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50–319 2009

S. HRG. 110–917 

PAYING FOR COLLEGE: THE ROLE OF PRIVATE 

STUDENT LENDING 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

ON 

ISSUES RELATED TO THE GROWTH AND DEVELOPMENT OF THE PRIVATE EDUCATIONAL LOAN MARKET AND ITS IMPACT ON STUDENT 

BORROWERS AND THEIR FAMILIES 

WEDNESDAY, JUNE 6, 2007 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


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(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

ROGER M. HOLLINGSWORTH, Professional Staff 

AARON D. KLEIN, Economist 

LYNSEY GRAHAM REA, Counsel 

JONATHON GOULD, Republican Counsel 

JIM JOHNSON, Republican Counsel 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE WHITTLE, Editor 


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(III) 

C O N T E N T S 

WEDNESDAY, JUNE 6, 2007 

Page 

Opening statement of Chairman Dodd .................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 4 

Senator Tester .................................................................................................. 4 

Senator Allard ................................................................................................... 5 

Senator Casey ................................................................................................... 6 

Prepared statement ................................................................................... 52 

Senator Schumer .............................................................................................. 7 

WITNESSES 

Andrew M. Cuomo, Attorney General, State of New York ................................... 9 

Prepared statement .......................................................................................... 53 

Jonathan Avidan, Consumer .................................................................................. 26 

Prepared statement .......................................................................................... 62 

Jennifer Pae, President, United States Student Association ............................... 28 

Prepared statement .......................................................................................... 66 

Peter B. Tarr, General Counsel, First Marblehead Corporation ......................... 30 

Prepared statement .......................................................................................... 73 

Tracy Grooms, Senior Vice President, Bank of America ...................................... 32 

Prepared statement .......................................................................................... 78 

Barry W. Goulding, Senior Vice President, Sallie Mae ........................................ 33 

Prepared statement .......................................................................................... 85 

Sevester Bell, Director of Student Financial Aid, Howard University ................ 35 

Prepared statement .......................................................................................... 104 

Luke Swarthout, Higher Education Advocate, United States Public Interest 

Research Group .................................................................................................... 36 

Prepared statement .......................................................................................... 110 


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(1) 

PAYING FOR COLLEGE: THE ROLE OF 

PRIVATE STUDENT LENDING 

WEDNESDAY, JUNE 6, 2007 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:08 a.m., in room SD–538, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. 

This morning the Committee examines the role of private student lending and keeping college affordable and accessible. I want 

to thank the Attorney General of New York, Andrew Cuomo, and 

our other witnesses for their appearance here this morning. I can 

think of no more important topic that this Committee can address 

at this particular time. Our Nation, our world, is growing more 

complex and interconnected day by day. Never has higher education been more crucial to the success of our people and our country. If our children are to achieve the highest aspirations and if our 

Nation’s economic backbone is to continue to grow strong, then we 

must ensure that the financial doors of higher education remain 

open for all who have the desire and the ability to walk through 

them. 

Today, 60 percent of the new jobs being created by our economy 

require at least postsecondary education. Compare to half a century ago when only 15 percent of new jobs required some amount 

of college. Yet, at a time when higher education has never been 

more important, in a very real sense it has never been more difficult for many families to afford. 

Over the past two decades or so, the cost of attaining a college 

degree has risen at approximately twice the rate of inflation. That 

is a staggering fact that has imposed a staggering burden on lowerand middle-income families in our nation. Today, the average cost 

of attending a public university is $13,000 a year. The average cost 

of attending a private university is more than double that, at 

$30,000 per year, with some schools, of course, costing as much as 

$50,000 a year. 

As the father of two young daughters, I am not making any 

plans to retire in the near future here. I was hoping Jack Reed was 

here to see any advice he might have on this issue with a child 

only several months old. 


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During the same period of time, the Federal Government’s commitment to student financial aid has waned in relation to the rising cost of a college diploma. Federal aid in the forms of grants and 

Federal loans has failed miserably to keep up with rising costs. By 

some estimates, the national gap between the cost of tuition and 

available aid is approximately $120 billion and growing. This college affordability gap leaves many would-be students with very few 

options: to give up their dream of pursuing a higher education degree or to rely on their parents for financing their education expenses or to seek out alternative sources of financing of their higher education, primarily through the forms of private education and 

direct-to-consumer loans. 

Unlike the Federal student loans, private loans are not guaranteed by the Federal Government, and while guaranteed student 

loans carry a rate of no more than 6.8 percent, there are no limits 

on the interest rates and fees private lenders can charge. Some 

have variable rates of up to 20 percent. Generally, the underwriting for private education loans is similar to that used for other 

forms of consumer credit. That means that the student borrowers, 

who usually have little to no credit history, poor credit scores, or 

no parental co-signer or whose parents have a poor credit history, 

will typically pay higher rates than those with good credit histories 

or those with a parental co-signer with a good history. In some regards, this model runs counter to the longstanding Federal purpose 

of student aid: targeting low-cost financial assistance to students 

with the greatest needs and those from the humblest of backgrounds. 

Now, that said, there is no doubt that private loans play a very 

critical and needed role, I would add, in providing students with 

the ability to finance college. But while beneficial, little is known 

about the private student loan market. We look forward this morning to hearing more about this at today’s hearing, which will focus 

on an array of issues related to the growth of the private loan market, its oversight, and the role that private lending plays as part 

of the broader financial aid landscape. I also look forward to hearing more about how private lending practices, products, and services impact student borrowers and their families and hearing from 

our witnesses about potential areas of concern within the private 

loan market. 

Since the beginning of the year, there has been a consistent purpose to many of this Committee’s hearings, specifically how to better ensure that Federal tools, like subprime mortgage lending and 

credit cards, be utilized by working Americans to build rather than 

diminish their wealth. Today’s hearing is in keeping with that vital 

purpose. 

The private student loan program is growing at an astronomical 

rate, by 1,200 percent over the past decade, and private student 

loans are projected to overtake Federal education loans as the largest percentage of student lending within the next decade. These 

two charts, by the way, will indicate that first point I made here, 

give you some idea from 1995 through 2005 of the increase. We do 

not have the chart here that I should show, by the way, just the 

increase as well, I mentioned double the rate of inflation of the cost 

of higher education, which obviously is driving a lot of this. But 


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again here, the blue and red lines indicate—the red being the private education loans, the blue being the Federal loans, and you see 

where down the road here those two will cross here, again, relating, of course, to the rise in cost of education. We will leave these 

around for people to take a look at. 

I believe we have an obligation in this Committee to ensure that 

this market is functioning effectively and efficiently for lenders and 

borrowers alike. We must act, including legislatively if need be, to 

ensure that young people in this country and their families have 

an opportunity to rise as high as their talents will take them without limiting them based on the wealth of their parents or themselves. And we must not let allow young, unsophisticated borrowers 

and their families to be subjected to practices that would deny 

them the ability to obtain credit on fair, transparent, and reasonable terms. Otherwise, countless students will suffer serious and irreversible harm to their financial futures, and our Nation’s economic and social future will suffer, I would point out, as well. 

One of the greatest contributions made by our Government to its 

people has been our support of higher education. Laws like the GI 

Bill and the National Defense Education Act and the Higher Education Act of 1965 stand as some of the great bipartisan achievements of the past century in terms of opening the doors of higher 

education to hard-working Americans and their children. 

The results of this commitment have been unmistakable and remarkable. In 1955, 3 million young people attended a college or a 

university. By 1980, that number had risen to 12 million. Today it 

stands at 18 million, and our Nation’s economy during the past 

half-century has not coincidentally become the strongest and most 

prosperous in the history of the world. College education is expensive, but if you think education is expensive, as has been pointed 

out by many in the past, then try ignorance as a cost. Our Nation 

could ill afford to support its children and their families as they 

work to achieve prosperity and economic security for themselves 

and our Nation. 

I want to point out here that the other Committee, one of the 

other committees on which I serve, the Health, Education, Labor, 

and Pensions Committee, will be marking up the Higher Education 

Act—I think it is next week, is the plan here. This Committee 

hearing this morning originally was going to be a joint hearing between Senator Kennedy and myself, combining the two committees 

because of the joint jurisdiction over the issue of higher education 

and its cost. Senator Kennedy, as many of you may know, is involved in the immigration bill on the floor of the U.S. Senate, and 

so he could not take the time this morning to be a part of this hearing. 

We are going to focus on, obviously, the lending issues here. The 

substantive issues involving the Department of Education are a 

matter we will bring up under the Higher Education Act. But we 

are anticipating a track here that will allow us to complement that 

work, and so, again, I appreciate Senator Kennedy’s cooperation 

and the work of his staff and others in working with us jointly, 

along with Senator Enzi, who is on this Committee, by the way, as 

well. 


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But let me turn to my colleague for any comments he has. Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Chairman Dodd. 

Over the past 20 years, the cost of tuition for higher education 

has increased substantially. Last year, tuition and fees at private 

4-year colleges rose almost 6 percent. Funds available to students 

through Federal Government lending programs, however, have remained largely unchanged since the mid-1990’s. And matriculating 

freshmen can qualify for a maximum amount of $3,500, sophomores are eligible for up to $4,500, while juniors and seniors may 

qualify for up to $5,500. Graduate students may obtain a maximum 

amount of $8,500 annually. Clearly, there is a large and growing 

gap between the cost of tuition and the funds available to students 

through Federal lending programs such as the Federal Family 

Education Loan Program, the Direct Loan Program, and the PLUS 

Program. 

As a result, more students and parents are turning to the private 

market to fulfill this gap. Sources such as home equity loans and 

lines of credit have been used to meet the needs of many collegebound students. At times, parents and students alike have used 

credit cards to meet their immediate financial demands. Given the 

recent reversal in the housing market, accessing homeowners’ equity is becoming less of an option for some families. Also, credit 

cards are rarely the best choice to finance long-term debt. Therefore, more and more students and parents are turning to the private lending industry to make up the difference. 

The growth of this industry has been exceptional over the past 

10 years. Private lending for higher education accounted for approximately $1.3 billion of student loans originated in 1995 and has 

since risen to over $17 billion in 2005. Some industry experts believe that by 2009, 2 years hence, the industry will see somewhere 

between $30 to $50 billion of loans originated annually. I believe 

this Committee, Mr. Chairman, has a responsibility to examine the 

private student lending market. We should assess whether there 

are any shortcomings in existing banking laws or enforcement tools 

to ensure adequate safeguards are there in place for students. 

Because the cost of higher education will continue to climb, I am 

afraid, we should also make sure that we encourage the growth of 

private lending and the choices they offer those seeking advanced 

education. I look forward, Mr. Chairman, to working with you, as 

always, and learning more about the lending industry from the experts that we will hear from today. 

Chairman DODD. Thank you very much, Senator Shelby. 

What I am going to do here, Senator Tester has a short opening 

statement, and Senator Allard, I presume, may make some short 

comments as well. But Senator Schumer—is that all right with 

you? I do not want to—let me turn to Senator Tester. 

STATEMENT OF SENATOR JON TESTER 

Senator TESTER. Thank you, Mr. Chairman. 

Very quickly, I want to thank you for having this hearing today. 

I think as you and the Ranking Member have pointed out, college 


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tuition costs have risen dramatically over the past 30, 40 years, 

and I am hopeful that this Committee hearing will shed light on 

the private loans, which are a critical component in our children’s 

ability to get a higher education, and the marketing practices that 

surround those. 

I want to welcome Attorney General Cuomo. I look forward to 

your comments involving what has been going on in your State as 

far as the recent marketing practices, to be kind. 

And I would just say this: I graduated from college some 30 

years ago. My kids are out of school. I am much older than you, 

Mr. Chairman. I know that. My oldest kid is out of college. She has 

got a Bachelor of Science in nursing. My parents were able to pay 

for my education. She had to borrow money to get through. We 

helped her, but we could not pay the whole thing. My son is a senior in a 5-year program, is on the 5-year plan, and he too is racking 

up debt. And I think it just takes away opportunity from our kids 

to be successful when they get out of college. 

So I look forward to the hearing. Thank you, Mr. Chairman. I appreciate your indulgence. 

Chairman DODD. Thank you very much, Senator. 

I should point out, by the way, that obviously myself, Senator 

Reed, Senator Brown, Senator Enzi, and Senator Allard are all 

Members of the Education Committee and Members of this Committee as well. So we have a lot of overlap on this subject matter. 

Senator Allard. 

STATEMENT OF SENATOR WAYNE ALLARD 

Senator ALLARD. Yes, thank you, Mr. Chairman and Ranking 

Member Shelby. I would like to thank you both for agreeing to hold 

this Committee hearing. I think it is important and timely so that 

we might examine the role of private student lending. 

As the American economy has evolved, education has increased 

in importance. When America was simply an agrarian economy, 

many people only completed very basic schooling, and academic 

education was less valuable than practical experience. 

Core education and training became more important as the economy shifted to a manufacturing base. In today’s highly technological, globally based economy, higher education has become necessary for Americans to remain competitive. In order to succeed in 

life, people must have strong knowledge and skills, and higher education is one of the best ways to access the opportunities they can 

bring. 

As a veterinarian, I am well aware of the importance of higher 

education. I could not have pursued my career without undergraduate and graduate studies. More and more people are realizing 

that their career or lifestyle goals will require postsecondary studies. 

Education can require a significant commitment of time and financial resources, though. The Federal Government has created a 

number of programs designed to make education more affordable, 

including tax credits, tuition repayment and forgiveness grants, 

and Federal loans. These options can go a long way in making college more affordable. 


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Now, private student lending is one additional option to the 

broad menu of choices available to students and parents in determining the best way to finance an education. Like any option, it 

may not be appropriate for all circumstances, but for some borrowers, it is the final piece that enables them to attend college or 

enables them to afford a practical path of study. 

As a member of the HELP Committee, I have had the privilege 

of working with Chairman Dodd on Higher Education Act reauthorization, including student lending provisions. I would also like 

to acknowledge the work of that Committee’s Ranking Member, 

Senator Enzi, for all his work on student lending. In particular, I 

have been pleased to work with him on the Student Loan Accountability and Disclosure Reform Act. He has been a strong advocate 

for fairness, accountability, and disclosure so that students and 

families can make informed decisions about how to pay for college 

based on clear, accurate, comprehensive information. 

I look forward to this opportunity to get more information on the 

financial aspects of private student lending, and I look forward to 

today’s testimony. 

Thank you. 

Chairman DODD. Thank you, Senator, very much. 

Senator Casey. 

STATEMENT OF SENATOR ROBERT P. CASEY 

Senator CASEY. Thank you, Mr. Chairman. I will be very brief 

because I know you want to get to our witnesses. 

I want to thank you, Mr. Chairman and Ranking Member Shelby, for calling this hearing. Attorney General Cuomo, welcome to 

you, and thank you for all your work in this area. And you are 

being introduced by a good guy there, and I know he wants to say 

a few words, so I will be brief. 

By the way, I did not know that Jon Tester is 30 years out of 

college. You look great, Jon. 

[Laughter.] 

Senator TESTER. I will give you some money. 

Senator CASEY. It took us about 20 minutes to get to this chair, 

so we want to be nice to the guy next to us. 

Just very briefly, I think what brings us together here—and I 

would ask that my whole statement be submitted for the record. 

Chairman DODD. It will. 

Senator CASEY. But what brings us together here is a real concern about what is happening in this market, so to speak. Two 

trends, really, two regrettable trends: one, cost of college tuition 

going through the roof—we all know that; but at the same time the 

failure of loan programs to meet that challenge in the lives of people; and then, of course, the real scandal that we have seen over 

the last couple of months, if not longer. So we have a lot of questions, and we want to hear the testimony of the witnesses. 

I do want to note that on the next panel, from Pennsylvania— 

and I may not be here for this—is Mr. Jonathan Avidan, who is 

going to testify and give personal witness to this, tragically so, and 

I wanted to make sure that I mentioned him. 


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But we thank you, Attorney General Cuomo, and we appreciate 

the work you have done, and we are looking forward to your testimony. Thank you very much. 

Chairman DODD. Chuck, thank you very much. Senator Schumer 

is going to introduce our witness, but I just want to say to you, Mr. 

Attorney General, it is a pleasure to have you back before this 

Committee. I know you must be having sort of a Pavlovian response here, having spent some time at that table in your previous 

job as Secretary of HUD, in which you did a fabulous job for this 

country. 

Senator SHELBY. Mr. Chairman, will we get to question Schumer 

since he is there? 

[Laughter.] 

Chairman DODD. No, I will step in. I will defend you, Chuck. I 

will not allow any questions—unless you want to answer them. 

