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KEEPING COLLEGE WITHIN REACH: 

EXAMINING OPPORTUNITIES TO STRENGTHEN 

FEDERAL STUDENT LOAN PROGRAMS 

HEARING 

BEFORE THE

COMMITTEE ON EDUCATION 

AND THE WORKFORCE 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD IN WASHINGTON, DC, MARCH 13, 2013 

Serial No. 113–9 

Printed for the use of the Committee on Education and the Workforce 

( 

Available via the World Wide Web: 

www.gpo.gov/fdsys/browse/committee.action?chamber=house&committee=education 

or 

Committee address: http://edworkforce.house.gov 
(II) 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

JOHN KLINE, Minnesota, Chairman 

Thomas E. Petri, Wisconsin 

Howard P. ‘‘Buck’’ McKeon, California 

Joe Wilson, South Carolina 

Virginia Foxx, North Carolina 

Tom Price, Georgia 

Kenny Marchant, Texas 

Duncan Hunter, California 

David P. Roe, Tennessee 

Glenn Thompson, Pennsylvania 

Tim Walberg, Michigan 

Matt Salmon, Arizona 

Brett Guthrie, Kentucky 

Scott DesJarlais, Tennessee 

Todd Rokita, Indiana 

Larry Bucshon, Indiana 

Trey Gowdy, South Carolina 

Lou Barletta, Pennsylvania 

Martha Roby, Alabama 

Joseph J. Heck, Nevada 

Susan W. Brooks, Indiana 

Richard Hudson, North Carolina 

Luke Messer, Indiana 

George Miller, California, 

Senior Democratic Member 

Robert E. Andrews, New Jersey 

Robert C. ‘‘Bobby’’ Scott, Virginia 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Rush Holt, New Jersey 

Susan A. Davis, California 

Rau ́l M. Grijalva, Arizona 

Timothy H. Bishop, New York 

David Loebsack, Iowa 

Joe Courtney, Connecticut 

Marcia L. Fudge, Ohio 

Jared Polis, Colorado 

Gregorio Kilili Camacho Sablan, 

Northern Mariana Islands 

John A. Yarmuth, Kentucky 

Frederica S. Wilson, Florida 

Suzanne Bonamici, Oregon 

[Vacant], Staff Director 

Jody Calemine, Minority Staff Director 
(III) 

C O N T E N T S 

Page 

Hearing held on March 13, 2013 ............................................................................ 1 

Statement of Members: 

Kline, Hon. John, Chairman, Committee on Education and the Workforce 1 

Prepared statement of ............................................................................... 3 

Miller, Hon. George, senior Democratic member, Committee on Education 

and the Workforce ......................................................................................... 4 

Prepared statement of ............................................................................... 5 

Statement of Witnesses: 

Delisle, Jason, director, Federal Education Budget Project, New America 

Foundation ..................................................................................................... 13 

Prepared statement of ............................................................................... 14 

Draeger, Justin S., president and CEO, National Association of Student 

Financial Aid Administrators (NASFAA) ................................................... 25 

Prepared statement of ............................................................................... 27 

Lucas, Deborah, Sloan distinguished professor of finance, Massachusetts 

Insititute of Technology ................................................................................ 8 

Prepared statement of ............................................................................... 9 

Mercer, Charmaine N., Ph.D., vice president of policy, Alliance for Excellent Education ............................................................................................... 37 

Prepared statement of ............................................................................... 39 

Additional Submissions: 

Bonamici, Hon. Suzanne, a Representative in Congress from the State 

of Oregon, letter, dated January 23, 2012, from Robert D. Reischauer ... 71 

Mr. Delisle, response to question submitted for the record .......................... 81 

Mr. Draeger: 

Report, ‘‘Reimagining Financial Aid to Improve Student Access and 

Outcomes,’’ Internet address to ............................................................ 78 

Report, ‘‘Report of the NASFAA Task Force on Student Loan Indebtedness,’’ Internet address to ................................................................. 79 

Report, ‘‘Report of the NASFAA Award Notification and Consumer 

Information Task Force,’’ Internet address to ..................................... 79 

Response to questions submitted for the record ..................................... 79 

Grijalva, Hon. Rau ́l M., a Representative in Congress from the State 

of Arizona, questions submitted for the record to Mr. Draeger ................ 79 

Hudson, Hon. Richard, a Representative in Congress from the State 

of North Carolina, questions submitted for the record to: 

Mr. Draeger ............................................................................................... 79 

Mr. Delisle ................................................................................................. 81 

Chairman Kline: 

Prepared statement of the Education Finance Council ......................... 77 

Mr. Miller: 

Memo, dated March 12, 2013, from the Associated Students of Michigan State University ............................................................................. 47 

Memo, dated March 12, 2013, from Emily Yu, president, American 

University Student Government .......................................................... 48 

Statement of the National Campus Leadership Council: ‘‘Summary 

of Student Perspectives on Student Loans’’ ......................................... 48 

Roby, Hon. Martha, a Representative in Congress from the State of 

Alabama, questions submitted for the record to Mr. Draeger .................. 79 

(1) 

KEEPING COLLEGE WITHIN REACH: 

EXAMINING OPPORTUNITIES TO STRENGTHEN 

FEDERAL STUDENT LOAN PROGRAMS 

Wednesday, March 13, 2013 

U.S. House of Representatives 

Committee on Education and the Workforce 

Washington, DC 

The committee met, pursuant to call, at 10:03 a.m., in room 

2175, Rayburn House Office Building, Hon. John Kline [chairman 

of the committee] presiding. 

Present: Representatives Kline, Petri, Foxx, Roe, Walberg, Salmon, DesJarlais, Roby, Heck, Brooks, Hudson, Miller, Andrews, 

Scott, Hinojosa, McCarthy, Tierney, Holt, Davis, Grijalva, Bishop, 

Loebsack, Courtney, Fudge, Polis, Wilson, and Bonamici. 

