 
39 
40 
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42 
43 
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PREPARED STATEMENT OF LISA MADIGAN, ATTORNEY GENERAL FOR THE STATE OF

ILLINOIS, CHICAGO, ILLINOIS
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46 
47 
48 
49 
50 

PREPARED STATEMENT OF G. MARCUS COLE, PROFESSOR OF LAW, STANFORD

UNIVERSITY, STANFORD, CALIFORNIA
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52 
53 
54 
55 
56 
57 

PREPARED STATEMENT OF DANIELLE JOKELA, CHICAGO, ILLINOIS
58 
59 

PREPARED STATEMENT OF DEANNE LOONIN, NATIONAL CONSUMER LAW CENTER, 

BOSTON, MASSACHUSETTS
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61 
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68 
69 
70 
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PREPARED STATEMENT OF NEAL MCCLUSKEY, ASSOCIATE DIRECTOR, CENTER FOR

EDUCATIONAL FREEDOM, CATO INSTITUTE, WASHINGTON, DC 
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78 
79 
80 
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82 

QUESTIONS SUBMITTED BY SENATOR DICK DURBIN FOR PROFESSOR G. MARCUS COLE
83 

QUESTIONS SUBMITTED BY SENATOR DICK DURBIN FOR DEANNE LOONIN
84 

QUESTIONS SUBMITTED BY SENATOR JEFF SESSIONS FOR PROFESSOR G. MARCUS COLE
85 

QUESTIONS SUBMITTED BY SENATOR JEFF SESSIONS FOR NEAL MCCLUSKEY
86 

RESPONSES OF DEANNE LOONIN TO QUESTIONS SUBMITTED BY SENATOR DURBIN
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88 
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90 
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92 
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RESPONSES OF NEAL MCCLUSKEY TO QUESTIONS SUBMITTED BY SENATOR SESSIONS
94 

NOTE: At the time of printing, after several attempts to obtain 

responses to the written questions, the Committee had not received 

any communication from G. Marcus Cole. 
95 

AMERICAN ASSOCIATION OF UNIVERSITY WOMEN (AAUW), MARCH 19, 2012, LETTER
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97 

CONSUMER BANKERS ASSOCIATION, WASHINGTON, DC 
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99 
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102 
103 
104 
105 
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107 
108 

INSTITUTE FOR COLLEGE ACCESS & SUCCESS, MARCH 19, 2012, LETTER
109 

LETTER TO SENATOR DURBIN FROM 35 ORGANIZATIONS EXPRESSING SUPPORT FOR THE

Fairness for Struggling Students Act of 2011 
110 
111 

CONSUMER ACTION, WASHINGTON, DC, MARCH 16, 2012, LETTER
112 

AMERICAN BANKERS ASSOCIATION, AMERICAN FINANCIAL SERVICES ASSOCIATION, 

CONSUMER BANKERS ASSOCIATION, THE FINANCIAL SERVICES ROUNDTABLE, MARCH

20, 2012, JOINT LETTER
113 
114 

NATIONAL ASSOCIATION OF STUDENT FINANCIAL AID ADMINISTRATORS, WASHINGTON, 

DC, STATEMENT
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116 
117 
118 

NATIONAL COUNCIL OF HIGHER EDUCATION LOAN PROGRAMS, INC., WASHINGTON, 

DC, STATEMENT
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120 

‘‘HOW MUCH IVORY DOES THIS TOWER NEED?’’ OCTOBER 27, 2011, REPORT BY NEAL

MCCLUSKEY
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138 
139 
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144 

‘‘UNBEARABLE BURDEN? LIVING AND PAYING STUDENT LOANS AS A FIRST-YEAR

TEACHER,’’ DECEMBER 15, 2008, REPORT BY NEAL MCCLUSKEY
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146 
147 
148 
149 
150 
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168 

‘‘FEDERAL HIGHER EDUCATION POLICY AND THE PROFITABLE NONPROFITS,’’ JUNE 15, 

2011, REPORT BY VANCE H. FRIED
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170 
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184 

EDUCATION FINANCE COUNCIL, WASHINGTON, DC, STATEMENT
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186 

Æ