Senator SCHUMER. Remember the Woody Allen movie ‘‘Bananas’’ 

where he sat here and he was the witness, he testified, and he was 

the lawyer, and he kept going back and forth? 

[Laughter.] 

I am not going to do that, I assure you, my friend. 

Chairman DODD. Well, anyway, Andrew, first of all, I have been 

a personal friend, and I have a high regard for you, and I am delighted you are here this morning, and we all admire what you 

have been doing over the last number of weeks and months here 

on this very, very important issue. So it is highly appropriate you 

are here. We thank you for offering to come before us and share 

your thoughts and ideas on how we can do a better job here on 

oversight, and also looking at the possibility of some legislative activity here to better manage a very, very important issue, a critical 

issue for America’s well-being. 

So, Chuck, why don’t you go ahead. 

STATEMENT OF SENATOR CHARLES E. SCHUMER 

Senator SCHUMER. Well, thank you, and I want to thank you, Mr. 

Chairman, for having this hearing. We have had a whole series of 

timely hearings on a whole bunch of other issues, and your leadership on this Committee is greatly respected and needed. I want to 

thank Ranking Member Shelby, who did the same thing when he 

was Chairman, and I want to welcome all of the witnesses here 

today to testify on this important issue. 

I am pleased to be here to introduce the 64th Attorney General 

of my home State, the Honorable Andrew Cuomo. The Attorney 

General is here today, of course, to talk about the investigation he 

has spearheaded to shine light on the practices of the student loan 

industry and its partners. Thanks to his efforts—intelligent, 

thoughtful, unfailing—universities and colleges across the country 

are now entering into a voluntary College Loan Code of Conduct 

to ensure that their students are being offered a fair deal to fund 

their education. 

Attorney General Cuomo has a long and illustrious record of 

fighting on behalf of New Yorkers and Americans. A native New 

Yorker, he attended two proud New York institutions—Fordham 

University and Albany Law School. He began his legal career as an 

assistant district attorney in Robert Morgenthau’s fabled D.A. ofVerDate Nov 24 2008 04:15 Dec 05, 2009 Jkt 050319 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 E:\HR\OC\A319.XXX A319

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fice, and then served at the firm of Fried, Frank, Harris, Shriver 

& Jacobson. 

In 1986, Mr. Cuomo founded Housing Enterprise for the Less 

Privileged, well-known across the country as HELP, which quickly 

became the Nation’s largest provider of transitional housing for the 

homeless. Its innovative model led to his appointment to the New 

York City Commission on the Homeless by former Mayor Dinkins. 

In 1996, President Clinton, as you mentioned, Mr. Chairman, 

nominated Mr. Cuomo to serve as Secretary of HUD, where his key 

focus became fighting racial discrimination. As HUD Secretary, he 

brought over 2,000 antidiscrimination cases across the country and 

successfully led 400 mayors and local law enforcement in a coalition to help fight gun violence. His work as HUD Secretary earned 

him the prestigious Innovations in American Government Award 

from the Ford Foundation and the Kennedy School of Government. 

In addition to being a dedicated public servant, he is the father 

of three beautiful daughters—Mariah and Cara, and the youngest, 

Michaela—and they are cuties. They are great little kids, and I 

love to see them at the events where we bump into one another. 

So, Mr. Chairman, I thank you for allowing me to introduce my 

friend and colleague in Government, and I know the Committee 

looks forward to hearing his testimony. However, before we begin, 

I just want to touch on the issue at hand, the focus of today’s hearing: the role of private loans to pay for higher education. As you 

have mentioned, Mr. Chairman, college degrees are essential to the 

success of our children, also our country. Enrollment in higher education has increased from 3 million to 18 million. The United 

States has fallen to number 7 on the list of developed countries 

with the highest graduation rates. We used to be number 1 or 2. 

And the problem in higher education, by and large, is not quality. 

We are still way up there in terms of quality. Our K through 12 

is not, when you look at the developed nations. But it is cost. And 

to maintain global competitiveness, we need to ensure our students 

and their families have the ability to pay. Tuition is skyrocketing. 

We all know that. 

In the past year, two out of three students have had student loan 

debt, up from less than one-half in 1993. My experience is the same 

as Senator Tester’s. My parents probably on an economic basis certainly had less money than I did—than, you know, my wife and I 

earn, but they were able to pay for all their kids’ college and graduate school educations. We cannot. And I have two daughters—one 

starting college, one starting law school—and we are looking into 

the loan program as a consumer. Now, I can tell you, it is confusing 

and it is difficult as you go through it. 

Over the past decade, debt levels for graduating seniors have 

more than doubled, from $9,000 to $19,000. That is a 58-percent 

increase. And the rising student debt can affect a student’s livelihood. For decades after graduation, kids are not able to pursue the 

profession they want because they have all this debt hanging over 

their head, and they go do something that enables them to repay 

the loans. They might delay the purchase of a home or a car. They 

are discouraged from starting an earlier family. It has all kinds of 

ramifications way beyond just paying the loan back. 


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So what is the answer? There are a lot of answers, but one that 

I would hope this Committee would focus on is just clearer disclosure. There may be other things we should do. It is confusing, as 

I said, as a consumer going through this now. And one of the reasons that kids get taken advantage of is that the competition is not 

there because it is so confusing. 

Good old-fashioned American competition is the great antidote 

here. And if people understood the varying costs and complications 

and just my experience, you not only have to look at the interest 

rate, you have to look at when the interest starts accumulating. 

You have to look at the points and fees. You have to be almost a 

math genius to figure out the different programs, and as Andrew 

Cuomo has admirably shown, many colleges and institutions steer 

you to one lender, and that sort of eliminates competition from the 

get-go. Andrew just told me that about 90 percent of the students 

go to the place that is recommended by their institution. 

So one thing we might consider is something that, as you know, 

Mr. Chairman, throughout my career in the House and the Senate 

I worked on, disclosure, we have a Schumer box for credit card applications. It is simple. Everyone can compare what the interest 

rate is. Everyone can compare the three things, and, in fact, Secretary Bernanke just made some changes. We ought to have a similar box, a similar Schumer box, for loan application packages so 

that people can understand and compare. And if the college says 

do this one but you can look at another private loan and it is 

cheaper, you will be able to see it quickly and easily, and you do 

not have to hire a Ph.D. in mathematics to figure out which loan 

is cheaper, because it is not as cut-and-dried as you might be. 

So I would hope, Mr. Chairman, one of the things we can do— 

and I know under your capable leadership we will pursue every aspect that this Committee has jurisdiction on in this—is look at disclosure, make sure it is simple and fair. Make sure prospective loan 

applicants can just compare the basic programs and see how much 

they pay, without much duress, and making that sort of like we did 

in credit cards in a simple box-like form on every application I 

think would be a good start. 

With that, I want to thank the Attorney General for being here 

again. 

Chairman DODD. Thank you, Senator Schumer, very, very much, 

and thank you for your statement. 

Mr. Attorney General, welcome. Thank you for being with us. We 

will include your statement and any supporting evidence or documents you think would be worthwhile for the Committee to have 

as well, and that will be true of all of our witnesses. Go ahead and 

proceed. 

STATEMENT OF ANDREW M. CUOMO, ATTORNEY GENERAL, 

STATE OF NEW YORK 

Mr. CUOMO. Thank you very much. First, it is my true honor to 

be introduced by Senator Schumer. He is a great U.S. Senator, but 

he is a New York treasure, and we take special pride in watching 

the great work the Senator is doing. I have had the good fortune 

to work with him for many years, and it is a true pleasure to work 

with him on this very, very important issue. 


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Chairman Dodd and Ranking Member Shelby, it is a pleasure to 

be back before the Committee. As you mentioned, I was HUD Secretary so I spent 8 years testifying before the Committee. The chair 

does not seem as warm as it was when I sat in it as HUD Secretary. So it is a pleasure to be back. And as the Members of the 

Committee have pointed out, it is a very, very important issue indeed. It affects families all across the United States. It is one of 

the most precious assets that we are trying to protect. And I believe in this case with the student loan issue, Government has really hit students and their families with a real one-two punch. 

First, as has been pointed out, Government student aid has not 

even come close to keeping pace with the rising cost of college. If 

a student or their family cannot self-finance this enormous cost, 

they must enter the private loan market. 

The second punch lands when the Federal Government fails to 

police that marketplace. After pushing students into the arms of 

private lenders, the Federal Government has failed to ensure that 

those lenders operate ethically and legally and has allowed students to be victimized. 

There has been much discussion about the Department of Education’s failure to police these rampant abuses. If jurisdiction is the 

issue, then where were the FTC and the OCC and the FDIC? In 

my opinion, it is a double debacle of Government failure, an alphabet soup of acronyms that have failed to do their jobs. 

The private loan arena is growing exponentially. It is now over 

20 percent of the market. Why? Because that is where the money 

is. Private loans are big business. Let me give you an example of 

the high cost of these private loans. One private lender, for example, markets private student loans at interest rates as low as 7 percent, yet over 40 percent of its loans are at interest rates of 10 to 

16 percent. Some loans go as high as 19 percent. Only 17 percent 

of the lender’s loans are actually at rates between 6 and 8 percent. 

And let us not forget that the interest rates on these private loans 

are variable, meaning they may significantly increase over time. 

I urge this Committee to ask a very simple question to the private lenders: What are your rates and at what colleges? I think you 

will be surprised by the answer. 

The worst practices we have seen in the college loan investigation came out of this sector of the student loan business. It is the 

Wild West of the college loan business. Most of the troublesome activities that schools and lenders have engaged in focus on what is 

called ‘‘preferred lender lists.’’ These are the schools’ lists of recommended lenders. The benefits to being on a preferred lender list 

are powerful. As Senator Schumer mentioned, 90 percent of the 

students follow the recommendation of the school; 90 percent of the 

students take one of the ‘‘preferred lenders.’’ Why? Because the students trust their schools. This is not a normal consumer transaction. When the school recommends a preferred lender, it carries 

significant weight in the recommendation. And the worst practices 

and inducements offered by lenders are about getting on these preferred lists in the private loan arena. 

Let me describe some of the worst practices we have seen in this 

area. 


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Revenue sharing, and we believe this is the most egregious practice that we have found. This practice was exclusive to the private 

loan sector because it is specifically illegal in respect to Federal 

loans but not in private loans. In revenue-sharing arrangements, 

the lender pays the school a set percentage of the student loan volume. These revenue-sharing arrangements are essentially undisclosed loan brokerage schemes. In my opinion, they are no better 

than illegal kickback arrangements found in other industries and 

they should be banned. 

Perks to school financial aid officers—expensive meals, travel to 

attractive locations, conferences in attractive locations, tickets to 

entertainment events, honoraria to serve on lender advisory 

boards. In some instances, financial aid officers even held stock in 

the lending companies that they were recommending to students. 

We have also found numerous other benefits to schools, including 

lender-funded printing of materials, lender-run call centers, cobranding of lender materials using the school’s logo, improper use 

of sweepstakes to get students to take loans, and leveraging of opportunity loans. 

There are also significant rate disclosure issues, as Senator Schumer points out. Amazingly, although lenders advertise their ‘‘as low 

as’’ rates, students often do not get the actual rate until the time 

the loan is being signed up. Financial aid officers who do not even 

know what the rate is going to be suggest preferred lenders without knowing the rates. 

How did this happen? Because the Department of Education 

claims that they were unable to regulate this sector, and because 

the Department of Education did not refer the problems to the Federal banking and consumer regulators, such as FDIC, Federal Reserve, OCC, OTS, as well as the FTC. 

The Federal banking regulators, by the way, could have addressed the problem without any referral, but they did not. Interestingly, while all this has occurred, my office has still not heard 

from a single Federal regulator. Even more interesting, I believe, 

is that all the actions we brought in the Attorney General’s office 

and other Attorneys General are bringing all across the country 

could have been brought by the OCC or the FTC if they wanted to 

bring these actions. 

The good news is that as my office has exposed these illegal practices, consumers and the industry have heard the problems, and 

they are responding. Consumers are demanding reform, and 

schools and lenders are actually willing to change course and set 

a new industry standard. To that end, we have entered into numerous settlement agreements with seven major lenders across the 

country, all from the private loan sector, and 25 schools in which 

they adopted a new College Code of Conduct. And this is before the 

Federal Government has even acted. 

So where are the Federal regulators? Well, just last week, the 

Department of Education issued new proposed regulations in the 

spirit of addressing this problem. These regulations, however, are 

still inadequate, in my opinion. They still allow some perks to be 

dangled before financial aid officers, and they do not make it clear 

that when a school picks a preferred lender, that decision should 

be in the best interest of the student, period. We passed a law in 


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the State of New York called SLATE, which would do just this. But 

I believe in the Department of Education rules, there is still a gaping hole. 

Finally, the regulations do not and, according to the Department 

of Education, cannot extend the Department’s supervision to the 

private loan sector. This is not a defense. If the Department of 

Education cannot regulate the private loan market, then why not 

refer these actions to the appropriate banking and consumer protection regulators, such as the FDIC, the Federal Reserve, OCC, 

OTS, as well as the FTC? And why can’t the Federal banking regulators do their job unprompted? 

In a nutshell, we suggest increasing the Federal student aid to 

keep pace with the cost of college and to having the Federal Government perform its function as a regulator and protector of the 

American consumer. The Department of Education was asleep at 

the switch, but so were the banking regulators, who must now also 

awake and act. This is, as the Committee has pointed out, a far 

greater than purely economic issue. It is a moral issue. It is more 

than just dollars and cents. If we believe in the American dream 

of higher education for all its children, then we must do far better. 

We must ensure that the students can afford the dream without 

becoming enslaved in a nightmare of long-term debt. 

The good news is I believe we have an opportunity here, Mr. 

Chairman. We have disclosed the problem. We have disclosed the 

solutions. Students are crying out for help. Colleges and lenders 

are saying they are ready to reform. We just need the political will 

now for Government to act, and hopefully with the leadership of 

this Committee we will. 

It is my pleasure to be before you, and anything I can do to be 

of service, I will. 

Chairman DODD. Well, again, congratulations on your fine work 

in this area, and actually you end on a good, encouraging note as 

well. I was delighted to hear and read the other day about a number of the lenders as well as the institutions stepping up and offering to accept certain guidelines. Our intention would be here as 

well to take a look at clearly what we might be able to do legislatively and try and marry that with the Higher Education Act moving forward so we can complement the efforts there that need to 

be practiced. 

Senator Shelby and I were mentioning here something that I presume you are aware of. In fact, you may have mentioned it already, 

but under the Real Estate Settlement Procedures Act, RESPA, 

which you are very familiar with, they prohibit kickbacks under 

the law in the mortgage industry. And I guess the simple question 

I would ask is: Shouldn’t a similar provision be included when it 

comes to students loans? 

Mr. CUOMO. Mr. Chairman, and as Ranking Member Shelby 

knows, it is a very interesting parallel to me. The student loans, 

I think, at one time were much smaller in terms of volume than 

a home mortgage, so they never received the same level of scrutiny 

or regulation. Student loans now rival home mortgages. In some 

families, the student loan indebtedness is higher than the home 

mortgage. But if you look at the way we regulate the home mortgage industry—the disclosure, the transparency, the definition of 


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relationships—it is not even close. The home mortgage transaction 

is a much safer, better regulated, consumer-friendly transaction 

than the student loan industry. RESPA, the RESPA laws, the disclosure of the role that you are serving, disclosure of fees, disclosure of kickbacks, is a much more protected loan system than the 

student loan system. And I think if we just replicate what we did 

in the home mortgage system, we would greatly enhance the student loan system and the protections for consumers. 

Chairman DODD. You know, let me draw upon your earlier experience as well. I could not help but think, in anticipation of your 

presence here today, we have had a lot of discussion over the years, 

certainly during your tenure at HUD, about redlining in a sense, 

where entire neighborhoods and so forth would be treated differently than others based on the assumption that there were going 

to be higher default rates in those communities or parts of those 

communities. 

One of the concerns I have here is that we are looking at, in 

some cases here, anyway—and I would like you to comment on 

this—that institutions are being sort of in effect redlined when it 

comes to student loans based on the economic status of the parents 

or the families of the children who attend these institutions, rather 

than looking as to whether or not the individual student is going 

to be in a position to meet the obligations under the loan at all. 

Tell me what you discovered or what you are finding in regard 

to that and what recommendation you have. We are going to have 

witnesses here this morning from some schools that I suspect—I do 

not know this, but I suspect that overall the financial status of the 

families there are going to be less than they would be at some of 

the Ivy League schools in some cases, and whether or not those 

students ought to be discriminated against based on the fact that 

they come from families that are less well off and thus are denied 

the opportunity to get some of these loans. 