Staff present: Katherine Bathgate, Deputy Press Secretary; 

James Bergeron, Director of Education and Human Services Policy; 

Heather Couri, Deputy Director of Education and Human Services 

Policy; Amy Raaf Jones, Education Policy Counsel and Senior Advisor; Nancy Locke, Chief Clerk/Assistant to the General Counsel; 

Brian Melnyk, Professional Staff Member; Krisann Pearce, General 

Counsel; Mandy Schaumburg, Education and Human Services 

Oversight Counsel; Nicole Sizemore, Deputy Press Secretary; Emily 

Slack, Legislative Assistant; Alex Sollberger, Communications Director; Alissa Strawcutter, Deputy Clerk; Aaron Albright, Minority 

Communications Director for Labor; Tylease Alli, Minority Clerk/ 

Intern and Fellow Coordinator; Kelly Broughan, Minority Education Policy Associate; Jody Calemine, Minority Staff Director; 

Jamie Fasteau, Minority Director of Education Policy; Scott 

Groginsky, Minority Education Policy Advisor; Brian Levin, Minority Deputy Press Secretary/New Media Coordinator; Rich Williams, 

Minority Education Policy Advisor; and Michael Zola, Minority 

Senior Counsel. 

Chairman KLINE. A quorum being present, the committee will 

come to order. Good morning and welcome to our hearing. This is 

the third of a series we began last Congress to discuss ways institutions, states, and leaders in Washington can work together to 

help more students access an affordable college degree. 

We are fortunate to have a distinguished panel of higher education experts here today and I would like to thank each of you for 

joining us. 

Last summer, debate about student loans reached a fever pitch 

thanks to a scheduled increase in the interest rate for subsidized 
2 

Stafford Loans made to undergraduate students. The President 

began touring college campuses, calling on Congress to prevent the 

increase, frankly, that his own party set in motion back in 2007. 

As I said at the time, no one wants to see student loan interest 

rates increase, particularly as young people continue to struggle 

with high un- and underemployment. But we need to move away 

from a system that allows Washington politicians to use student 

loan interest rates as bargaining chips, creating uncertainty and 

confusion for borrowers. 

When Congress approved legislation to temporarily stave off the 

Stafford Loan interest rate increase, my colleagues and I lent our 

support with the promise that we would use this time to work toward a long-term solution that better aligns interest rates with the 

free market. 

Today’s hearing provides an opportunity to explore the merits of 

a market-based system. As many of you are aware, such a system 

was previously in place from 1992 through 2005. Had it remained, 

interest rates on student loans could be less than 3 percent today. 

In addition to our discussion on student loan interest rates, we 

must also begin a larger conversation on the state of federal student aid programs as a whole. Supporting higher education remains a top priority in Washington. 

Each year, taxpayers dedicate billions of dollars to help students 

afford to attend the college of their choice. In the 2011-2012 school 

year, students received more than $237 billion in aid, of which the 

federal government provided nearly $174 billion. 

Given this significant investment, it is troubling to learn students struggle to navigate the various federal student aid programs 

available to help them pay for college. More work must be done to 

help students and families understand the federal student aid system and make informed choices about their higher education options. 

Congress has a responsibility to explore ways we can strengthen 

and streamline federal student aid programs, making the process 

simpler for students, institutions, and families. 

In his fiscal year 2013 budget request, President Obama proposed a number of initiatives affecting federal student aid programs, including a plan to change how three campus-based aid programs—Supplemental Education Opportunity Grants, Perkins 

Loans, and Work-Study—are distributed to shift funds away from 

institutions where the administration believes tuition is too high. 

While my Republican colleagues and I continue to support the 

basic principles of competition and transparency to help encourage 

lower costs in higher education, we remain concerned that such 

policies could lead to federal price controls and more confusion for 

institutions and borrowers. 

Though we are still waiting for the President’s delayed fiscal 

year 2014 budget proposal, I hope the administration will abandon 

these previous proposals and instead illustrate a willingness to 

work with Congress to improve existing programs while demanding 

states and institutions do their part to tamp down college costs. 

Before I yield to the senior Democratic member of the committee, 

Mr. Miller, I would be remiss if I didn’t note my continued concerns 

with the Department of Education’s management of the Direct 
3 

Loan program, which is responsible for the implementation and repayment of all federal student loans. 

Borrowers continue to report a range of problems, including 

missing financial information, unexpected changes to loan 

amounts, poor customer service, difficulty rehabilitating loans, and 

data breeches. 

The committee has been working with the Government Accountability Office to investigate some of these issues, and I hope we are 

able to solve some of these problems as we move into the reauthorization of the Higher Education Act. 

With that said, I look forward to a productive discussion with my 

colleagues and our witnesses on proposals to improve and simplify 

federal student loan programs. 

I now recognize Mr. Miller for his opening remarks. 

[The statement of Chairman Kline follows:] 

Prepared Statement of Hon. John Kline, Chairman, 

Committee on Education and the Workforce 

Last summer, debate about student loans reached a fever pitch thanks to a scheduled increase in the interest rate for subsidized Stafford Loans made to undergraduate students. The president began touring college campuses, calling on Congress to prevent the increase that his own party set in motion back in 2007. 

As I said at the time, no one wants to see student loan interest rates increase, 

particularly as young people continue to struggle with high un- and underemployment. But we need to move away from a system that allows Washington politicians 

to use student loan interest rates as bargaining chips, creating uncertainty and confusion for borrowers. 

When Congress approved legislation to temporarily stave off the Stafford Loan interest rate increase, my colleagues and I lent our support with the promise that we 

would use this time to work toward a long-term solution that better aligns interest 

rates with the free market. 

Today’s hearing provides an opportunity to explore the merits of a market-based 

system. As many of you are aware, such a system was previously in place from 1992 

through 2005. Had it remained, interest rates on student loans could be less than 

3 percent today. 