Mr. CUOMO. Mr. Chairman, it is an excellent point, and I think 

it is a helpful parallel to remember the home financing system, the 

mortgage system, when we are thinking about student loans. And 

you will see on the student loan side that competition is nowhere 

near as productive, the disclosure, the transparency, the fees, the 

relationships are nowhere near as transparent and clear to the consumer. And we just—and I want to be careful what I say because 

we have recently commenced an investigation into exactly what 

you have just inquired about—the underwriting of these loans. And 

on the home finance side, the redlining suggested that by virtue of 

just being in a geographic area, the borrower may be put in a different situation. And on the home finance side, the mortgage side, 

we are familiar with what criteria are allowed in underwriting and 

what are not, what are the civil rights ramifications of using certain criteria in mortgage underwriting. 

We are now looking at the same on the student loan side. What 

criteria are they using in doing the underwriting of student loans? 

Parental income in the case where the parents are actually signing 

or co-signing the loan. Student income, student creditworthiness. 

How about the school that you attend? And are different schools 

weighted differently in the underwriting criteria? If I go to Harvard, is that one score versus going to a public school? If I go to 


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a historically black college, how do you weigh that, if at all, in the 

underwriting criteria? 

And we are investigating that now in the Attorney General’s office. Of course, a financial institution has a right to make the determination as to creditworthiness and scoring and FICO scores, et 

cetera. But there are also civil rights and legal ramifications to 

what criteria they are counting, and that is what we are now looking at. 

Chairman DODD. Well, good. I encourage you to do that, and we 

want to take a look at that as well. In fact, I will raise that issue 

with some of the witnesses who will come after you. 

Last, before turning to Senator Shelby, you mentioned here you 

have not heard back from any Federal agencies at all. That is disturbing to me in light of all the news around this and the obligation here, at least one would think, the interest being raised about 

what either existing law would allow Federal agencies to engage in, 

what practices they could examine, and where there may be a legitimate area even by regulation or by statute to expand our involvement. 

Expand on that a little bit further. You have heard from none 

of these agencies. You mentioned the FTC. Who else would you 

have assumed to have heard from? And what other Federal agencies do you think should be stepping up or at least expressing some 

interest in this matter? 

Mr. CUOMO. Well, Mr. Chairman, first, my premise is that the 

actions that we brought, the actions that other Attorneys General 

are bringing, they could have all been brought by the Federal regulators. My reading of the Federal Trade Commission Act clearly 

speaks to jurisdiction to protect consumers in unfair transactions, 

deceptive practices. It is what the FTC could be doing. I believe the 

FDIC also has jurisdiction, and the OCC. And we have heard from 

none of those agencies, not even inquiring, and a lot of the actions 

we have brought are involving Federal institutions. 

Chairman DODD. Have you communicated with any of them at 

all yourself, any correspondence or any inquiries from your office 

to theirs, or just not hearing back? 

Mr. CUOMO. We have been communicating with the Department 

of Education, but we are now going to be contacting the Federal 

regulators also, because it is ironic in some ways, there is a separate discussion on the issue of preemption where the Federal regulatory argument is you do not need these State AGs doing consumer protection because the Federal regulatory agencies already 

have that legal jurisdiction and that mandate, so why confuse it 

with these State Attorneys General running around? 

Well, if that is the theoretical position—and I believe it is a reading of the law. The FTC could have brought these actions. But they 

did not. Why didn’t you? And even when you are on notice, why 

didn’t you? And even when the Department of Education had all 

sorts of information and Inspector General reports about these circumstances, why didn’t you act? And if you are not going to act, 

well, then, why not allow the AGs across the country to act and fill 

a vacuum when you are leaving it? And it is clear that there are 

voids and there are vacuums. 


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So I believe they have the jurisdiction. I believe they did not exercise it. I believe that from the Federal Government’s point of 

view, this is not the situation by the old expression where the left 

hand did not know what the right hand was doing. I think that it 

is a situation where the left hand did not know what the right 

hand was not doing. If the Department of Education cannot do it 

and they do not have jurisdiction, then the banking regulators 

should have been doing it. 

Chairman DODD. Thanks very much. 

Senator Shelby. 

Senator SHELBY. Attorney General Cuomo, we mentioned RESPA 

a minute ago. You know a lot about it. You served as HUD Secretary. We dealt with you. Senator Allard was very involved in this 

and, Senator Dodd will recall, in stopping that proposed regulation 

change where there would not be full disclosure of where fees went 

and so forth. They could lump things together and they could do 

different things, and Senator Allard was very involved when he 

was Chairman of the Subcommittee in that area then. 

Some of us thought, my gosh, why do you want to create something and not have full disclosure? What we tried to do, as I understand, we tried to create conditions in Government, make public 

policy where the public, the consumer, will know what they are 

getting to try to eliminate conflicts, and I commend you for what— 

and people that are getting kickbacks in one form or another. They 

are never called kickbacks, but, you know, we know what—and if 

we can do this and you are in the forefront of it, I think it is for 

the good. But the average person needs a level playing field. 

I want to ask you this. We deal with the banking regulations 

here and jurisdiction, Senator Dodd. The Truth in Lending Act 

presently governs most student lending. Is this law appropriately 

tailored for this kind of lending, in your judgment? In other words, 

does it work better for, say, credit cards than private student loans 

or so forth? You understand what I am getting at. 

Mr. CUOMO. Yes, I do. 

Senator SHELBY. In other words, is this something that we need 

to look at from this perspective on the Banking Committee? 

Mr. CUOMO. It is a good question, Senator. I believe this is not 

a case where you need new law and new regulations to give the 

Federal Government the authority that they do not have. I believe 

they had the authority. I believe they did not exercise it. I believe 

it would be appropriate to spur them to act or clarify the law or 

the regulation. But I do not believe it is a question of creating new 

jurisdiction—— 

Senator SHELBY. They do not need any new laws. They just need 

more action. 

Mr. CUOMO. They need more action. 

Senator SHELBY. OK. 

Mr. CUOMO. And when you compare this, Senator, to the conversations we have had on RESPA and all those conversations 

about disclosure, the lack of disclosure here, it is not even a comparable conversation. We have disclosure on the mortgage side that 

has gone so far, is so protective, that is where I come up with the 

expression this is the ‘‘Wild West’’ compared to the mortgage side. 

You have colleges making recommendations, 90 percent of the stuVerDate Nov 24 2008 04:15 Dec 05, 2009 Jkt 050319 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 E:\HR\OC\A319.XXX A319

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dents are following them because it is not even a normal marketplace transaction. People believe the school. 

Senator SHELBY. And people are making money off of those recommendations. 

Mr. CUOMO. They are making money. They were revenue sharing 

as they were getting a commission. It was undisclosed. It was a significant amount of money. We did a settlement with one school 

where we made them return the commissions, $500 per student. 

None of this would be close to legal, I am—— 

Senator SHELBY. Didn’t some of them have stock in some of the 

deals, too? 

Mr. CUOMO. Some of the financial aid officers actually had stock. 

There is no competition in the industry. Once you are on the preferred list because of your relationship, you are on the preferred 

list. And no one else can get on that preferred list, so you are not 

even allowing the marketplace to work where they could compete 

against each other, get the rates down, so the students would have 

the benefit of the competition. 

Senator SHELBY. Mr. Attorney General, it would be helpful for us 

here in our oversight if you could share with us any specific instances where lenders have violated Federal banking laws so that 

we can focus our oversight efforts? As you said, the laws are there. 

It is a question of enforcing the laws. The regulators and others are 

supposed to enforce the laws. We are going to do our oversight, but 

you can help us in that regard. 

Mr. CUOMO. It would be my pleasure, Senator, but I do not believe—— 

Senator SHELBY. If you would furnish this for the record, and our 

staff would be—— 

Mr. CUOMO. It would be my pleasure. But just as a general statement, Senator Shelby, I do not believe there is an action that I 

have taken that the Federal regulators could not have taken. 

Senator SHELBY. OK. Thank you. 

Thank you, Mr. Chairman. 

Chairman DODD. Yes, Senator Tester. 

Senator TESTER. Yes, thank you, Mr. Chairman. I want to thank 

Ranking Member Shelby for his questions because I think whether 

we have to change the policy or not or whether it is ineptness in 

the bureaucracy I think are important points to make. 

I would ask you, Attorney General Cuomo, why you think that 

they did turn a blind eye to this issue of consumer protection for 

our young folks. But my guess is it would just be supposition, unless you know. 

Mr. CUOMO. Senator, it is an interesting question, and the evolution of this situation is interesting. This market has grown very 

quickly. The rate of growth on this private loan market—which has 

really been established to fill this void. The college costs went up. 

The Government student loan programs did not go up. You came 

up with a gap. Someone had to fill that gap. The private loan market expanded very rapidly to fill that, with very little specific regulation. So then the market overheated, the market competed, and 

it became a situation where everyone was being entrepreneurial, 

and they were pushing the envelope, in my opinion. And one of the 

lines I have heard over and over again is, ‘‘Well, everyone was 


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doing it.’’ So since your competition was offering a certain perk, you 

had to offer a better perk if you wanted to compete. And that fed 

on itself, and the regulators did not step in. 

In that case, it is a classic situation where an overheated private 

market without appropriate governmental regulation can abuse 

consumers, and it did. 

Senator TESTER. How did you find out about—who gave you the 

information by which you took the initiative to find out what the 

heck is going on in this marketplace? 

Mr. CUOMO. Well, you know, Senator, I wish I could come and 

say that my office was prophetic on this. Actually, the issue has 

been out there for quite some time, and there have been congressional sources that have been looking at it; other AGs have been 

looking at it. 

Senator TESTER. So it is something the bureaucracy should have 

known about and did probably know about. 

Mr. CUOMO. Oh, yes. No, there was no secret here. 

Senator TESTER. OK. I am just curious. Your best guess, the percentage of higher education, private and public, that are doing the 

revenue sharing and the perks and, you know, a lot of stuff that 

is not quite square, do you think it is all of them? 

Mr. CUOMO. On the private loan side, it is rampant, because you 

almost had to, if you were going to compete. If I am a private loan 

officer and I am offering a financial aid officer a conference in the 

Bahamas, well, then my competition is going to have to do something else. If I am offering the school 1 percent of the loan volume, 

then the competition is going to have to work against that bid. And 

that fed on itself, and it overheated, and no regulator came in and 

said, ‘‘Slow down. Let us look at the law here.’’ 

Senator TESTER. Well, I just want to make just a final comment. 

I really appreciate your work on this issue, and I appreciate your 

testimony here today to bring it to our light, and hopefully that 

will not be the last we hear about this issue, and I am sure it will 

not. Thank you, Attorney General Cuomo. 

Mr. CUOMO. Thank you, Senator, for your kindness. 

Senator TESTER. Thank you, Mr. Chairman. 

Chairman DODD. Thank you. 

Senator Allard. 

Senator ALLARD. Thank you, Mr. Chairman. 

The Federal Reserve is currently undergoing an examination of 

Regulation Z, which implements the Truth in Lending Act, and student loans fall under the Truth in Lending Act. What regulation 

do you think is necessary over and above what is provided in the 

Truth in Lending Act now? 

Mr. CUOMO. I think you could provide clarity or direction on how 

those current regulations apply to student loans: no revenue sharing, no undisclosed kickback arrangements, open competition. If 

the school is putting together a preferred lender list and you know 

the students are in a position of reliance on that list, then the essence of the word ‘‘preferred’’ means preferred by the students, not 

preferred by the school. That is what ‘‘preferred’’ means in that 

context, that the preferred list should be in the best interest of the 

students, not in the best interest of the school. 


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I do not really believe it is a question of new laws or new jurisdiction. If you wanted to clarify how those regulations pertain to 

this area, I think that would be appropriate. 

Senator ALLARD. Do you believe that this can be accomplished 

under the Fed’s existing authority? 

Mr. CUOMO. Yes, sir. 

Senator ALLARD. Or do you think there is a need for new legislation now? 

Mr. CUOMO. Well, I think because of the inaction, there is a need 

for legislation, direction. Thinking back to my days as HUD Secretary, there were a number of ways the Senate could communicate 

its desire to me. It happened in this room many times. Sometimes 

I got a law passed. Sometimes I got a letter. Sometimes I got a 

phone call. But I think the—I do not think it was a question of additional jurisdiction. Legislation that would clarify and specifically 

apply the current Federal jurisdiction to student loans either 

through the Truth in Lending Act or through the deceptive practice 

FTC jurisdiction. 

Senator ALLARD. Now, students spend a good deal of time searching out a university or college that they want to go to. Is there anything that we need to do that would give them more information 

when they are seeking out a loan other than the disclosure part 

from the university when they put them on the preferred list? Anything beyond—it seems that most of your testimony is just directed 

to the school and having them—what happens when they get it on 

a preferred list? Is there anything over and above that other than 

what is required by Truth in Lending that we could do to help the 

student be a better shopper, somewhat in the manner in which 

they are out there shopping for the university they want to go to? 

Mr. CUOMO. Senator, that is what we are working to do in my 

office. We are going down two tracks: 

No. 1, we are trying to inform high school graduates who are 

planning to attend college and their parents, educating them as to 

the maze of options they face, because as Senator Schumer said, it 

is confusing. It is confusing for me to try to understand all these 

programs and all these options. So we are undertaking an education effort for high school graduates and their families here. Here 

are your options: Stafford loan, PLUS loan, private loan. We are 

also operating a website and an information hotline where people 

can call in and say here is my situation, here is my question, and 

they can get an objective response. 

Incidentally, some schools operate an information hotline, and 

you could call a school, a financial aid office, think you are talking 

to the financial aid office, but you are actually talking to a lender 

who mans that call-in center for the school, and you would never 

know it. You wind up taking that loan because that is how the 

school financial aid officer suggested it. But I believe there is an 

education effort for high school graduates. 

The second prong, stop the scams that are misleading them. At 

the top of that list is the ‘‘preferred lender’’ list, revenue sharing, 

undisclosed kickbacks and commissions—stopping the scams which 

are now affecting them. We are trying to do both. 


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Senator ALLARD. Is it possible a diligent student today and their 

parents, is it possible for them under current law to get the total 

cost of that loan? 

Mr. CUOMO. You can put together a package of loans that can 

cover the total cost, if you are creditworthy, if you can—if you qualify for the loan, if you are willing to sign the loan. 

Senator ALLARD. My question for comparison purpose, you know, 

they can go to several lenders and say, OK, here is the loan, here 

are the fees that we request, here is the payment schedule, and you 

have three or four lenders out here. Is there enough information 

that is generally provided for students if they are diligent to be 

able to make those comparisons between three and four different 

loans, loan providers if they would go to them and ask the total 

cost of that loan? 

Mr. CUOMO. It is theoretically possible. I would argue it is practically impossible. Trying to determine what your interest rate 

would be on a private loan, you often do not get that number, the 

interest rate that you are going to pay, until you are virtually signing the agreement. So it is very hard to comparison shop where you 

can go to one website or one source and price different loans. It is 

extraordinarily hard, if not impossible. 

Senator ALLARD. I think my time has expired here, Mr. Chairman. Thank you. 

Chairman DODD. Well, thank you very much, Senator. 

Senator Casey. 

Senator CASEY. Mr. Chairman, thank you. 

Attorney General Cuomo, thank you again for your testimony. I 

wanted to direct your attention to two areas: one is the Code of 

Conduct, and the second is the question of oversight. 

I noticed in your testimony—and you had spoken to this directly 

in your written testimony—that the Code of Conduct that you entered into with these institutions covered, I guess, four or five, at 

least in terms of prohibitions: gifts, trips, the kickback issue, as 

well as the call centers. In other words, these schools agreed to do 

this, and it became, in essence, voluntary. 

The question I have for you—and I am thinking of my own experience as a State official, a State elected official, where we had a 

code of conduct in the department that I ran, the Auditor General’s 

Department, and we would actually have employees sign it, which 

kind of conveyed a sense of commitment and seriousness. In that 

instance, it was mandatory because I could make it mandatory. 

Do you think it should be kind of a case-by-case or institutionby-institution decision that they enter into an agreement with your 

office or a similar office in various States? Or do you think it 

should be somewhat made mandatory either at the State or the 

Federal level? 

Mr. CUOMO. Senator, I believe it should be mandatory. I think 

it should be a Federal directive, Federal regulation, Federal piece 

of legislation, whatever vehicle you would deem appropriate. 