In addition to our discussion on student loan interest rates, we must also begin 

a larger conversation on the state of federal student aid programs as a whole. Supporting higher education remains a top priority in Washington. Each year, taxpayers dedicate billions of dollars to help students afford to attend the college of 

their choice. In the 2011-2012 school year, students received more than $237 billion 

in aid, of which the federal government provided nearly $174 billion, or 73 percent. 

Given this significant investment, it is troubling to learn students struggle to 

navigate the various federal student aid programs available to help them pay for 

college. More work must be done to help students and families understand the federal student aid system and make informed choices about their higher education options. Congress has a responsibility to explore ways we can strengthen and streamline federal student aid programs, making the process simpler for students, institutions, and families. 

In his fiscal year 2013 budget request, President Obama proposed a number of 

initiatives affecting federal student aid programs, including a plan to change how 

three campus-based aid programs—Supplemental Education Opportunity Grants, 

Perkins Loans, and Work-Study—are distributed to shift funds away from institutions where the administration believes tuition is too high. 

While my Republican colleagues and I continue to support the basic principles of 

competition and transparency to help encourage lower costs in higher education, we 

remain concerned that such policies could lead to federal price controls and more 

confusion for institutions and borrowers. 

Though we are still waiting for the president’s delayed fiscal year 2014 budget 

proposal, I hope the administration will abandon these previous proposals and instead illustrate a willingness to work with Congress to improve existing programs 

while demanding states and institutions do their part to tamp down college costs. 

Before I yield to the senior Democratic member of the committee, George Miller, 

I would be remiss if I didn’t note my continued concerns with the Department of 
4 

Education’s management of the Direct Loan program, which is responsible for the 

implementation and repayment of all federal student loans. Borrowers continue to 

report a range of problems, including missing financial information, unexpected 

changes to loan amounts, poor customer service, difficulty rehabilitating loans, and 

data breeches. 

The committee has been working with the Government Accountability Office to 

investigate some of these issues, and I hope we are able to solve some of these problems as we move into the reauthorization of the Higher Education Act. With that 

said, I look forward to a productive discussion with my colleagues and our witnesses 

on proposals to improve and simplify federal student loan programs. 

Mr. MILLER. Thank you very much, Mr. Chairman, and thank 

you for holding this hearing on student loans. 

Today more than ever higher education is viewed as a pathway 

to middle-class jobs and economic security. A college degree plays 

a critical role in most American dreams. 

Unfortunately, we know all too well about the rising costs of 

higher education is pushing those American dreams a little bit further out of reach for too many families. 

The rising costs are due to a number of factors. States’ falling 

support for higher education has caused tuition to go up well above 

inflation. Many of us in this committee can remember the days 

when a decent higher education was well within the reach of average working families. 

But this is no longer true. Higher education costs have been 

shifted increasingly to students and families. And to make matters 

worse, families’ incomes have not kept pace with rising costs. 

When workers incomes were growing with their productivity, 

parents could afford to contribute to the education of the children, 

but this too is fast becoming a thing of the past. 

To make up most of this shortfall, students and parents turn to 

loans in order to pay for college. As a result, the average student 

now graduates $26,000 and that in the Consumer Financial Protection Agency tells us that there is over $1 trillion in debt out of the 

streets. This is higher than the nation’s total credit card debt. 

Just last week we had yet another report from the New York 

Federal Reserve on the impact of rising student loan debt on the 

economy. It found that student loan debt is almost tripled in the 

last 8 years as more students need to borrow more money to go to 

college and it is simply unsustainable. 

Students who did everything that was asked of them are rightly 

concerned about their future. They wonder whether borrowing all 

of that money to get a degree is worth the trouble. Repaying their 

student loans has become a tremendous financial obstacle to making other life decisions. 

It affects where they can work, whether they can ever dream of 

saving enough money to purchase a home, whether they will be 

able to afford to take the risk of starting a business, or should they 

just get married—or whether they should get married and start a 

family. In short, student debt can become a very serious drag on 

the economy. 

This isn’t just young people borrowing, either. Those 40 and older 

hold 34 percent of our nation’s student loan debt. Older borrowers 

may be forced to delay savings for their child’s education or for 

their retirement. 
5 

Falling behind on monthly payments will scar borrowers’ credit 

ratings and open the door to wage, Social Security, and tax-refund 

garnishments. This debt threatens the very upward mobility of 

higher education once guaranteed. 

A few years ago, Congress took significant steps forward in helping students and families deal with these realities and to afford an 

education, but those were just the first steps. There is more that 

needs to be done in short and long term to make college affordable, 

accessible, and to make student aid programs work better. 

Members of both sides of the aisle should work together to develop these solutions. In the short term, while the economic recovery remains fragile, this committee must make sure that student 

loan interest rates do not double on students this summer. 

On July 1, the subsidized Stafford loan interest rates will double 

to 6.8 percent for millions of undergraduate students if Congress 

does nothing. With the job market still recovering, we should not 

be asking students with the greatest need to be burdened by higher 

loan costs. 

Interest rates for banks are at a historic low. In a sense, they 

are getting free money and there is no good policy reason why to 

allow rates for students to double at this time. 

In the longer term, we need to consider new ways to calculate interest rates for federal student loans. There are a number of proposals that have been put forward, and we will hear more this 

morning, that we should examine. 

Also, we must not ignore the problems of the private loan market. These rates are higher. Refinancing can be next to impossible 

and borrowers do not enjoy access to various repayment options 

that we provided to help borrowers pay for their loans. 

We also should consider various solutions. As we do so, we must 

not lose sight of the fact that the borrowers are our nation’s future. 

I look forward to hearing from our witnesses on the way Congress can work together to address the interest rate question and 

reduce student loan debt. 

I would also suggest that, Mr. Chairman, you and I have had a 

number of conversations about we are trying to make college more 

affordable, but we have to sometime get the colleges in here to tell 

us how they are going to reduce the cost of education, and there 

is a lot of things coming on the horizon now with online courses 

and massively-sized online courses. 