We have passed a law in the State of New York that makes it 

mandatory in the State of New York. So our Code of Conduct is the 

law of the land in the State of New York. It applies to every college, every lender doing business in the State. That is one State. 


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I would argue that same law, through whatever the appropriate 

Federal vehicle, become the Federal law of the land. 

Also, Senator, we have signed up 25 schools. We have signed up 

seven of the largest lenders. In many ways, we are getting there 

anyway. It is now a function of settlements on specific actions, and 

that is how we have gotten to 25 schools. But we have the seven 

lenders; we have the top five largest lenders in the country who 

have already agreed. 

So I believe we are getting there, and the marketplace is demanding that we get there. Students are demanding that we are 

getting there. We have been trying to inform students that when 

you go to the school, ask your school, ‘‘Have you signed on to the 

Code of Conduct? And if not, why not?’’ When you go to shop a 

loan, ask the lender, ‘‘Have you agreed to the Code of Conduct? If 

not, why not?’’ 

But you can make this the law of the land. You could take this 

reform that the marketplace is already accepting. If this was impossible, Senator, we would have known about it by now. If it was 

impossible, the largest lenders in the United States would not have 

signed on to the code. Some of the largest schools in the country 

would not have signed on to the code. They are telling you they can 

do it. Since they can do it, with the appropriate Federal action it 

will become the law of the land. It hurts no one. The lenders will 

still do business. I argue that it is going to be better for the lender’s business. The students will be protected; the schools will be 

protected. 

Senator CASEY. It became the law in New York when? 

Mr. CUOMO. Several weeks back. 

Senator CASEY. OK, just this year. Have any other States done 

anything similar to this in terms of passing this law? 

Mr. CUOMO. No. 

Senator CASEY. OK. 

Mr. CUOMO. New York State passed the law. Many of these investigations have come out of New York, have been pushed by my 

office. We drafted a piece of legislation which just takes the Code 

of Conduct that the lenders are signing and schools are signing, 

takes that Code of Conduct, made it a piece of State legislation. 

That State legislation I think is very similar to the sunshine proposal, sunshine law proposal in the Congress, which would take a 

lot of the same concepts of the Code of Conduct and make it Federal law. 

Senator CASEY. My second question—and maybe more than one, 

but under the heading of oversight, you said a couple of times—and 

I wanted to make sure I got this right—that all the actions you 

took as the Attorney General of New York could have been taken 

or similar actions could have been taken by FTC, OCC, and FDIC, 

those three at least? 

Mr. CUOMO. Yes. And, Senator, as you heard, before your time 

here I was in this seat as HUD Secretary. I believe in the Federal 

Government, and I believe in the authority and the ability of the 

Federal Government. I am now a State official. I really believe this 

is better handled by the Federal Government. This should not be 

up to a State Attorney General. This should not be one State’s law 

where, if you happen to be a New York student, you are going to 


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have this level of protection, but if you are Connecticut student, 

you do not, or if you are a Pennsylvania student, you do not. 

I believe this is the place where the Federal Government can and 

should act, and I believe they already had the jurisdiction. They 

chose not to exercise it. Omission or commission. But I do not believe there is a single action I brought that the Federal regulators 

could not have brought if they were attentive. 

Senator CASEY. And in light of your experience, you know what 

being called before a Committee can do. You prepare for it. You are 

cognizant of what the oversight means to you, and I think that 

stands to reason. 

I will not ask you to comment on this. You can if you want, but 

I think one thing we should consider is bringing some of these 

agencies in front of this Committee to ask them why they were not 

taking such actions, and I think that is something the Committee 

should consider. And, of course, when and if that happens, we 

would ask you to help us prepare the questions. 

Mr. CUOMO. It would be my pleasure, Senator. 

Senator CASEY. Thank you. 

Mr. CUOMO. The world turns, Mr. Chairman. 

Chairman DODD. I was going to say, the idea of a former Cabinet 

Secretary preparing questions for other Cabinet people—— 

Mr. CUOMO. Oh, I know the tough ones, Mr. Chairman. 

[Laughter.] 

Chairman DODD. Ones we never asked you when you were in 

that chair. 

Senator SHELBY. I think he was asked a few. 

Chairman DODD. Senator Reed. 

Senator REED. Thank you, Mr. Chairman, and I want to commend you, Attorney General, for your very visionary and aggressive 

efforts in this regard. You have saved lots of families a lot of money 

that is desperately needed for college education, so thank you for 

that. 

Mr. CUOMO. Thank you, Senator. 

Senator REED. Do you think that the authority exists today to 

clearly delineate and label so that there is no confusion a Federal 

loan versus a private loan? And should that be done? Is that a first 

step? 

Mr. CUOMO. First, Senator, it is a pleasure to be before you once 

again. 

I believe the distinction between the two loans is clear. I think 

what practices are allowed under each is unclear. The revenue 

sharing we are talking about, that is not a question of a lack of 

clarity. Revenue sharing is illegal under the Federal loan program. 

I believe it is illegal under the private loan program, but that is 

a possible area of lack of clarity. 

Senator REED. So that it would be helpful, either through regulatory guidance or through legislation, to clarify that the revenue 

sharing is not permissible in the private loan field? Is that your 

view? 

Mr. CUOMO. Yes. The Department of Education proposed new 

regulations last week that would only apply to the Federal loan 

side. They say they have no jurisdiction on the private loan side. 

But all the wrongs that they are trying to right—which I would 


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argue too little, too late, but they now have at least proposed regulations—that does not apply to the private loan side. 

Senator REED. And I understand that our colleague, Senator 

Kennedy, is working on legislation that will closely parallel the 

Code of Conduct, and Senator Dodd and I and others on the Committee will be involved, we think next week, in the Higher Education Act reauthorization, the beginning of the markup. And I 

would assume that you would encourage us to include those provisions in any bill with respect to higher education. 

Mr. CUOMO. Yes, Senator. 

Senator REED. Well, thank you. Again, Attorney General, thank 

you. You have really gotten off to a very aggressive and very productive few months in office. Thank you. 

Mr. CUOMO. Senator, I told the Chairman before I came in, I said 

it is because you taught me well when I was down here, Senator. 

The 8 years I had in the Federal service, sometimes being Attorney 

General seems easy compared to what I went through in Washington. 

[Laughter.] 

Chairman DODD. Well, Mr. Attorney General, we thank you very 

much—I am sorry. I did not see you. Senator Crapo, I apologize. 

I did not see you walk in. 

Senator CRAPO. Thank you very much, Mr. Chairman, and, Mr. 

Attorney General, I appreciate having you with us. I am sorry I 

was not here for all of your testimony, but I have reviewed it, and 

one question that I had is: As you have indicated in your testimony, we have found that some lenders have been able to get on 

the preferred lender list by paying schools to put them on the list 

or somehow providing an incentive to the school to get on the list 

so that they are presented to the students. Do you have any data 

to indicate whether those institutions at that point are able to adjust the interest rates that they utilize for their loans because they 

have made it on to the preferred list? 

Mr. CUOMO. I am sorry, Senator. I may—— 

Senator CRAPO. In other words, are they able to raise, to increase 

the rates of interest that they would otherwise charge for their 

loans by having made it on to the list? 

Mr. CUOMO. Once they get on the list, do they raise their rate? 

Senator CRAPO. Yes. 

Mr. CUOMO. I am sorry. I am not following the question. 

Senator CRAPO. Well, as I understand it—— 

Mr. CUOMO. Or are the ones with the lowest rates getting on the 

list? 

Senator CRAPO. No, it is the former. The question I have is: Is 

there an ability by an institution that is able to successfully get on 

the list to then charge a higher interest rate than it had previously 

been charging for its loans? 

Mr. CUOMO. Well, Senator, it is not that you get on the list necessarily because you have the lowest interest rate. 

Senator CRAPO. Right. 

Mr. CUOMO. This is not like an open competition or a bidding 

process. Thinking about it today, it reminds me that I had conversations with the Committee about their problems with soleVerDate Nov 24 2008 04:15 Dec 05, 2009 Jkt 050319 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 E:\HR\OC\A319.XXX A319

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source contracting, and their point was you should have an open 

competition, get the lowest rate for the taxpayer. 

These are akin to sole-source contracts. You wind up on the preferred lender list because you had a relationship, because you went 

to the right conference, because you were offering revenue sharing 

to the school, because the financial aid officer has stock in your 

company. It is not that you wind up on the list because you won 

the place on the list necessarily because you offered the lowest 

rate. 

That is one of the problems with these lists. They are not encouraging open competition which would drive the interest rates down 

and get the best deals for students. To the extent there is competition, it is on perks, it is on what I call kickbacks to the schools, 

it is on personal relationships with financial aid officers, but it is 

not about offering the best interest rates to students as a rule. 

Senator CRAPO. Now, it is my understanding that you are not 

proposing that we get rid of the list. You are saying that the system by which an institution gets on a list should be more competitive and, therefore, drive the rates down in the lists that are presented to the students. 

Mr. CUOMO. Yes. I believe the school can serve the purpose that 

Senator Allard was referring to, who is going to decipher this maze 

of options and this multitude of lenders. The school could say, ‘‘We 

undertake that service. We are going to do the due diligence. We 

are going to do the research, and then we are going to recommend 

to our student population these are the three best lenders, in our 

opinion, for our school.’’ That could be a great service. It could be 

a great service—if they undertook that responsibility and if they 

did it in the best interest of the student. 

My problem is they are saying these are the preferred lenders. 

It is often not because of due diligence, because they were thinking 

about the student, because they had a competition and brought 

down the rates. It is preferred by the school in actuality, not preferred by the student, and that is deceptive, in my opinion. 

Senator CRAPO. And do you have a suggestion or an idea as to 

how we could cause that to happen? Obviously, we could pass a law 

or something. Do you think legislation is needed, or do you think 

that some other kind of incentives are needed to cause schools to 

do what you just described? 

Mr. CUOMO. That you would need to do by a regulation or clarification or advocacy of one of the agencies to propose a regulation 

that does it or legislation, if nothing else is effective, if not always 

fast. 

Senator CRAPO. Do you have any suggestions as to what students 

or families of students could do to obtain the best possible loans for 

college, private loans? 

Mr. CUOMO. We also chatted about this with Senator Allard before you came in. The education process that a family or an individual has to go through here to be an informed consumer is burdensome and tedious because this is a very, very complicated transaction. That is why 90 percent of the students tend to be taking 

a preferred lender by the school, because they look at the landscape 

and they say, ‘‘This is complicated. It is hard for me to figure out. 

I will trust my school. I believe in the school. That is why I tried 


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to get in. That is why I am paying all this money, so I will trust 

the school.’’ Ninety percent follow the recommendation of the 

school. 

So I think that could be a good vetting vehicle, but then that vehicle actually has to operate in the best interest of the student, 

which they are not doing. As a matter of fact, they are, I believe, 

taking an undisclosed commission at the expense of that student. 

Senator CRAPO. All right. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Mr. Attorney General, we thank you once again for joining us 

here. You have made some very good recommendations, and Senator Shelby and I will be talking with our colleagues here about the 

best way to proceed on this. And Senator Casey suggested—and I 

think it is an idea we will take into consideration—the idea of having actually some of the regulators come in to talk about what they 

believe they have the authority to do or not to do in this regard, 

and to examine whether or not some action could be taken. We 

have the Higher Education bill moving along in the other Committee, and my hope would be that if there is action to be taken 

by this Committee, we would try to think of doing so at least in 

conjunction with that action at some point either on the floor or 

whatever. But we need to examine this thoroughly and carefully to 

determine whether or not new authority is necessary or just getting the institutions to exercise existing authority. And I would be 

very interested to hear what my colleagues have to say about that 

at the appropriate time. 

Senator SHELBY. Senator Dodd, I just want to make an observation. The laws ought to be uniform if it is a Government loan or 

if it is a private loan. We cannot have one standard for one and 

another standard for the other. I think the Attorney General pointed that out, alluded to it several times. 

Mr. CUOMO. And, Senator, if I might, the Department of Education just put forth a regulation, which is not perfect but it could 

be improved, that applies to the Federal loans. If that same regulation was just applied to the private loans, you would have done 

these students and families a great service. 

Senator SHELBY. Yes. Thank you. 

Chairman DODD. That is what we want to look at here. Certainly, my intention would be to insist that happen. The question 

is: Can you do it under existing regulations and statutes, or does 

this Committee and the Congress need to act to give these agencies 

additional authority which they may claim they do not have? If 

that is the case, then I would aggressively pursue taking such action. If they can do it without it, then my intention would be to 

pursue them aggressively to see that they exercise the authority 

they have. But I think all of us here—I would hope all of us here 

agree that this is a very, very important area of interest. This is 

a critical component of the economic success of this country. If you 

leave the American student behind for a decade, you are going to 

leave this country behind for a century, in my view, when it comes 

to competitiveness in a global marketplace today. This is a very, 

very critical issue not just from an economic standpoint and fairness standpoint. Someone mentioned last year the number—and I 


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do not know if this is an active number—that somewhere between 

200,000 and 250,000 students who graduated from high school 

were accepted to a higher institution of learning and did not go because of cost. 

If we are losing close to a quarter of a million kids who are not 

going on because they cannot afford to go on, that is a frightening 

statistic to me, not to mention the half million to a million students 

who drop out of school every year. These numbers are startling and 

very troublesome in terms of our ability as a Nation to continue to 

compete effectively in a very competitive global marketplace, and 

the ability for students to get on and get that higher education is 

very important to them and their families. It is also important, 

very important, to us as a country. 

Mr. CUOMO. Yes. 

Chairman DODD. And so beyond just what happens to students 

and their families, as bad as that is, our country will pay an awful 

price indeed if we are pricing education out of the market for an 

awful lot of families in this country, and students. That really does 

great damage to our Nation. 

So we want to move quickly on this, and we will, to try and close 

this gap. But thank you again immensely for your leadership. 

Mr. CUOMO. Well stated. My pleasure, Mr. Chairman. Thank 

you. 

Chairman DODD. Thank you very much. 

We will go now to our second panel here, and I thank them for 

their patience. I am going to call you up and ask you to take the 

witness stand, if you will, and we will move along as quickly as we 

can. I will get back to my list of witnesses here 

[Pause.] 

Chairman DODD. Well, again, you have already joined us here. 

Well, thank you very much. You are all very quick here getting up 

to the chairs. 

Jonathan Avidan works in Newtown, Pennsylvania, for Calle Financial Network, an investment advisory business, is Director of 

Operations. He is a registered representative with NASD, attended 

Boston University School of Management with a B.A. in Science in 

2004. 

Luke Swarthout works as a higher education associate with U.S. 

PIRG on higher education access and affordability issues. He is the 

author of several reports on student debt and financial aid, including ‘‘Paying Back, Not Giving Back: Students’ Debt Negative Impact on Public Service Career Opportunities.’’ 

Jennifer Pae is the elected president of the United States Student Association, the country’s oldest and largest national student 

association, representing millions of students nationwide. Ms. Pae 

oversees the national campaign for the organization and recently 

ended her term as the primary student negotiator for the Department of Education’s Negotiated Rulemaking Student Loan Committee. Thank you, Ms. Pae, for being with us. 

Sevester Bell is the Director of Student Financial Aid at Howard 

University. Mr. Bell began his career in banking and finance as assistant manager of Household Finance Corporation after serving 4 

years in the United States Marine Corps. He began his Howard 

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sity’s Office of the Bursar and has served in various roles in student aid administration until January of 2005, when he was appointed Director of Student Financial Services, and we thank you 

very much, Mr. Bell. 

Peter Tarr joined First Marblehead as general counsel in 2005, 

elected Chairman of the Board of Directors in October of 2005. 

From 1986 to 2005 he was the senior partner in the Corporate Law 

Department and member of the Executive Committee of the law 

firm of Wilmer, Cutler, Pickering, Hale & Dorr. He received his 

B.A. from Yale, M.A. from Yale Divinity School, and J.D. from the 

University of Virginia, and we thank you very much for being with 

us. 

Tracy Grooms is the Senior Vice President of Student Lending at 

Bank of America. Ms. Grooms joined Student Lending in March of 

2006 and leads aspects of the business, including credit loan organization and student call center capability. Tracy Grooms joined 

the Bank of America in 1983 as a financial analyst and has held 

a variety of positions in the finance group, including planning and 

financial reporting. A graduate of the University of South Carolina, 

Tracy has a degree in accounting and holds an MBA from the 

McColl School at Queens University in Charlotte. 

And, last, Barry Goulding has been a Senior Vice President and 

Sales Manager at SLM Corporation since May of 2001, where he 

manages the company’s internal lending brands, education loan 

product management, including private credit loans, online school 

solutions, and sales reporting. From 1994 to 1999, Mr. Goulding 

served as Vice President of Education Loan Product Management. 