I see in my state legislation in California they are about to introduce legislation that they think is going to pass that suggests that 

these online courses in fact be given credit so that students can 

save money by participating in that and reduce the cost of education and money they have to borrow. 

So I think there’s a lot we need to have a conversation with the 

colleges and universities about in this question of the cost of college. We have dealt long and hard with the affordability of it but 

we are running out of tools. Thank you. 

[The statement of Mr. Miller follows:] 

Prepared Statement of Hon. George Miller, Senior Democratic Member, 

Committee on Education and the Workforce 

Good morning, Chairman Kline. Thank you for holding this hearing on student 

loans. 
6 

Today, more than ever, higher education is viewed as the pathway to a middle 

class job and economic security. A college degree plays a critical role in most American Dreams. 

Unfortunately, we know all too well that the rising cost of higher education is 

pushing those American Dreams a little further out of reach for too many families. 

This rise in costs is due to a number of factors. 

States’ falling support for higher education has caused tuition to go up well above 

inflation. Many of us in this committee can remember the days when a decent higher education was well within reach for average working families. 

Thanks to significant state support for higher education, credit hours were affordable. A summer job could be enough to help us get through the following year. But 

this is no longer true. Higher education costs have been shifted increasingly to students and families. And to make matters worse, families’ incomes have not kept 

pace with this rising cost. 

When workers’ incomes were growing with their productivity, parents could afford 

to contribute to the education of their children. But this, too, is fast becoming a 

thing of the past. 

To make up for this shortfall, students and parents turn to loans in order to pay for college. As a result, the average student now graduates with $26,000 in debt. 

And that debt looks more like a mortgage if a student goes on to attend graduate 

or professional school. 

Last year, the Consumer Financial Protection Bureau found that student loan debt was more than $1 trillion. This is higher than the nation’s total credit card 

debt. Just last week we had yet another report from the New York Federal Reserve 

on the impact of rising student loan debt on our economy. It found that student loan 

debt has almost tripled in the last eight years as more students need to borrow 

more money to go to school. 

This is unsustainable. Students who did everything that was asked of them are 

rightly concerned about their future. They wonder whether borrowing all that 

money to get a degree was worth the trouble. Repaying their student loans has become a tremendous financial obstacle to making other life decisions. 

It affects where they can work, whether they can ever dream of saving enough 

money to purchase a home, whether they can afford to take a risk and start a business, or when they should get married or start a family. 

It isn’t just young people borrowing either—those 40 and older hold 34 percent 

of our nation’s student loan debt. Older borrowers may be forced to delay saving for 

their child’s education or their retirement. Falling behind on monthly payments will 

scar a borrower’s credit rating and open the door to wage, Social Security, and tax 

refund garnishment. This debt threatens the very upward mobility that higher education once guaranteed. 

A few years ago, Congress took significant steps forward in helping students and 

families deal with these realities and afford an education. But those were just the 

first steps. There is more to be done in the short and long term to make college 

affordable, accessible, and make student aid programs work better. 

Members from both sides of the aisle should work together to develop and move 

those solutions. In the short-term, while the economic recovery remains fragile, this 

committee must make sure student loan interest rates do not double on students 

this summer. 

On July 1, the subsidized Stafford loan interest rate will double to 6.8 percent 

for millions of undergraduate students. With the job market still recovering, we 

should not be asking students with the greatest need to be burdened by higher loan 

costs. Interest rates for banks are at historic lows. There is no good policy reason 

to allow rates for students to double at this time. 

In the longer term, we need to consider new ways to calculate interest rates for 

federal student loans. There are a number of proposals that have been put forward 

that we should examine. 

Also, we must not ignore problems in the private student loan market. There, 

rates are higher. Refinancing can be next to impossible. And borrowers do not enjoy 

access to various repayment options that we have provided to federal loan borrowers. 

As we consider various solutions, we must not lose sight of the fact that these 

borrowers are the nation’s future. If they are shackled by unmanageable debt, our 

economy will invariably suffer. We have a moral and economic obligation to ensure 

that all qualified students who want to attend college can afford to go. 

Our ability to compete in the global marketplace depends on it. I look forward to 

hearing from our witnesses on ways Congress can work together to address the interest rate question and reduce student loan debt. 

Thank you for joining us today. I yield back. 
7 

Chairman KLINE. I thank the gentleman, and I agree with that 

comment. 

As the gentleman knows, we have been looking at that. We have 

had a number of experts come in and talk to us. We are going to 

continue that dialogue and I am confident that will be in a bipartisan way as we explore the technology explosion that is so impressive and there is no way that we, Washington, can keep up with 

that. They are just going to move faster than we can. But there is 

work to be done there—— 

Mr. MILLER. Faster than us? 

Chairman KLINE. Faster than us. I know, it is shocking. Shocking concept I know. 

Pursuant to committee Rule 7C, all committee members will be 

permitted to submit written statements to be included in the permanent hearing record and without objection, the hearing record 

will remain open for 14 days to allow statements, questions for the 

record, and other extraneous material referenced during the hearing to be submitted in the official hearing record. 

It is now my pleasure to introduce our distinguished panel of witnesses. Dr. Deborah Lucas is the Sloan Distinguished Professor of 

Finance at the Massachusetts Institute of Technology’s Sloan 

School of Management. 

Mr. Jason Delisle serves as the director of the Federal Education 

Budget Project at the New America Foundation. Previously, Mr. 

Delisle was a senior analyst on the Republican staff of the Senate 

Budget Committee and from 2000 to 2006 he was a legislative aide 

in the office of Mr. Thomas Petri who will be joining us shortly. 

Mr. Justin Draeger is the President and CEO of the National Association of Student Financial Aid Administrators. Prior to joining 

NASFAA—I don’t know who invents these acronyms—in 2006, Mr. 

Draeger served as a financial aid director at the Douglas J. Aveda 

Institute in East Lansing, Michigan. 

And Dr. Charmaine Mercer joined the Alliance for Excellent Education in June 2012 as Vice President of Policy. Prior to joining the 

Alliance, Dr. Mercer worked for the House Education and Workforce Committee under Mr. George Miller on elementary and secondary education issues. 

And while this is truly a distinguished panel, I have to say that 

it is especially distinguished having former key staff. 

So, before I recognize each of you to provide your testimony, let 

me briefly explain our lighting system. 

You will each have 5 minutes to present your testimony. When 

you begin, the light in front of you will turn green. When 1 minute 

is left, the light will turn yellow. When your time is expired, the 

light will turn red. At that point, I ask you to please wrap up your 

remarks as best you are able. 

After everyone has testified, members will each have 5 minutes 

to ask questions of the panel and I would remind my colleagues 

that that 5 minutes includes the answers of our witnesses. 

I would now like to recognize Dr. Lucas for 5 minutes. 
8 

STATEMENT OF DR. DEBORAH J. LUCAS, SLOAN DISTINGUISHED PROFESSOR OF FINANCE, MASSACHUSETTS 

INSITITUTE OF TECHNOLOGY 

Ms. LUCAS. I am happy to testify on this important issue. 

I want to focus on several programmatic changes that may seem 

technical in nature, but that are likely to yield significant benefits 

to students and taxpayers, and the budget. 

A critical issue is what the rule should be that determines the 

interest rates charged to borrowers. As you know, interest rates on 

student loans are set in statute. Those rules have been changed numerous times throughout the history of the programs including 

shifting between fixed interest rates and variable interest rate formulas. 

Since 2006, new Stafford loans have carried a fixed interest rate 

of 6.8 percent. The rate on subsidized loans is fixed at 3.4 percent, 

but that rate is scheduled to increase to 6.8 percent for loans made 

after the end of June. 

The current practice of setting fixed interest rates that extend 

many years into the future—rather than linking them by formula 

to prevailing market interest rate conditions—has adverse consequences for students, for taxpayers, and for the stability and control of budgetary costs. 

For students, the current policy creates large swings in the value 

of government assistance from year-to-year; very similar students 

that attend the same school but in different years receive very different amounts of support. Subsidies are small when interest rates 

are low as they are now and large when rates are high. 

As well as raising fairness concerns, this volatility makes it more 

difficult for prospective students to assess the affordability of pursuing a higher education. 

At the same time, the variability in year-to-year subsidies creates potentially large and uncertain liabilities for taxpayers, and 

from a budgeting and control perspective, the uncertain size and 

volatility of subsidies over time is detrimental to budgetary planning, and it has the effect of reducing the control that Congress exercises over the allocation of scarce budgetary resources. 

Adopting the alternative of market-indexed rates would reduce 

the volatility in subsidies for borrowers and taxpayers and also 

help to stabilize the budgetary costs of the programs. 

Under that approach, the interest rate charged on new loans 

each year would be linked to a market rate; for instance, to a 

Treasury security with a similar duration to the loans. The interest 

rates could still be fixed over the life of an individual loan, but that 

fixed rate charged to new borrowers would vary year-to-year. 

Alternatively, borrowers could be charged a floating rate that 

resets every year over the life of the loan as was the case before 

2006. 

The notion that allowing interest rates to vary with market conditions would create greater stability and fairness than fixing interest rates by statute may at first seem unintuitive. 

However, market-linked interest rates are beneficial because 

they generate more stable real, or inflation-adjusted, loan payments. High nominal interest rates generally coincide with periods 

of high expected inflation rates. 
9 

Market rates increase because investors need more compensation 

just to maintain the purchasing power of the loan repayments they 

receive. At the same time, wages grow more quickly during periods 

of higher inflation, making higher nominal payments more affordable to borrowers. 

Furthermore, low nominal interest rates tend to be a symptom 

of a weak economy and job market, as is the situation today. Fixing 

the interest rate by law tends to shrink government subsidies at 

just those times when students would benefit from them the most. 

With market-indexed interest rates, the generosity of subsidies 

could be controlled by choosing an appropriate interest rate spread; 

a number which could be specified in legislation in place of the 

fixed interest rates that are there today. 

Because of the way student loans are budgeted for, moving to indexed rates would have the effect of lowering the volatility of their 

budgetary costs over time. 

Specifically, under the Federal Credit Reform Act of 1990 or 

FCRA, credit programs are budgeted for on an accrual basis that 

records the lifetime cost of the loans disbursed each year. 

Specifically, the costs are calculated by discounting to the 

present the expected cash flows over the life of the loan using maturity-matched, Treasury interest rates as the discount rates. 

With interest rates on student loans that are fixed by statute, 

when market Treasury rates go up, the value of the projected future payments fall and the budgetary cost of the loans increases; 

and conversely when market rates fall. 

Indexing interest rates on student loans would largely eliminate 

that source of budget volatility. 

The move to accrual accounting for federal credit with FCRA represented a significant improvement over the cash accounting that 

preceded it in terms of accuracy and transparency. However, the 

requirements use Treasury rates for discounting fail to account for 

the full cost to taxpayers. 

A proposal that would alleviate the understatement of cost in the 

budget and increase transparency would be to replace FCRA subsidy costs with so-called fair or market value estimates in the 

budget. 

That change would eliminate the artificial appearance that the 

student loan programs are highly profitable for the government, 

which is the case now. It would also put credit and noncredit assistance on a more level playing field in the budgetary process. 

In particular, it would reduce the cost disadvantage of Pell 

grants compared to student loans by accurately portraying the cost 

of the loans. 

I also have some comments in my written testimony on the effects of moving to a more income-based repayment system, but in 

the interest of time, I will end here and look forward to your questions. Thank you. 