He was promoted to Assistant Vice President in 1984. He has his 

B.S. degree from Carnegie Mellon University. 

We thank all of you. A rather long list here, and I apologize for 

packing you in this tightly along the way. I am going to ask each 

of you to keep your remarks to 5 minutes, if you would, and then 

we will submit your full testimony as part of the record and any 

supporting documents you think are worthwhile. 

Let us begin in the order that I introduced you. 

STATEMENT OF JONATHAN AVIDAN, CONSUMER 

Mr. AVIDAN. Chairman Dodd, Ranking Member Shelby, thank 

you for the opportunity to appear here today to discuss private student loan lenders. 

My name is Jonathan Avidan. I am 25 years old, recently married and living in Langhorne, Pennsylvania. I attended Boston University and graduated in 2004 with a bachelor’s degree in business 

Administration. I work for Calle Financial Network, an investment 

advisory business, as its Director of Operations. 

My parents, like the majority of middle-class Americans, struggled with the enormous challenge of spiraling college costs during 

my first 2 years at Boston University. Prior to my junior year, they 

told me they could not afford to pay my tuition anymore. I was 

faced with a grim choice: go home and enroll in my local community college, or stay at Boston University. I wish I knew at the time 

that the choice to stay would be the most expensive decision of my 

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I was able to borrow $18,000 of Government loans at a fixed 3 

percent, but this only covered a fraction of school costs. I would be 

forced to find the vast majority of funds through private loans— 

over $60,000 for the remaining 2 years. I have been making payments every month for the past 2 years, but the balance has managed to increase to $69,000. 

I was told up front that the original 6.36 percent variable interest rate was capped at 10 percent and that it was tied to the prime 

rate. How many 20-year-olds really know what that means? The 

truth was the variable rate was not capped. In fact, the rate was 

the current LIBOR rate plus a margin of 4.85 percent. The 4.85 

percent was derived, at the time, from my parent’s credit score and 

our combined creditworthiness. I cannot believe that the original 

terms of the promissory notes could not be reevaluated after 5 

years. Then I was 20 years old and I had no credit history or income. Now I am 25, with a flawless credit history and a credit 

score of over 720 points. I deserve a better margin now than I did 

5 years ago. Currently the rate is 9.92 percent. 

Right now, despite generous and timely raises and my wife’s income, we are hard pressed to keep up with the combination of rate 

increases and graduated payments. My private student loan payments, $250 when I first graduated, have gone up over 200 percent 

in the last 24 months. Currently, I am paying $600 a month. By 

April 2009, my payment will be approximately $1000 a month. I 

will not begin to reduce the principal for another 2 years, and my 

expected payoff date is November 2024. When it is all over and I 

have paid off all my debt to these lenders, I will have paid back 

close to triple the amount that I borrowed. 

As a new borrower, I purchased a used car for $18,000 at 10.1 

percent interest over 6 years. I find it rather remarkable that the 

rates on my private loans would come so close to the percentage 

rate on my used car. Surely, I am a better risk than a 4-year-old 

sedan. 

Ultimately, my life is completely affected by my private student 

loans. Instead of renting a one-bedroom apartment, my wife and I 

could be taking a mortgage on a house. Instead of decades of interest, I could be contributing to an IRA or putting money away in 

a 529 Plan for my children. Instead of being forced to work right 

out of school so I could afford to pay my private loans, I could have 

pursued a graduate degree at Wharton, a lifelong dream of mine. 

Our country is supposed to be a country of opportunity for anyone that has a dream. In the world we live in today, receiving an 

undergraduate degree is increasingly a prerequisite for success. By 

allowing these companies to voraciously apply wide margins to the 

money they lend, we risk crippling a generation with massive debt. 

These companies have taken advantage of an unregulated market 

and young Americans who want to better themselves through higher education. 

Young men and women graduating from colleges around the Nation are supposed to strengthen the economy once they enter the 

workforce. But how are we supposed to help the economy when we 

are struggling to help ourselves? I know that I am only one voice 

and one story, but I am sure all of you know that it is young people 


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like myself that are the future of this country and it is only getting 

worse. 

So, again, I would like to thank both of you for having me here. 

Thank you. 

Chairman DODD. Thank you very much. 

Ms. Pae. 

STATEMENT OF JENNIFER PAE, PRESIDENT, UNITED STATES 

STUDENT ASSOCIATION 

Ms. PAE. Thank you, Mr. Chairman and Senator Shelby, for allowing me to be here today. 

As stated earlier, private student loans are the fastest-growing 

and most profitable part of the student loan industry. Ten years 

ago, only 5 percent of total education loan volume was in private 

loans. Today they represent 20 percent of what all students and 

their families borrow to pay for school. With the rising cost of tuition and fees and the lack of sufficient Federal and State grant aid 

for low- to middle-income students and families, the private loan 

industry has grown exponentially off the backs of those who are the 

most vulnerable. 

Private loans have higher interest rates, fewer borrower benefits, 

and often saddle students with larger debt levels than Federal 

loans. Nearly two-thirds of the 15 million college students graduate 

in debt that averages nearly $20,000. This number is only expected 

to increase without Congress taking action to protect student borrowers from unmanageable levels of debt. 

Students are continually inundated with solicitations from lenders through direct mail, the Internet, and savvy advertising campaigns promising to guarantee up to $50,000 in just seconds. From 

letters that are made to look like official documents from the Federal Government or the Department of Education to co-branded 

loans with colleges and universities, most borrowers cannot distinguish differences between loans that are helpful and those that are 

harmful. 

Not only are students faced with skyrocketing tuition and fees, 

but they are graduating with high levels of debt that force them 

to put off starting a family, buying a home, pursuing careers in 

public service, and even furthering their education. Paul Perry 

graduated last month with a degree in political science and international studies from American University and also with a bill for 

over $75,000—$45,000 of which are private loans. Paul will be giving back to a community in need through Teach for America this 

fall and unfortunately, like millions of other borrowers, has no idea 

how he will repay such massive debt. Regardless of economic backgrounds, from low-income working class families to middle-income 

families, students are being forced to rely on private loans to fill 

the gap between available Federal aid and the cost of attending college. 

For all of these families, especially first-generation college students like myself, a college degree is the best shot at future economic security and achieving the American dream. Yet college is 

quickly becoming out of reach for millions of students. Instead of 

America stepping up to the challenge to vie in a highly competitive 

global economy, we are retreating by failing to invest in higher 


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education and providing adequate protections from the private student loan industry. Every qualified student should be able to access 

higher education regardless of their economic status. With student 

loan debt spiraling out of control and the compromised integrity of 

both the Federal and private student loan industry, the need for 

congressional action is more apparent than ever before. 

Last fall, we filed a complaint with the Federal Trade Commission against Loan to Learn, a division of EduCap, based on their 

distribution of misleading information relating to Federal student 

loans. Materials provided by Loan to Learn to potential customers 

made numerous deceptive claims designed to discourage customers 

from applying for Federal aid and to make the company’s loans appear to be a preferable alternative. 

This case highlights an alarming industry practice of tricking 

borrowers into higher-cost private loans before exhausting their 

safer and lower-cost Federal student aid options. 

Under current law, borrowers who have fallen victim to these deceptive practices have no real legal recourse because it is extremely 

difficult for a borrower to file a claim against a private lender. Policymakers need to regulate the industry to hold lenders accountable for deceptive marketing and lending practices. 

The focus should really be to reduce the need to rely on private 

loans, ensure that private loan borrowing that does occur is affordable, and mandate that clear and accurate information is presented 

to student borrowers to allow them to make responsible educational 

financing decisions. We also urge Congress to adopt legislative solutions proposed by The Project on Student Debt. These solutions 

include: treat private student loans like other consumer debt in 

bankruptcy so there is a safety net for vulnerable borrowers buried 

in private student loan debt; clearly label private student loans as 

different from Federal loans so students understand their options 

before making crucial financial decisions; make it easier to compare 

private student loans and require private lenders to disclose in 

plain English the rates, terms, and conditions of private loans 

when the student or parent receives approval; and to protect borrowers who are harmed by conflicts of interest or fraud so that students are not caught in a cycle of debt due to deceptive practices 

by lenders or schools. 

In conclusion, we urge Congress to pass legislation that regulates 

the growing private loan industry in order to protect the rights of 

current and future borrowers. The door of higher education is closing for millions of Americans under the weight of high-cost private 

loans due to inadequate Federal financial aid. Economic insecurity 

is replacing economic opportunity for hard-working college graduates who are confronting spiraling debt. By enacting reforms in 

the private student loan industry, we are taking a step toward 

opening these doors of opportunity. 

Thank you again, and we look forward to working with you to 

be able to address these problems. 

Chairman DODD. Thank you very much, Ms. Pae. 

Mr. Tarr. 


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STATEMENT OF PETER B. TARR, GENERAL COUNSEL, 

FIRST MARBLEHEAD CORPORATION 

Mr. TARR. On behalf of First Marblehead, I thank Chairman 

Dodd, Ranking Member Shelby, and the Committee for inviting us 

here to discuss this very important issue. 

First Marblehead provides outsourcing services for private, nongovernmental education lending in the United States. Founded in 

1991, First Marblehead today employs more than 1,000 people 

working primarily in the Boston area. 

First Marblehead helps meet the growing demand for private 

education loans by providing financial institutions with an integrated suite of private loan services—from program design—— 

Chairman DODD. Come a little closer to the microphone. 

Mr. TARR. I am sorry. From program design through application 

processing. Over the past 16 years, we have helped our lender clients deliver more than 1 million loans, and in the process we have 

assisted more than 600,000 students in the pursuit of their educational goals. 

As we have heard this morning, the annual funding gap between 

the cost of education and traditional funding sources such as Federal student loans, scholarships, and grants continues to widen, 

and today we estimate that gap at traditional 2- and 4-year public 

and private institutions to be $122 billion. 

To address this huge funding gap and to meet the growing demand for long-term, supplemental financing for education, First 

Marblehead and other reputable companies have over the past 16 

years created innovative products that provide reasonable, marketbased pricing and attractive features for borrowers. In the upcoming academic year, we estimate the total private education loan 

market will exceed $20 billion. Today, private loan providers are 

competing vigorously on the basis of price, product features, customer service, and borrower benefits. The result is better choices 

for students and their families seeking financing options that work 

best for their circumstances. 

Private education loans are funded by financial institutions and 

are not guaranteed against default by the Federal Government. 

Many private education loans have features similar to federally 

guaranteed student loans, including no prepayment penalties, inschool payment deferment, and forbearance. Many programs also 

offer borrower rewards for on-time and electronic payment, as in 

the Federal programs. 

Because they are not federally guaranteed, the risk of default on 

private education loans is borne by the lender or loan holder. This 

most fundamental difference is a key limiting factor as to who 

might actually qualify for a private student loan. Private loan borrowers must typically qualify for the loan by meeting certain credit 

criteria. Not all applicants for private loans are approved for the 

loans. Approximately one-half of the applicants for First Marblehead-facilitated private loans are declined due to insufficient credit. 

In fact, few if any undergraduates can meet our strict underwriting 

criteria on their own, so they enlist their parents or another experienced borrower to co-sign the loan. As a result, the ‘‘typical’’ private 

loan borrower in the programs we administer is an undergraduate 

student with a 50-year-old parental co-signer with an average 


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FICO score in excess of 700. Approximately 80 percent of the loans 

we process are co-signed. The remainder are generally to older students or non-traditional students—who have the requisite credit 

history. 

The interest rates on First Marblehead-facilitated private loans 

are determined by a borrower’s credit quality. Again, because of the 

absence of a Federal guarantee, rates are typically higher than 

those on Federal loans. For private loan products facilitated by 

First Marblehead, interest rates are based on the London Interbank Borrowing Rate—an internationally recognized money rate 

index. Also, many private loans include an origination or guarantee 

fee which provides a reserve against potential loan default. While 

these may result in higher rates than Federal student loans, these 

rates are in most cases better than those offered on credit cards or 

other unsecured debt, which are frequently utilized by students to 

pay some portion of education expenses. 

Private education loans are offered by providers through two distinct channels. Historically, most private loans have been originated via the school financial aid office, similar to how Stafford 

loans are administered. An increasing percentage of private loans 

are originated directly between the borrower—typically a student 

and an adult cosigner—and the loan provider. The growing range 

of product types, features, and providers allows borrowers to choose 

private loan products and providers based upon their own personal 

preferences and selection criteria. 

Postsecondary education is a large and highly impactful investment for students and families. With the cost of college continuing 

to rise at a rate far exceeding inflation, it is critical that students 

make sound financial decisions in determining how to pay for college. No one benefits—not the student, the school, the lender, nor 

First Marblehead—when a borrower struggles to repay their private education loan. To foster smart borrowing, First Marblehead 

initiated a borrower information program in mid-2006 to encourage 

students and families to carefully consider the full range of opportunities available to them. 

Our industry is heavily regulated, and I have listed in my prepared remarks the agencies that we are subject to. We are also governed by Truth in Lending, Equal Opportunity Employment, and 

Title IV Gramm-Leach-Bliley. 

In closing, First Marblehead thanks the Committee and Chairman Dodd for the invitation to testify today. The employees of First 

Marblehead are deeply committed to working with our lender clients to provide attractive, high-value financial solutions for students and families pursuing their educational goals. We firmly support product innovation and the objective of making the process of 

financing higher education more efficient, transparent, and understandable for students and families. 

Thank you. 

Chairman DODD. Thank you very much, Mr. Tarr. 

Ms. Grooms. 


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STATEMENT OF TRACY GROOMS, SENIOR VICE PRESIDENT, 

BANK OF AMERICA 

Ms. GROOMS. Good morning, Chairman Dodd, Ranking Member 

Shelby, and staff of the Committee. My name is Tracy Grooms. I 

am Senior Vice President and Student Lending Executive for Bank 

of America. 

Bank of America plays an important role in education lending. 

In 2006, our student lending business made it possible for over 

630,000 students to attend schools by originating approximately 

$4.6 billion in education loans. We originate loans that are federally backed through the Federal Family Education Loan Program— 

called FFELP loans—and we originate private education loans, 

which are not federally backed. 

The bank is optimistic about growth prospects in the student 

lending industry, and private lending in particular. The number of 

people choosing higher education continues to grow. The cost of 

higher education also continues to grow, and the availability of 

grants and lower-cost direct Government or FFELP loans has not 

kept pace. 

Consider, for example, that the average annual cost to attend a 4-year public college is almost $13,000, while the maximum 

amount per year of a Government-backed loan is only $5,500. As 

a result, Americans are filling this gap with private education 

loans. Such trends have led Members of this Committee to express 

concern about rising levels of student debt. 

We believe individual students’ debt levels should be manageable 

for two reasons. First, the bank’s overall business objective is to 

serve customers throughout the major financial events in their 

lives—buying that first home, saving for retirement, and, yes, saving and providing for children’s education. Second, industry participants are vigilant in managing credit losses resulting from student 

loans, as defaults impact the overall customer experience and margins. Accordingly, we seek to ensure consumers receive loans in 

amounts and with terms they can afford. 

The private education loan market has produced affordable products with flexible terms. Today, for example, students can get unsecured private education loans that: defer all payments until the 

student is out of school and has an opportunity to obtain employment; may be repaid over periods as long as 25 years; and include 

fair interest rates. 

As part of our marketing, we make students and their parents 

aware of all available options for education financing, including 

grants, lower-interest Government-backed loans, and private education loans. 

In sum, the private education loan market serves an important 

consumer need, with Bank of America and lenders competing to 

provide affordable products in appropriate amounts. 

In the remaining time I have, I would like to address briefly 

sales practices. At Bank of America, one of our core values is 

‘‘Doing the right thing.’’ Consistent with that value, we have several longstanding policies that prohibit associates from making improper payments of any kind to schools, guarantors, or customers. 

As a result, Bank of America has not provided lavish trips or gifts 

to financial aid officers; Bank of America has not used ‘‘advisory 


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boards’’ of school representatives; Bank of America has not given 

stock to financial aid officers; and Bank of America has not provided staff to operate call centers on behalf of schools or provided 

computer hardware or software to schools. 

Finally, we voluntarily chose to adopt the New York Attorney 

General’s Student Loan Code of Conduct as a way of leading by example, encouraging others in the industry to follow. We will continue to operate our business according to the highest business and 

ethical standards. We are proud to be part of the student lending 

industry. At a time of rising education costs, diminishing grants, 

and federally backed financing, private education loans remain a 

good alternative for students and their families. 