[The statement of Ms. Lucas follows:] 

Prepared Statement of Deborah Lucas, Sloan Distinguished Professor of 

Finance, Massachusetts Insititute of Technology 

Thank you, Chairman Kline and Congressman Miller. To all the members of the 

committee, I appreciate the opportunity to testify on opportunities to strengthen the 

Federal student loan programs. My focus will be on four programmatic changes that 
10 

are seemingly technical in nature, but which are likely to yield significant benefits 

to students and taxpayers, and that could increase the stability and transparency 

of budgetary costs. 

Market-Indexed Student Loan Rates 

A critical issue is to revisit the rule for how the interest rates on student loans 

are determined. Student loan interest rates are set in statute. The statutory rules 

have been changed numerous times throughout the history of the programs, including shifting between fixed interest rates and variable interest rate formulas. Since 

2006, new Stafford loans have carried a fixed interest rate of 6.8%. The rate on subsidized loans is fixed at 3.4%, but that rate is scheduled to increase to 6.8% for loans 

made on or after July 1, 2013. The rates on other types of loans also are fixed in 

legislation. 

The current practice of setting fixed interest rates that extend many years into 

the future—rather than linking them by formula to prevailing market interest rate 

conditions—has adverse consequences for students, for taxpayers, and for the stability and control of budgetary costs. • For students, the current policy creates large swings in the value of government 

assistance from year to year. Similar students that attend the same school but in 

different years receive very different amounts of support: Subsidies will be small 

when market interest rates are low and large when rates are high. As well as raising fairness concerns, the volatility makes it more difficult for prospective students 

to assess the affordability of pursuing a higher education. • At the same time, the variability in year-to-year subsidies creates potentially 

large and uncertain liabilities for taxpayers. • From a budgeting and control perspective, the uncertain size and volatility of 

subsidies over time is detrimental to budgetary planning, and it has the effect of 

reducing the control that Congress exercises over the allocation of scarce budgetary 

resources. The volatility in federal subsidies caused by fixing the interest rates on student 

loans is illustrated in Table 1, which shows the subsidy rates estimated by OMB 

for loans originated between 2006 and 2011. The pattern of sharply lower subsidies 

starting in 2009 reflects that the rates charged to students remained constant even 

as Treasury interest rates fell to historically low levels. 

Adopting the alternative of market-indexed rates would reduce the volatility of 

subsidies for borrowers and taxpayers, and also help to stabilize the budgetary costs 

of the programs. Under that approach, the interest rate charged on new loans each 

year would be linked to a market rate, for instance, to a Treasury security with a 

similar duration to the student loans. The interest rates could still be fixed over the 

life of each individual loan, but that fixed rate would change year to year. 

The notion that allowing interest rates to vary with market conditions would create greater stability and fairness than fixing interest rates by statute may at first 
11 

seem unintuitive. However, market-linked interest rates can be beneficial because 

they result in more stable real (or inflation-adjusted) loan payments. High nominal 

interest rates generally coincide with periods of high expected inflation rates. Market rates increase with inflation because investors need more compensation just to 

maintain the purchasing power of the loan repayments they receive. Wages also 

grow more quickly during periods of higher inflation, making higher nominal payments more affordable to borrowers. Furthermore, low nominal interest rates tend 

to be a symptom of a weak economy and job market, as is the situation today. Fixing the interest rate by law tends to shrink government subsidies at just those 

times when students would benefit from them most. 

With market-indexed interest rates, the generosity of subsidies could be controlled 

by choosing an appropriate ‘‘interest rate spread’’—a number which could be specified in legislation in place of a fixed interest rate. For example, Stafford borrowers 

could be charged a 3 percent spread over the 10-year Treasury bond rate (which 

would translate to an interest rate of 5 percent under current interest rate conditions of 10-year rates at about 2 percent). Lower rate spreads could be specified for 

subsidized loans. 

If rates are indexed, policymakers may want to protect borrowers from unusually 

high interest rate conditions by setting an interest rate cap that limits the maximum rate charged. For example, the cap on consolidation loans is currently 8.25%. 

However, the lower is the cap that is chosen, the higher the cost and volatility that 

would be reintroduced. It is worth noting that even without a cap, borrowers would 

have some protection against unusually high interest rates because student loans 

can be prepaid without penalty. 

Fair Value Accounting for Costs 

Because of the way student loans are budgeted for, indexing student loan interest 

rates would have the effect of lowering the volatility of their budgetary costs over 

time. Specifically, under the Federal Credit Reform Act of 1990 (or FCRA), credit 

programs are budgeted for on an accrual basis that records the lifetime cost of the 

loans disbursed each year. Specifically, costs are calculated by discounting to the 

present the expected cash flows over the life of the loan using current, maturitymatched, Treasury interest rates as the discount factors. 

With interest rates on student loans that are fixed by statute, when Treasury 

rates go up the value of projected future payments fall and the budgetary cost of 

the loans increases; and conversely when market rates fall. Indexing the interest 

rates on student loans would largely eliminate that source of volatility. (Subsidies 

would still vary over time with changes in projected default rates, program participation, and other factors.) 

The move to accrual accounting for federal credit represented a significant improvement over the cash accounting that preceded it in terms of accuracy and transparency. The use of Treasury rates as discount factors, however, fails to account for 

the full costs of the risks associated with government credit assistance. Those costs 

must ultimately be borne by taxpayers, just as they must be borne by the equity 

holders (owners) of private lenders that make private loans. 

A consequence of that incomplete accounting for risk is that in recent years student loans have appeared to be quite profitable for the government. For example, 

OMB reported that the government earned 14 cents per dollar on student loans 

made in 2011, even though the rates charged were significantly lower than those 

offered by private lenders, and despite the heightened risk of defaults caused by the 

still weak job market. 

A policy change that could alleviate the understatement of costs in the budget and 

increase transparency would be to replace FCRA subsidy costs with so-called ‘‘fair’’ 

or market-based cost estimates in the budget. That change would eliminate the artificial appearance that the student loan programs are highly profitable for the government. To illustrate, Table 2 reproduces CBO’s 2010 estimates of the hypothetical 

effect of switching from FCRA to fair-value estimates of program cost. 
12 

1Deborah Lucas and Damien Moore, ‘‘The Student Loan Consolidation Option,’’ manuscript, 

MIT, January 2013. 

As well as improving transparency about program costs, moving to fair value estimates would have the salutary effect of putting credit and non-credit assistance to 

students on a more level playing field in the budgetary process. In particular, the 

budgetary disadvantage of offering Pell grants as compared to student loans would 

be reduced by using a more comprehensive approach to estimating of the cost of 

credit assistance. 

Income-Based Repayments 

Proposals have been put forward to move to a more income-based repayment system, under which borrowers’ payments would depend on their earnings after they 

graduate. Such policies would benefit students in several ways: It would help them 

avoid unmanageable debt levels, and it would make it easier to pursue careers in 

lower paying fields such as the military, public service, or teaching. It could be especially beneficial to low-income students whose prospects after graduation are less 

predictable and who are therefore more wary of taking on debt. 

The costs and risks to the government of an income-based repayment scheme 

would depend critically on the details of how the policy is structured. In principle 

it would be possible to set up the system in a way that did not increase overall program costs. However, because the savings that would be anticipated from lower default rates are unlikely to fully make up for the higher costs associated with reducing or extending the payments of students who get relief but would not have defaulted under the old system, overall costs would tend to be higher unless the average interest rates charged were also increased. 

Restructure the Consolidation Option 

Finally, modifying the consolidation option to eliminate borrowers’ ability to convert a floating rate loan to a fixed rate loan with the same interest rate could potentially save the government a significant amount of money in the event that Congress ever decides to return to fully floating interest rates. My academic work on 

the consolidation option suggests that between 1998 and 2005, a period when student loans carried a variable interest rate tied to 3-month Treasury rates, the cumulative cost of consolidation to the government was about $27 billion.1 The greatest 

benefits accrue to cohorts who happen to graduate when interest rate conditions are 

favorable to consolidation, to professional students with the largest loan balances, 

and to borrowers with the sophistication to manage their loans efficiently. As such, 

the option is unlikely to be an efficient way to subsidize higher education. The benefits of allowing students to combine all their loans into a single loan could be preserved, but the costs of consolidation reduced, by charging a rate on floating-to-fixed 

conversions that is linked to a current long-term Treasury rate. 

Chairman KLINE. Thank you. 

Mr. Delisle, you are recognized for 5 minutes. 
13 

STATEMENT OF JASON DELISLE, DIRECTOR OF THE FEDERAL 

EDUCATION BUDGET PROJECT, THE NEW AMERICA FOUNDATION 

Mr. DELISLE. Thank you Chairman Kline, Ranking Member Miller, and committee members. Thank you for inviting me to testify 

about the need to improve the federal student loan program. 

If there is one thing recent debates about federal student loans 

have demonstrated is that Congress needs to develop a rational, 

long-term plan for setting interest rates. 

Currently, the program charges borrowers the same fixed interest rates no matter what happens to other interest rates in the 

economy, and the rates are arbitrary. 

Congress wrote them into law back in 2002, and with the exception of an arbitrary cut to 3.4 percent on some loans, those rates 

have been in law ever since. 

There are a lot of problems with picking a fixed rate that looks 

about right for the time being and then deciding to cut it in half 

on some loans some of the time when market or political conditions 

might warrant it. That approach, as you are all aware, makes rate 

adjustments in either direction very difficult to legislate. 

An upward adjustment is politically unpopular and a downward 

adjustment is prohibitively costly to taxpayers. 

Here is what I believe is a better approach. Set a fixed interest 

rate for newly issued student loans based on the rate on the 10- 

year treasury notes time the loans are issued plus three percentage 

points. 

That formula would set rates low enough to provide a subsidy to 

borrowers. That is, the terms will be better than those in the market all the time, but the rates will be high enough to partially offset the cost of the program. Rates would still be fixed and borrowers would receive lower rates when rates are low and higher 

rates when rates are high. 

On loans issued this coming school year under this approach 

would carry a fixed rate of 4.9 percent, lower than the current 6.8 

percent rate on the most widely available federal student loans. 

What is more, the rate would be available to all undergraduate and 

graduate students, unlike an extension of the 3.4 percent rate. 

Now of course, under this formula, the rate on loans issued in 

subsequent years could be higher or lower than today’s rates. The 

Congressional Budget Office projects that long-term interest rates 

will eventually rise, but this is also why the budget office shows 

that the proposal I have recommended does not score as a cost over 

a 10-year window; although there would be costs in the first 5. 

Now student aid advocates in some policymakers worry that a 

rate-setting formula like the one I have recommended could make 

loans unaffordable for borrowers should interest rates increase significantly. 

They suggest capping the rate, yet a cap would be costly for taxpayers and it would reintroduce an arbitrary interest rate back into 

the program. More importantly, a cap would be redundant. The 

federal student loan program already includes a built in interest 

rate cap and it is targeted only to borrowers who need it. It is 

called income-based repayment, or Pay-As-You-Earn. 
14 

Under these programs, borrowers make monthly payments based 

on their incomes, not the interest rates on their loans. Moreover, 

the loan terms are fixed at 10 or 20 years through loan forgiveness 

so that a borrower with a high interest loan would have his debt 

forgiven before the rate influences payments provided he qualified 

for the assistance based on his income. 

An IBR is an even more effective interest rate cap thanks to the 

large new benefits that the Obama administration has added to the 

program. 

Now I should note that my colleague, Alex Holt, and I have identified some significant flaws in those new benefits. Our ongoing 

analysis shows that that graduate and professional students face a 

clear and obvious incentive to borrow more rather than less. 

These students can easily accumulate loan balances where they 

will bear no incremental cost in borrowing an additional dollar. The 

added debt and interest will be forgiven under IBR. 