Thank you for your time, and I am pleased to answer any questions. 

Chairman DODD. Thank you, Ms. Grooms. 

Mr. Goulding. 

STATEMENT OF BARRY W. GOULDING, SENIOR VICE 

PRESIDENT, SALLIE MAE 

Mr. GOULDING. Chairman Dodd, Ranking Member Shelby, on behalf of Sallie Mae’s 12,000 employees, thank you for giving us the 

opportunity to describe how we are helping millions of students 

and families pay for one of the most significant investments of a 

lifetime—a college education. 

We all know that the dramatic rise in college cost has outpaced 

the growth in Federal grants, Federal loans, family savings, and 

family incomes. Students and families face an increasing gap between the price tag for college and available resources. As a result, 

many families have been forced to seek out other ways to finance 

college, including private education loans. As has been discussed 

this morning, private education loans are regulated, yet we understand that the growth in the private education loan market raises 

important consumer and policy questions. 

Consumers, schools, lenders, and policymakers all share a common interest in making sure that students have access to college, 

complete their academic programs, and successfully transition to 

the workplace. In an effort to do our part, Sallie Mae advises students to minimize their total borrowing by tapping into whatever 

existing resources they have, whether it is personal savings or a 

529 plan. Our Upromise subsidiary manages over $17 billion in 529 

college savings plans and assists more than 7.5 million members. 

We counsel students on the 1–2–3 Approach to paying for college. 

One, after exhausting personal financial resources, a student 

should tap into free money, such as scholarships and grants. Two, 

if borrowing is necessary after tapping into free money, students 

should take advantage of low-cost Federal loans. Three, and only 

as a last resort, to enable access to college students, students 

should turn to private education loans or other consumer lending 

alternatives. 

Additionally, students should understand how their loans work 

before they undertake any debt. We provide information to students about the rates and terms on their loans before, during, and 

after they are in college. And when it comes time to pay back loans, 


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borrowers must have access to programs to help them manage 

their debt. 

The financing gap, driven by rising college costs, is what has 

driven the growth in private education loans. To put this in perspective, in academic year 2005–06, Sallie Mae originated approximately $22 billion in Federal and private loans, including $7 billion 

in private education loans. In fact, even though Howard University 

is a direct lending school, Howard borrowers utilized over $10 million of Signature Student loans, which are Sallie Mae’s private education loans, to help them close that gap. We designed our private 

education loan programs to mirror Federal student loan programs 

in many respects. 

Since many students have little or no income while they are in 

school, we do not require our borrowers to pass an income or a 

debt-to-income test. Like Federal student loans, private student 

loan borrowers can delay making any payments until 6 months 

after they complete their studies. While we have been successful in 

mirroring many of the characteristics of the Guaranteed Student 

Loan Program, we cannot mirror Federal rates and fees. Without 

Federal insurance, lenders appropriately price private education 

loans using a risk-based model. 

The bottom line is that lenders take 100 percent of the repayment risk on loans made to people with no income, limited credit 

histories, and to people who will not begin to even repay their 

loans for several years. At Sallie Mae, we believe that private education loans are an investment in human capital. Fortunately, the 

overwhelming majority of our customers are successfully managing 

their private education loan debt, and the median interest rate 

across our entire $25 billion in private education loans is prime 

plus 2. 

As the demand for these products has grown in recent years, we 

have introduced several new enhancements. We expanded our disclosures to strongly encourage potential borrowers to max out on 

their Federal student loans before taking out any private loans. We 

believe that the 1–2–3 Approach that I mentioned is working. At 

Sallie Mae, 85 percent of our customers only have FFELP loans, 

and I did bring a sample of some of these disclosures that I would 

request be included in the record. 

We created additional safeguards to prevent borrowers from inadvertently borrowing more than the cost of attendance. We reduced our maximum private loan interest spread and fees. We introduced a private loan consolidation program to help borrowers 

lower their monthly payments, and over 75 percent of those who 

have used this program to date have not only lowered their monthly payments, they have also lowered their interest rates. 

We have launched an online education program to provide counseling tools to help borrowers understand debt before they ever 

take out a loan and to manage their debt and to protect their credit 

score. 

In summary, Mr. Chairman, access to private education loans is 

increasingly important and can make the difference as to whether 

or not a student goes to college. At Sallie Mae, we will continue to 

make constructive enhancements, and we look forward to working 

with Congress on this important issue. 


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Chairman DODD. Thank you very much. 

Mr. Bell, thank you for being here. 

STATEMENT OF SEVESTER BELL, DIRECTOR OF STUDENT 

FINANCIAL AID, HOWARD UNIVERSITY 

Mr. BELL. Chairman Dodd, Ranking Member Shelby, on behalf 

of Howard University, I would like to thank you for the invitation 

to testify during this most important hearing on the student loan 

industry. 

As a participant in the U.S. Department of Education’s William 

D. Ford Direct Lending Program, Howard University does not accept Federal Stafford loans processed by private lenders. Since the 

university moved to direct lending in 1997, it has eliminated the 

need for Howard students’ utilization of private lenders as it relates to servicing Federal student loans. 

As a result, the university’s cohort default rate was reduced from 

a high of 11.7 to its fiscal year 2005 draft cohort default rate of 3.2 

percent. For fiscal year 2006, Howard University students and parents borrowed nearly $110 million in Federal direct Stafford and 

PLUS loans, and almost $18 million in non-Federal Stafford loans 

from private lenders. Private loans constituted only 13.8 percent of 

all student loans at Howard University in fiscal year 2006. 

Howard University remains steadfast in ensuring full compliance 

with Federal student aid regulations. In response to New York 

State Attorney General Andrew Cuomo’s initial inquiries into the 

private lending industry and its relationships with other institutions, Howard University immediately clarified its existing policy 

on private lenders. The university’s policy on private lenders includes the prohibition of a preferred lender list and restricts financial aid officer contact with private lenders to only that which is 

necessary to facilitate student loan certifications. 

Financial aid officers are restricted from sitting on private lender 

boards and committees, receiving gifts from private lenders, and 

must disclose any financial interest in private lenders or guaranty 

agencies. In addition, all financial aid staff members have signed 

statements on file attesting to their full compliance with university’s policy. 

Previously, comparative charts detailing private lending interest 

rates and loan criteria were provided only upon request to students. Howard University does not provide nor recommend private 

student loans to those students eligible to receive Federal student 

loans. However, upon inquiry, students who may not be eligible for 

Federal student loans are instructed to conduct their own search 

of private student loans which should include comparing loan interest rates, repayment terms, deferment and forbearance options, 

and other loan criteria. 

The growth and development of the private educational loan industry has increased over the past 4 consecutive years despite efforts to decrease our students’ overall indebtedness. Howard University has continued to experience significant growth in the volume of alternative loans processed, from $8 million in 2003 to nearly $18 million in 2006. 

The popularity in and need for alternative loans are centered on 

four principal reasons. First, students who have reached their full 


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eligibility for Federal student loans must borrow through an alternative lender to secure funding each year. Second, students who 

have lost their Federal aid eligibility due to Satisfactory Academic 

Progress requirements may borrow funds through select alternative 

lenders who do not consider academic progress as a criterion for determining eligibility. The third reason relates to students enrolled 

in select graduate and professional programs, such as medicine, 

dentistry, and pharmacy, where students require additional funds 

to offset their direct and indirect expenses, as their cost-of-attendance exceeds the maximum annual loan limits offered through the 

Federal programs. Last, doctoral candidates in the final stages of 

their dissertation may be enrolled less than half-time; they also 

would not be eligible considering their half-time status. 

In conclusion, Howard University continues to encourage its students to first utilize and exhaust all Federal loan sources prior to 

seeking alternative loans. Nevertheless, in many cases this advice 

does not deter them from entering contractual agreements within 

the private loan industry as they present a viable, if not the only, 

resource for students to fund their education. 

Chairman DODD. Thank you very much, Mr. Bell. 

Mr. Swarthout. 

STATEMENT OF LUKE SWARTHOUT, HIGHER EDUCATION ADVOCATE, UNITED STATES PUBLIC INTEREST RESEARCH 

GROUP 

Mr. SWARTHOUT. Chairman Dodd, Ranking Member Shelby, 

thank you very much for convening the hearing. My name is Luke 

Swarthout. I am the Higher Education Advocate for the U.S. Public 

Interest Research Group. We are a national network of nonpartisan, nonprofit organizations in 30 States and working on 100 

campuses. I would like to just briefly summarize my written statement, and you can mix it into my written testimony below. 

I think what we have seen over the last couple of years is that 

private student loan borrowing has expanded well beyond current 

regulations. In the wake of the student loan scandals detailed by 

Attorney General Cuomo, the subprime mortgage crisis, and certainly just families concerned about college affordability, it is clear 

that Congress needs to act. 

Now, Congress has long treated students loans differently than 

other types of debt because they are more socially valuable. When 

a borrower invests in their education, they are making an investment not only in their own well-being but also in the social, economic, and political health of our country. Your decision to pursue 

the private loan industry and what oversight this Committee has 

jurisdiction on is well within the 50-year track record of this Congress in helping students finance their education. 

Now, private loans are utilized by a subset of student borrowers. 

It has not been said here today, but about 5 percent of undergraduates borrow a student loan. Because these loans tend to be larger, 

they comprised about 20 percent of the overall loan volume last 

year. Interest rates on these loans are determined by the credit of 

the student or their parent. They can range from prime to prime 

plus 12, which is 8 percent at current market rates, anywhere up 

to 12 percent. 


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Now, there are a couple of reasons to be really concerned about 

the growth in the private loan industry, and one of them was actually identified by Chairman Dodd in his opening statement, which 

is that students are already facing a serious debt burden paying for 

college and taking out student loans, and private loans and increased reliance on private loans works counter to the very financial aid system that this Congress has built up. 

We try and target the greatest aid to the students with greatest 

need in our loan programs and in our aid programs. But turning 

students over to the private loan market actually does the exact opposite. It asks students with the least, who have the greatest need, 

to pay the highest interest rates and to suffer the worst terms. 

The second major problem and one that, Senator Shelby, you 

identified clearly in some of your questioning is that there is a lack 

of clear consumer information for borrowers out there, and I think 

there is a real need—and I will talk about it in some recommendations—to expand on the Truth in Lending Act. But we see a significant percentage of borrowers every year take out private loans 

when they have not maxed out on their Federal loans. 

Now, that shows, at best, that some students are clearly misinformed, but at worst, it is the product of misleading and manipulative schemes by private lenders seeking to grow their private 

loan portfolios that are more profitable at the expense of students. 

For a student who does manage to survey all the options and still 

decides to take a private loan, it is almost impossible to compare 

offers between lenders. Most students do not even see the rate they 

are going to receive until they are signing the promissory note. 

Lenders use other practices such as co-branding to further confuse 

students and shield them from the harsh reality of their loan 

terms. 

Exacerbating this problem and worth mentioning is the 2005 

bankruptcy law that treats student loans worse than almost any 

other type of consumer debt. This bankruptcy change, which makes 

it almost impossible to discharge student loans, has helped grow 

the student loan industry at the expense of students. 

I would like to make a couple of concrete recommendations for 

this Committee and this Congress to take action on student loans: 

first, per our previous discussion, provide students with clear information about student loan terms; mandate that lenders provide 

students with an APR before the time that they are taking out 

the—before the time that they are signing the promissory note; 

provide students with a cooling-off period at the beginning of every 

semester where students can return their loans at no cost to the 

student, similar to what we have in Federal loan programs. 

We should mandate that schools clearly distinguish between Federal loans and private loans. As mentioned earlier by Senator Reed, 

this is a confusion to some students. We should ban co-branding 

practices detailed by Attorney General Cuomo where banks use the 

logo and the name of the school to try and make their product seem 

more appealing. 

We should treat borrowers more fairly in bankruptcy. Students 

investing in their education should be supported in that effort, and 

we ought to have laws that show that support. We should treat stuVerDate Nov 24 2008 04:15 Dec 05, 2009 Jkt 050319 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 E:\HR\OC\A319.XXX A319

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dents in bankruptcy more favorably than other consumers, not less, 

as we do now. 

And, fourth, provide students with anti-fraud protection. We 

should expand the FTC holder rule to apply to all loans and all 

schools so that when lenders and schools engage in relationships, 

students can hold them accountable and have recourse. 

Again, thank you so much for holding this hearing. I look forward to any questions. 

Chairman DODD. Well, thank you very, very much. You have all 

given testimony, and I appreciate your being timely in your responses to the 5-minute rule here. 

Senator Shelby and I have a recorded vote on. I think there is 

at least one, maybe—— 

Senator SHELBY. Two votes. 

Chairman DODD. Two votes. So what I am going to do is we will 

go into recess here for a few minutes. Let us go cast our votes and 

then come back. 

Senator SHELBY. May I make an observation? 

Chairman DODD. Yes, you certainly may. 

Senator SHELBY. Because I do not know if I will get back because 

it is noon and we have other commitments. 

Mr. Chairman, this is a distinguished panel, and it is broad in 

scope, and I think we have learned a lot. 

Ms. Grooms, I was interested in your testimony because you represent one of the largest banks in the world, probably the largest 

bank in the U.S. by deposits. And what you said is that your bank 

did not have this policy of conflicts and all of this stuff, and I commend you for that. I think that is good. I think that is a policy we 

have got to pursue. 

Mr. Chairman, I might have some comments and questions for 

the record, if you would leave the record open. 

Chairman DODD. We will do that, certainly, and for other Members. 

Senator SHELBY. We have a lot of colleagues that are on other 

committees that would—and we know this is a very important subject. 

Chairman DODD. I will be back, and others may come back as 

well after the votes, but I apologize for having you wait around a 

little longer to proceed. But I have some questions I want to raise 

with you as well and give you a chance to comment on them before 

we complete the hearing. So, with your forbearance, we will come 

back as quickly as we can. Thank you for your testimony. 

The Committee will stand in recess. 

[Recess.] 

Chairman DODD. Well, thank you all for coming back. I want to 

apologize. There were two votes that went on a little longer than 

I anticipated. So I appreciate the patience of the panel in coming 

back together on this. 

Let me take a few minutes. What I am going to also do, because 

of time constraints, we will leave the record open—I may have 

mentioned this before the recess here—and submit questions or 

allow questions to be submitted by other members of the Committee as well, beforehand. 


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Let me, if I can, I was going to jump to some general questions 

here, particularly regarding—well, first of all let me ask you, because several of you mentioned this and I would like to get a sense 

on the panel, particularly from the lenders here. I think you may 

have all said this. But if you haven’t not, let me clarify for the 

record. And that is that you seek to ensure, I understand, that students that come through your program, that they take the free 

money first, the cheap money second, and then if you will, they 

turn to the private loan alternative. 

Can I get a recognition? That is your recommendation? I see Mr. 

Tarr says yes. Ms. Grooms. 

Ms. GROOMS. Yes. 

Chairman DODD. Mr. Goulding. 

Mr. GOULDING. Yes. 

Chairman DODD. That is what you advise? How do you deal with 

this? Do you each deal with it differently in some way? What is the 

policy? Do you have a written policy on this? 

Mr. TARR. What we do—— 

Chairman DODD. Watch that microphone again, Mr. Tarr. I 

apologize. 

Mr. TARR. What we do, Senator, is in our marketing literature 

we include a specific paragraph advising prospective borrowers to 

consider all alternatives before private loans. In addition, when 

prospective borrowers call into our call centers, our telephone operators are advised, either through scripts or prior education, to encourage the prospective borrower to look at alternatives which 

would be less expensive sources of funds. 

Chairman DODD. And that is part of your recommendations that 

go to your financial aid officers and so forth? 

Mr. TARR. Yes. 

Chairman DODD. How about you, Ms. Grooms? 

Ms. GROOMS. Yes, Senator. I would say that it is more of a philosophy than it is a policy. And so that philosophy of informing students and parents of all of their options, to paraphrase you, of the 

free and cheap money first. We do that, whether it is through our 

call centers, through marketing materials such as the student loan 

guide. We also have a partnership with the Monster organization 

that will provide seminars within high schools and then an online 

tool that walks a family and a student through each sequence, each 

step in the sequence, to ensure that they are considering those 

cheaper options first and use the private loans only to fill the gap. 

Chairman DODD. Is there any kind of a directive here at all? You 

say the philosophy. Now you have got people obviously handling 

these phone centers. Do they have in front of them some guidance 

sheets? Or is there a training period? Or is there counseling so how 

they handle the calls coming in so that part of that job they have 

initiating that conversation or beginning it they say to them words 

to that effect or advise them to that effect? Or is it just sort of an 

overall—I am not clear what you meant by the—— 

Ms. GROOMS. Thank you, Senator, for allowing me to clarify. 

When I say that it is a philosophy, I intended that to mean that 

it pervades every aspect of our business. So specifically to your 

question are our client service reps trained to ensure have you 


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completed your FAFSA? That is one of the questions that they will 

ask the family. 

Are you aware of all of your sources? Have you taken advantage 

of those sources? 

And again, we offer the marketing tools. And we also ensure on 

our website that we provide the student loan guide, the Making 

College Financial Planning Count. Again, that is the step-by-step 

plan that students and families can build. 

And it may seem like a small detail, but on that website we even 

list and start with the Federal loans first, to again help ensure that 

the students, that is what they see first, that they are considering 

those options. 

Chairman DODD. How about you, Mr. Goulding? 

Mr. GOULDING. Yes, Senator. As I mentioned in my oral remarks, 

I did bring—— 

Chairman DODD. I heard you say that. 

Mr. GOULDING. This is an example. This says the Financing College Guide, featuring Sallie Mae’s 1–2–3 Approach to Paying for 

College. And it is laid out in detail here. 

Other examples are on the website, under a tab planning for college, it has the 1–2–3 approach. But even on a website that you 

get to if you click to indicate you are interested in a private loan 

for undergraduate school, it says the Signature student loan is the 

most popular after Stafford loans. So even in kind of our tag line 

where—and Signature is our private education loan—we are emphasizing to the student that it should be taken out after they take 

out their Federal loan. 

And if you click onto our website indicating you are interested 

in a—— 

Chairman DODD. This is Sallie Mae, for the audience. 

Mr. GOULDING. This is Sallie Mae. And if you click on our 

website saying you are interested in a private loan for graduate 

school, because of the recent introduction of Grad PLUS, a student 

can actually borrow their entire cost of attendance through federally guaranteed student loans. We say graduate students are 

strongly encouraged to first exhaust Federal loan availability, including Stafford and Grad PLUS. 

So it is very clear in our materials that we, in fact, are strongly 

advocating the 1–2–3 approach. 

Chairman DODD. Mr. Bell, I am going to ask you to comment on 

this, as well. What advice do student loan officers give, as well, in 

this regard? Watch that microphone if you would, so we can hear 

you. 

Mr. BELL. Senator, the advice that the Howard University students are provided is also to exhaust all Federal funding, to exhaust all institutional funding. However, we do not necessarily encourage the usage of private loans unless the student particularly 

comes to our office for advice. And then that advice is to conduct 

a search and compare some of the critical areas of taking out a 

loan such as the terms, as the forbearance and the deferment provisions, and other criteria, and then do a comparison and select 

your lender. 


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Chairman DODD. Let me ask all four of you here, in any reasonable circumstances is it ever advisable for a student to forego taking a Federal student loan in exchange of taking a private loan? 

Mr. TARR. Senator, on purely financial terms, I cannot envision 

a situation where a private loan would be more economically advantageous than a Federal loan, given the Federal guarantee and 

the rates. 

Chairman DODD. What do you think of that, Ms. Grooms? 

Ms. GROOMS. I agree with that on financial terms. I cannot imagine that. 

Chairman DODD. Mr. Goulding. 

Mr. GOULDING. We have seen examples of where a parent who 

is not—who has some concerns about going into debt with a parent 

Federal loan—has actually, parents have actually made the decision that they would rather be a coborrower on a private loan that 

their son or daughter is the primary obligor on. And we believe 

that that decision is made because if a parent takes the entire debt 

in their name, they are concerned that it might conflict with their 

ability to plan for retirement and things like that. It is not what 

I would say is an economic decision. It is rather how is the family 

trying to position themselves to afford their college for their children. 

Chairman DODD. Mr. Bell. 

Mr. BELL. Senator, that is highly possible but, of course, we have 

not experienced that at the University, as a 100 percent direct 

lending institution. We do have a number of parents that are utilizing the Parent PLUS loan. 

As I said, our—in the past year, $110 million was borrowed in 

direct lending and only 13.8 percent, I believe, in the private loan 

industry. 

Chairman DODD. Let me ask you, Ms. Pae, and you, Mr. 

Swarthout, to respond here. What is the—you have heard the responses of the lenders here. Is this pretty much what you believe 

to be the case? Again, we have lenders here and they are not the 

only lenders in the world so I am curious to your overall reaction 

as to whether or not you believe that students and their families 

are getting advised early on that it is always preferable to take— 

at least except in some rare circumstance here that Mr. Goulding 

has identified—it is always preferable for the student and their 

family to take out the student loan as opposed to the private loan— 

or the Federal loan? 

Ms. PAE. For us that would be our hope. But unfortunately the 

landscape currently, I think there is two points that I would like 

to raise up. The first thing is the type of information that is available to students. The marketplace is not fair currently for students 

because they are inundated with so much information. Although a 

lender or an institution may advise the student to go and maximize 

on their Federal aid if there is, for example when checking an email, get $50,000 in just seconds, a student may turn to that alternative rather than applying for the FAFSA. 

Another issue is if the loan package or the Federal aid package 

comes together with cobranded materials from the college and university. And when that information is presented to the student, a 


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student can very well be confused by Federal aid versus this being 

a private loan because my institution packaged this for me. 

So although we would hope for all lenders to abide by these practices, I think unfortunately, due to the amount of information 

that’s out there, it is very difficult for a student to be able to maneuver whether or not they are actually maximizing on their Federal aid versus I am actually taking out a private loan. 

Chairman DODD. I am going to ask you to comment on this now, 

and I want to come back to that question in a minute and ask you 

about TILA and disclosure issues and lenders. 

Mr. SWARTHOUT. I want to associate myself with Jen’s comments, 

because if this is the case, and these are really the actions of all 

the lenders, then something is going wrong somewhere. We know 

that 20 percent of dependent students who take out private loans 

did not max out their Federal loans. We know about 50 percent of 

independent students who take out private loans did not max out 

their Federal student loans. 

Chairman DODD. What is that number again, 50 percent? 

Mr. SWARTHOUT. Fifty percent of independent college students do 

not max out, do not take the maximum Federal student loans, so 

not PLUS loans as Mr. Goulding was referring to a situation for 

parents. Fifty percent of independent students do not take at a 

maximum student loans, the allowable Federal student loans. 

Suggesting that something is going wrong. Now whether it is cobranding, whether it is inundation of information, whether it is 

some lenders—and we have seen some private lenders that do not 

engage in the Federal loan programs and thus have a different 

profit motive, simply just push their private loan product without 

making mention or in some cases even questioning whether students should bother to fill out the FAFSA form. 

So maybe it is some of those instances or a combination of the 

three, but there is a real problem here. I would say categorically 

there is no circumstance where a student should be taking out a 

private loan instead of their Federal student loan. 

Chairman DODD. Let me ask you about disclosure because you 

have raised it, Ms. Pae, and it is an important point. It has been 

pointed out that students and parents cannot easily compare the 

terms and benefits of various loans or the distinctions and terms 

of Federal versus private loans. It gets confusing. You heard Senator Schumer talking about, in fact he was telling me privately because he has two daughters now in the midst of going through all 

of this, that he sat down himself to go through it, as someone who 

is a trained lawyer and obviously a member of these Committees. 

And he said it was a nightmare for him to try and understand it 

as a parent, trying to sort this out. 

I wonder if, again the lenders here, let me ask you whether or 

not you believe Congress should make changes to the Truth In 

Lending Act disclosure requirements to provide student borrowers 

with enhanced information about the terms and conditions of private loans, including percentage rate information? And what other 

types of disclosures would any of you suggest that may be needed? 

And in conjunction with that, let me ask you whether or not—TILA 

protections do not extend to student loans in excess of $25,000. And 

I would be curious as to whether or not, again, the lenders here 


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would agree that TILA protections ought to be extended beyond 

that number to cover potentially all student loans? So two questions for you. 

Mr. TARR. A response to your second question, Senator. We 

would support—we comply with TILA now and we would support 

any regulation changes—— 

Chairman DODD. Do you see any problem with doing that? Is 

there some reason we ought to be thinking twice about that for 

some reason? 

Mr. TARR. Off the top of my head I cannot, because if we have 

procedures in place to comply with TILA now, the amount of the 

loan should not impact whether or not you can provide the Act disclosure. 

One point I would make on the comparison shopping aspect of 

this: as this industry matures—and we estimate there are now 

about 150 providers of student loans in various states of maturity—you are starting to see, I think in response to your interest, 

on websites for example where you can go to websites and they will 

compare various loans and it is all in one place. 

One observation I would make, and we have been doing this and 

advocating this, is this is a process that too many families start too 

late. This process should really be started at the end of the junior 

year in high school. Too frequently people are scurrying in July and 

August of the summer before their student is about to matriculate. 

And they really—and it is complicated. I cannot mislead you and 

tell you it is not. 

But it takes a lot of work. My assessment is the information is 

out there. Is it all in one place, to be used as efficiently as possible? 

Probably not. But it is out there. I would strongly suggest that if 

there is any way to educate people to start this process much earlier. 

Chairman DODD. What about that disclosure box we have talked 

about, where you get very clear on what rates are, using examples 

and so forth, that we have done with other financial instruments 

to make it clear for people as they look at it and give them much 

better ideas? Any objections to any of that? 

Mr. TARR. No, I think a procedure and process and agreement on 

what would be in the box would have to be devised. But conceptually, no. 

Chairman DODD. Ms. Grooms, what are your thoughts on this? 

And again, regarding the $25,000 limit, what is the view of Bank 

of America? 

Ms. GROOMS. Bank of America is supportive in a number of 

areas, including this one, of transparency and disclosure that is in 

the best interest of the consumer, in this case the student and perhaps their family. So I agree with Mr. Tarr, that should not be a 

problem. 

But also emphasize that we are compliant with the Truth in 

Lending Act, and provide the consumer with a 10-day grace period 

upon receipt of the Truth in Lending statement, in which they can 

cancel the loan. 

Chairman DODD. Mr. Goulding. 


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Mr. GOULDING. We already are complying with the Truth in 

Lending Act and all of our private education loan borrowers do receive a Truth in Lending Act disclosure today. 

Chairman DODD. And the number, raising the number, you have 

no objection to that? 

Mr. GOULDING. No. We are complying with it up and down the 

line. 

Chairman DODD. But I am suggesting raising the limit. 

Mr. GOULDING. No, we would not have a concern with that. 

Chairman DODD. Let me come right back, if I can here. You stated that in calculating a student’s private loan interest rate, one of 

Sallie Mae’s considerations is the default rate of the individual institution of higher education. I wanted to ask Ms. Grooms and Mr. 

Tarr, do your companies use either default rates or graduation 

rates of an individual institution in determining what interest rate 

you offer a student that is applying to those schools or in those institutions? 

Mr. TARR. No. What First Marblehead does is we are partners 

with a non-profit guarantor, the Educational Resources Institute, 

which has an approved list of 6,500 colleges and universities. The 

criteria they use to determine who is on that list include whether 

it is public or private, operating history, financial condition, accreditation by recognized national or regional agency, licensing by State 

authority, program course offerings, and Federal Title IV loan programs. Those are the criteria that are used to select the schools 

that we support. 

Chairman DODD. Ms. Grooms. 

Ms. GROOMS. And Senator, we rely on First Marblehead and the 

agency that he referred to for the underwriting. So his response is 

the same for Bank of America. 

Chairman DODD. So the default rate of students at the institution is not a criteria in making a determination and that is the 

case in either case? 

Ms. GROOMS. Yes. 

Chairman DODD. And Mr. Goulding, why do you do that? Why 

does Sallie Mae do that? We heard Andrew Cuomo talk earlier and 

talk about the redlining aspects of all of this. Why does Sallie Mae 

insist on using that as a criteria when the students themselves 

ought to be the determination as to whether or not they are going 

to get the loan? 

Mr. GOULDING. We have a number of criteria we look at. The primary criteria is certainly the credit score of the borrower if they 

have one, as well as the credit score of a coborrower if they have 

a coborrower. 

Chairman DODD. I understand that. 

Mr. GOULDING. And we do encourage coborrower. 

Chairman DODD. But why do the institution ? 

Mr. GOULDING. Well, we look at academic progress, as well, Senator. That is a key issue because we have found that the highest 

correlating event to a default is for a borrower who drops out and 

does not complete their education. And we also consider the competitive landscape. We look at the default rate of students or borrowers that we have, in our experience, have attended a particular 

institution because we think when you are not looking at income 


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and when you are not looking at debt-to-income ratios, and you are 

not requiring income or debt-to-income ratios, that the historic experience you have had with students attending a particular institution does have an impact on the long-term ability—— 

Chairman DODD. How does that differ from people in banks who 

decided not to lend money to someone because they lived in a certain neighborhood based on performance? 

Mr. GOULDING. Let me be clear. This is not whether they are eligible for the loan or not. This would just be an impact potentially—— 

Chairman DODD. Well, it affects their ability to get the loan if 

they—— 

Mr. GOULDING. No, it does not. No, I am sorry, I misstated. It 

does not affect their ability to get the loan. It would affect potentially the rates and fees they would get. 

Chairman DODD. Well, how should that be the case? If a person 

has got a good record and meets these other criteria based on them 

performing well, why would you brand someone because of the institution over the years, for whatever reasons? It could be that they 

have had, just given the economic circumstances over the history. 

Historically black colleges, to use an example, historically the kids 

are coming from families that do not do—have not done as well economically. Putting aside the reason why here for a minute here, 

that child then or that family is disadvantaged in terms of getting 

a loan because they come from an institution that over the years, 

because of economic circumstances, through no fault of the young 

person or their family, has a disadvantage on a rate. 

So they are going to pay a higher rate, counter—actually going 

directly opposite of what we are trying to do, and that is to take 

disadvantaged students to provide greater assets for them so they 

can get that education. You are doing just the opposite. Why? 

Mr. GOULDING. We actually looked, in preparing for today’s hearing, we looked at six different historically black college and universities on our system. And we found that three of them are getting 

the very best rates that we have and three of them are getting the 

rates that are slightly less attractive. 

So in that case it probably had more to do with the competitive 

landscape, whether or not those schools were actively seeking out 

information from lenders and creating a preferred lender list based 

on the best terms and conditions that those lenders had to offer. 

Chairman DODD. But they are going to get a different product, 

and that is the bottom line. 

Mr. GOULDING. No, it is the same product, it is just—— 

Chairman DODD. Well, it is a higher cost. 

Mr. GOULDING [continuing]. Slightly different price. 

Chairman DODD. No, higher price. Higher price, right? More 

costly. 

Mr. GOULDING. Maybe 50 basis points or 100 basis points. 

Chairman DODD. You are out there trying—let me tell you, looking at what these costs of college are, that may not seem like much 

to somebody but if you are struggling as a family, that 50 basis 

points can make the difference in some cases here. 


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And again, going back to the fairness of it, in many ways, doing 

exactly the opposite, it seems to me, is exactly the wrong direction 

we should be heading in on that. 

Let me ask you about the bankruptcy stuff. I opposed the Bankruptcy Act. I thought it was a dreadful piece of legislation that 

came along, but obviously I did not prevail. I was in the minority 

on it. 

But advocates suggest here that the standard views in the Bankruptcy Act, undue hardship, failing to maintain a minimum standard of living before being able to discharge their private student 

loans in Chapter 7. Advocates suggest that the standard makes it 

nearly impossible for borrowers to discharge private loans and 

argue that lenders do not need special bankruptcy protection because private loans are often secured by a cosigner and banks have 

no limits on fees and rates they can charge borrowers under Federal loans. 

Do you think the Bankruptcy Law is appropriate or inappropriate? Mr. Tarr. 

Mr. TARR. My personal view is it is appropriate. 

Chairman DODD. You think it is appropriate? 

Mr. TARR. Yes, and one reason I say that is I think that if there 

is a change to the bankruptcy code in this respect, it will have an 

impact on the availability of private student loans. And I think we 

should all be mindful of what we are trying to address, as you eloquently said in your first early remarks, a growing gap of the education going like this, available funds are like this. 

If there is a change to the Bankruptcy Act, it could impact the 

amount of private student loans that are available to address that 

gap. 

Chairman DODD. Are you serious about that answer? 

Mr. TARR. Yes, I am. Yes, I am, sir. 

Mr. SWARTHOUT. God, so many things to say, so many objections 

to that idea. 

This is parallel—this conversation parallels the subprime mortgage argument. We have just seen huge default rates in the 

subprime mortgage industry. And the case is we need to be able 

to offer these incredibly predatory rates to borrowers, particularly 

low income borrowers, to be able to provide them with a loan for 

their house. 

If we are setting students up with interest rates that they cannot 

repay, that a significant percentage of students will default on, we 

are not doing favors to students. We are not increasing access. We 

are not increasing affordability. And we are certainly not doing 

what students need in order to succeed in our country. 

Mr. Goulding made a comment a little bit earlier where he described private loans are an investment in human capital. Well, if 

private loans are an investment in human capital for your company, then bankruptcy protections are the shackle that keeps that 

human capital from being able to escape. Because essentially we 

are taking 18-year-olds who are aspiring for a higher education and 

asking them to suffer penalties and bankruptcy laws that we provide to almost no other consumer credit. 


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We treat student loan defaulters in the private loan industry the 

same way we treat people who fail to pay alimony and fail to pay 

their taxes. That is an astounding idea. 

Why, given the social value of student loans, would we treat students as the lowest class of borrowers, if we really expect to invest 

in America’s future and our higher education? I strongly object to 

that concept. 

Chairman DODD. Go ahead, Mr. Tarr. 

Mr. TARR. May I respond? 

Chairman DODD. Yes, certainly. 

Mr. TARR. First of all, I do not believe I used the word predatory 

lending. I think we should go back in time and focus—we have all 

commented this morning on how rapidly this industry has developed. This industry has developed and grown rapidly because it is 

addressing a gap that previously was being addressed by credit 

cards or not at all. 

So the alternative was, unfortunately, many students were not 

getting to school period. And students—I happen to be an advocate 

of informed choice. And students and their families, if provided 

with the right information, are in the better position, I believe, to 

make a decision whether to take on a market priced loan. If the 

family chooses not to, that may prevent someone from going to 

school. 

And the alternative is credit cards. And I think we would all 

agree that credit cards are not preferable. Their rates are more expensive. And oh, by the way, they are not a—they are an instrument that has to paid off monthly. This is a 20-year unsecured obligation. 

Chairman DODD. Let me just interrupt for a second. I hope we 

did not create this impression. We all understand there is a gap 

that has to be filled. Even if you increase, as we should, the Federal loan program here. I hope none of you argue over that point. 

This is ridiculous. It has been flat-lined for the last number of 

years, watching the costs increase dramatically. 

I doubt it is ever going to close that gap. So you are going to be 

dealing with a gap. And so obviously there is a very important 

market here. 

The question is how does that market work? And to what degree 

is there any kind of a regulatory scheme here and oversight, so 

that we are guaranteeing that the kind of things that Andrew 

Cuomo pointed out are not going to go on. 

And you have all indicated that none of you engage in these 

practices that he talked about, the kickbacks and the financing or 

allowing people to serve on boards and so forth. I presume that is 

the case. 

Is there anything in the criteria that have been laid out by the 

Department of Education or anything that Andrew Cuomo, as Attorney General of New York, have advocated that you disagree 

with? 

Mr. TARR. No, the code of conduct that the New York Attorney 

General supported we support wholeheartedly. We are advocates of 

disclosure and transparency. So I do not believe there is requirement for additional regulation. But the provisions that were put 

forward by Attorney General Cuomo we are supportive of. 


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Chairman DODD. Ms. Grooms, you agree with that as well? 

Ms. GROOMS. Absolutely. As my testimony indicated, we voluntarily accepted the college code of conduct. We are evaluating the 

proposed sunshine act which I believe has already passed the 

House. And that is pretty consistent with the code of conduct. 

There is some more specificity there and we want to make sure, 

should that become law, that we not only meet but hopefully exceed the expectations. 

Chairman DODD. Beside from the point we just talked about a 

minute ago, Mr. Goulding, do you have any objections to the code 

of conduct principles that have been laid out? 

Mr. GOULDING. No, we have also adopted the code of conduct and 

are supportive of those principles. 

Chairman DODD. Let me go back. Mr. Avidan, I have not asked 

you any questions at this point here, but again, just from your own 

personal experience here, what is your reaction to what you are 

hearing here? 

Mr. AVIDAN. I feel that there is a gap. I am personally affected 

by that large gap. But I do not think that that is the main issue. 

I think the main issue is keeping rates low and providing support 

and proper disclosures for the borrower up front and during the 

process of them paying back the loans. 

I feel that once the loans are given they—they, being the lenders—they forget those people because they already got the promissory notes in their possession and they are signed and dated. So 

they move on to the next people that they can see how much of a 

rate they can get from them. 

Chairman DODD. Let me, if I can, I want to ask two final questions, if I can. I want to raise again, with the lenders here, the 

Community Reinvestment Act issue here. 

It strikes me that we should be promoting, of course, incentives 

for lenders to provide the neediest students with good loans. The 

loans, in my mind, that are similar in rate and fee structure to 

those under the Federal loan program. 

I think you all have said you indicate you agree with that general notion. I presume that has been the case. So I wonder if your 

institutions, they receive Community Reinvestment Act credit for 

student loans that you make. Is that true, Ms. Grooms? 

Ms. GROOMS. We do include our student loan information in our 

$750 billion commitment to low and moderate-income families and 

communities. I cannot affirm specifically that it is included in the 

official CRA data. That is something I would be happy to follow up 

on and respond back. 

Chairman DODD. What I would like to know is what kinds of 

loans do you receive credit for? And do the bank regulators give 

you credit for giving any loan to any student, including loans with 

high interest rates? I mean, I would be interested in whether or 

not that is the case. 

I do not think you are involved in this aspect at all, Mr. 

Goulding. 

Do you have any comments on this, Mr. Tarr? 

Mr. TARR. No, I do not. 

Chairman DODD. OK. Well, I would like to check on that. 


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We will submit, by the way, I would ask staff to submit that 

same question to other major lenders here, so we get the answer 

to that question as to how that works, as well before us here. 

Let me ask others here, as well. We have got this potential sale 

of Sallie Mae. And I am wondering what impact do you think that 

sale could have on competition and the products and services made 

available to student borrowers? Let me start with you, Mr. 

Swarthout. 

Mr. SWARTHOUT. I think, just a quick preface, which is to say at 

a time when we are seeing a greater demand for oversight, a greater demand for transparency, it is interesting that the largest player 

in this market will become less transparent and—by becoming a— 

going from a publicly traded company to a private entity. 

As far as products, I mean I think there are reasons for concern 

about the control of the market amongst a small number of players. 

We have seen this for a number of reasons and certainly will be 

continued concern as this process moves forward. 

We should note that for a—not on private loans but on federally 

subsidized loans, for a market that has fantastic subsidies, we have 

very little price competition historically. I think that is also one of 

the things that Attorney General Cuomo has found in his investigation. 

So there are reasons for inquiry. 

Chairman DODD. Let me ask you, Ms. Pae, about this, because 

I want to ask Mr. Tarr and I want to ask you, Ms. Grooms. Then 

I want to give you a chance, Mr. Goulding, to respond to what you 

have heard as well, in fairness to you here. Ms. Pae? 

Ms. PAE. Just to let you know that the U.S. Student Association 

has actually partnered with SEIU, Service Employees International 

Union, in regards to this issue. So they have some very good materials around why this is a large concern for not only the larger industry but specifically for how this plays out for students. 

As far as the profits that are at the expense of students, I think 

this plays a larger role in what type of competition is really, truly 

available for students and what type of real deals will students get 

in the private loan industry. So although I am not well versed on 

the issue, per se, I think it would be a good point of reference for 

the Committee to look at these materials. 

Chairman DODD. Mr. Tarr, do you want to comment on this? 

Mr. TARR. Senator, given that our two largest clients are involved, I would prefer not to. 

Chairman DODD. I thought I might slip that one by you here. 

[Laughter.] 

In a moment of weakness. 

Mr. TARR. I appreciate your understanding, Senator. 

Chairman DODD. You are taking the Fifth on this one. 

Ms. Grooms. 

Ms. GROOMS. Mr. Chairman, as we have stated, the Bank of 

America student lending business remains separate. It will compete separately from Sallie Mae. We continue to serve our customers and compete each day. And that aspect has not changed. 

Chairman DODD. Mr. Goulding, do you want to comment on this 

at all? This is not normally a question you would raise, but obviVerDate Nov 24 2008 04:15 Dec 05, 2009 Jkt 050319 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 E:\HR\OC\A319.XXX A319

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ously it is on everyone’s mind and is out there in the proposal. Do 

you want to share any thoughts or comments on this? 

Mr. GOULDING. Yes, Senator. First, let me caveat it by saying I 

am being acquired. I am not the acquirer. So I am speaking to this 

from a Sallie Mae perspective. And I have not been intimately involved with the transaction that you are referring to. 

Sallie Mae certainly has, in our history, conducted ourselves with 

transparency. We plan to continue to do that, public or private. 

And our buyers did put out a press release with respect to this 

issue in May. The statements they made were that as a private 

company Sallie Mae would continue to comply with the student 

loan code of conduct, it would continue to be regulated by the Department of Education and the FDIC, that we be continued to be 

subject to Congressional oversight, that we would be subject to all 

Federal and State laws including the Higher Education Act, that 

we would continue to participate in the public debt markets and 

issue relevant filings on our performance and financial health with 

the SEC, and that we would apply with all applicable SarbanesOxley requirements. 

So on the transparency side, I think that the buyers have addressed that. 

On the competitive front, as Ms. Grooms stated, Bank of America 

plans on continuing to vigorously compete with both Sallie Mae 

and the other minority bank investor. I should remind all that the 

banks involved with this transaction are minority investors, and 

that Sallie Mae has competed with both these banks historically. 

We are competing with them now. We would envision continuing 

to compete with them in the future. 

And I would disagree with the statement made by the gentleman 

to my left. I think there is active competition in this market. There 

are new entrants entering this market as we speak, and some very 

formidable consumer finance companies have entered this market 

space. 

Chairman DODD. Mr. Bell, do you want to comment on this at 

all, as a student financial aid officer? 

Mr. BELL. No, Senator. I really do not have any comment on it. 

Chairman DODD. I wanted to give you a chance to do that. 

Listen, there are a lot more questions people I know are going 

to want to raise here about all of this. But this is a very important 

issue. Again, there is a lot of interest in the subject matter, as I 

know all of you know. 

Again, I want to make it clear here, look, and there is going to 

be a lot more legislative action probably on higher education generally. But again, I want to state the case here, there is clearly a 

need here for private loans. There is no question about that, particularly in light of the gap that exists. So we are not—I do not 

want anyone to leave here with the assumption somehow there is 

hostile feelings about the product. The question is how the product 

is being handled and managed, and to what extent it is being managed in such a way as to disadvantage students and their families, 

with many of the items that have been raised by the Attorney General of New York and others, that those practices have to stop. 

I am going to inquire as to the—I am going to have a meeting 

with the—with Senator Shelby obviously involved in all of this— 


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with the Federal regulators to find out what they are doing, why 

they have not been. We listened to Andrew Cuomo talk about this 

being the wild west. And of course, the obvious question one wants 

to ask is where was the sheriff here? A lot of these things were 

going on for some time. 

We have talked about the subprime lending problem. That was 

going on for some time. We know there were people aware of this 

issue years ago and did nothing from a Federal agency perspective 

where they had jurisdiction, in my view. And I am not going to 

wait around for this problem to grow or become a greater concern, 

but to step in and to find out what, if anything, the regulators are 

doing. And if they need additional legislation, we will move on that. 

If there is additional regulatory authority, I want to find out what 

they need to get that, so that we have an aggressive cop here 

watching all of this. So the practices we have heard about are 

going to stop on this one way or the other. 

So again, I thank all of you for being here. We will keep the 

record open for additional questions. But I am very grateful to all 

of you. 

I want to thank the lenders who are here for being here. 

Ms. GROOMS. Thank you, Mr. Chairman. 

Chairman DODD. I realize you are stepping up here. 

Mr. TARR. Thank you. 

Chairman DODD. There is a lot of other people who engage in 

this business who are not here, but we are very much aware of 

some of the activities that are going on. 

So I think you for coming. This Committee will stand adjourned. 

[Whereupon, at 1:19 p.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 


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PREPARED STATEMENT OF SENATOR ROBERT P. CASEY 

I would like to thank Senator Dodd and Senator Shelby for calling today’s hearing 

on this important and timely topic. I would also like to thank the witnesses for appearing today. Attorney General Cuomo has been on the front line of exposing the 

problems with private student loans as well as the front line of the search for solutions. 

I would also like to say that I am pleased to welcome a constituent and resident 

of the Commonwealth of Pennsylvania. Jonathan Avidan is a resident of 

Langehorne, Pennsylvania. I wish he could be here under better circumstances, but 

unfortunately, he is a victim of bad educational loans. I would like to thank him 

for coming before us today to offer his experience. 

The growth in the private student loan market has been a product of two regrettable trends—the rapid increase in the cost of education, and the failure of federal 

student loan programs to meet the needs of students who have had to find ways 

to finance their education. 

The fact is that federal policy and institutions of higher education have created 

a vacuum, and the private sector has helped to fill that void. That is a good thing, 

but it has had some negative consequences. Past inaction, and lack of leadership 

on the part of the government, however, is no excuse for inaction now, and so I am 

glad that we are holding this hearing to help understand the scope and boundaries 

of the problems we now face. 

This issue involves our families, our education system, our future economy and 

society, and our values. We need more students going to college and getting degrees 

and entering the workforce highly educated and highly skilled. But increasing costs 

and punitive debt burdens work in the exact opposite direction. 

Before the witnesses deliver their testimony, I would like to just highlight three 

problems: 

• The first is the breach of trust between schools and students. There is an important relationship there that some schools, though certainly not all, have been 

far too cavalier with. 

• The second is deceptive and in some cases predatory and abusive practices on 

the parts of lenders. 

• The third is the way that some of these lending practices undermine federal 

student aid policies, which are designed to make college affordable and accessible to all students. 

This last problem is less obvious, but extremely important. As a society, we have 

for a long time directed the most aid to those with the most need, because hard 

work and ability is important and because we as a nation benefit when we allow 

people to use their talents to their fullest. All of America and Pennsylvania have 

benefited from this ideal. We cannot afford to let our investment in that ideal be 

undercut. 

I again, would like to thank Chairman Dodd for calling this hearing, and would 

like the witnesses to know I am particularly interested in what actions they feel 

should be taken moving forward to help fix the problems we are today confronting. 


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jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 139 here 50319A.002
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jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 140 here 50319A.003
56 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 141 here 50319A.004
57 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 142 here 50319A.005
58 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 143 here 50319A.006
59 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 144 here 50319A.007
60 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 145 here 50319A.008
61 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 146 here 50319A.009
62 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 147 here 50319A.010
63 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 148 here 50319A.011
64 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 149 here 50319A.012
65 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 150 here 50319A.013
66 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 151 here 50319A.014
67 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 152 here 50319A.015
68 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 153 here 50319A.016
69 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 154 here 50319A.017
70 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 155 here 50319A.018
71 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 156 here 50319A.019
72 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 157 here 50319A.020
73 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 158 here 50319A.021
74 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 159 here 50319A.022
75 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 160 here 50319A.023
76 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 161 here 50319A.024
77 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 162 here 50319A.025
78 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 163 here 50319A.026
79 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 164 here 50319A.027
80 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 165 here 50319A.028
81 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 166 here 50319A.029
82 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 167 here 50319A.030
83 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 168 here 50319A.031
84 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 169 here 50319A.032
85 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 170 here 50319A.033
86 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 171 here 50319A.034
87 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 172 here 50319A.035
88 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 173 here 50319A.036
89 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 174 here 50319A.037
90 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 175 here 50319A.038
91 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 176 here 50319A.039
92 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 177 here 50319A.040
93 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 178 here 50319A.041
94 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 179 here 50319A.042
95 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 180 here 50319A.043
96 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 181 here 50319A.044
97 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 182 here 50319A.045
98 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 183 here 50319A.046
99 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 184 here 50319A.047
100 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 185 here 50319A.048
101 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 186 here 50319A.049
102 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 187 here 50319A.050
103 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 188 here 50319A.051
104 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 189 here 50319A.052
105 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 190 here 50319A.053
106 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 191 here 50319A.054
107 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 192 here 50319A.055
108 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 193 here 50319A.056
109 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 194 here 50319A.057
110 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 195 here 50319A.058
111 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 196 here 50319A.059
112 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 197 here 50319A.060
113 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 198 here 50319A.061
114 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 199 here 50319A.062
115 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 200 here 50319A.063
116 


jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 201 here 50319A.064
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jbell on DSKDVH8Z91PROD with HEARINGInsert graphic folio 202/250 here 50319A.065