So using a very plausible income scenario, we find that once a borrower takes on about $65,000 in debt, he bears none of the incremental costs of borrowing an additional dollar under the new 

IBR even if he goes on to earn over $100,000 for most of his repayment term. 

If he expects to pursue a career in the nonprofit sector, he bears 

none of the incremental cost of borrowing an additional dollar once 

he reaches $49,000 in debt. 

In other words, the message that this program sends to graduate 

students is keep borrowing. The message it sends to schools is expand your graduate programs, start new ones, and charge more. 

These are very bad messages to send. 

Fortunately, Congress and the administration can address this 

problem without rolling back all of the new benefits that IBR and 

Pay-As-You-Earn provide and I have included those recommendations in my written testimony. 

So to wrap up today, I want to reiterate that Congress should set 

student loan interest rates based on a formula like the one I outlined and let a modified, income-based repayment program cap the 

interest rate for borrowers who truly need the assistance, but remember to address the perverse incentives and unnecessary benefits that IBR now provides to graduate and professional students. 

Thank you. I look forward to answering any questions that you 

may have. 

[The statement of Mr. Delisle follows:] 

Prepared Statement of Jason Delisle, Director, 

Federal Education Budget Project, New America Foundation 

Chairman Kline, Ranking Member Miller, and committee members, thank you for 

inviting me to testify about the need to improve the federal student loan program. 

My colleagues in the New America Foundation’s Education Policy Program and 

I have developed a set of recommendations that we believe will improve the federal 

student loan programs to the benefit of students and taxpayers. These recommendations were first published in two New America Foundation papers, Safety Net or 

Windfall? Examining Changes to Income-Based Repayment for Federal Student 

Loans (October 2012) and Rebalancing Resources and Incentives in Federal Student 

Aid (January 2013). Those recommendations are discussed briefly below. 

At the end of this testimony is a brief explanation of the series of events that led 

Congress to enact the current interest rate structure on federal student loans. That 

information may be helpful to the Committee as it considers changes to student loan 

interest rates. 
15 

The Case for Reforming Federal Student Loans 

• The federal student loan program is extremely complex, offering students and 

their families a variety of choices, with each carrying different congressionally set 

interest rates and borrowing limits. Borrowers also face a baffling array of repayment options. Benefits often overlap, which lead to unintended interactive effects. 

• Graduate students and the parents of undergraduates can take out loans up to 

the full cost of attendance. This encourages and enables imprudent borrowing, and 

also makes it easier for colleges and universities to raise their prices with impunity. 

• The benefits of the loan program are poorly targeted. The programs provide 

generous federal subsidies to some students based on their incomes before they enroll in school, rather than after they graduate, which is when they actually pay their 

loans back. Students are also charged the same interest rates regardless of changes 

in market interest rates, such that students are provided different levels of subsidies from year to year for no particular reason. Recent changes to the IncomeBased Repayment plan provide the largest benefits to those who borrow most, particularly graduate students, even if they earn a high income. 

• The program does not provide enough incentives for students to make steady 

progress and complete a credential on time. In some cases, it does the opposite. 

Recommended Reforms 

Address Flaws in the IBR Program and Make it the Sole Repayment Option 

for Borrowers 

A simpler federal loan program with better targeted benefits should offer a single 

repayment plan that is similar to both the Pay-As-You-Earn plan that the U.S. Department of Education recently enacted (which itself is meant to mimic a plan in 

statute set to take effect in 2014 and is referenced throughout this testimony as 

‘‘new IBR’’) and the Income-Based Repayment plan that was enacted in 2007 (referenced throughout this testimony as ‘‘old IBR’’).1 This sole repayment plan must 

incorporate changes to the current system to ensure that it does not provide windfall benefits to higher income borrowers who have the means to repay their debt 

or indemnify high tuitions and over-borrowing. Those recommended changes are the 

following: 

• Recommendation #1: Maintain the lower payment calculation (10 percent of 

AGI) in New IBR, but only for borrowers with AGIs at or below 300 percent of the 

federal poverty guidelines ($33,510 for a household size of one). Borrowers with 

AGIs above 300 percent will pay according to the Old IBR formula (15 percent of 

AGI). 

Justification: This change targets the benefits of lower monthly payments under 

New IBR to lower-income borrowers only. Borrowers earning more, while still eligible for IBR, must make payments based on the Old IBR formula. Additionally, by 

requiring borrowers with incomes above 300 percent of the federal poverty guidelines to make monthly payments based on 15 percent of their AGIs, it is much less 

likely that high-income borrowers will receive loan forgiveness. It also allows borrowers with lower incomes to benefit from the 10 percent rate that New IBR offers, 

but ensures that they will repay those benefits by paying at a higher rate if their 

incomes increase later. 

Lastly, those borrowers with AGIs above 300 percent of the poverty guidelines 

will likely have total incomes that are markedly higher than their AGIs because 

they are able to make pre-tax benefit payments, contribute to retirement savings, 

and take larger above-the-line deductions. Imposing a higher payment calculation 

(15 percent of AGI) on these borrowers compensates for their significantly lower 

AGIs relative to their total salaries. 

• Recommendation #2: Maintain the loan forgiveness threshold from New IBR (20 

years), but only for borrowers whose loan balances when they entered repayment 

do not exceed $40,000. Borrowers with higher initial balances would qualify for loan 

forgiveness after 25 years of repayment, the same as under Old IBR. 

Justification: Like the first recommendation, this proposal would maintain the 

more generous benefits of New IBR, but not for all borrowers. A two-tiered loan forgiveness system based on initial debt levels would keep the 20-year loan forgiveness 

targeted toward borrowers who have debt from undergraduate studies or moderate 

amounts of debt from graduate studies and who struggle to repay. By creating a 

longer loan forgiveness threshold for borrowers with debt levels above $40,000, this 

recommendation also reduces the tendency that New IBR has to provide loan forgiveness to high-income, high-debt borrowers when they are most able to make 

higher payments on their loans for a total of 25 years. This two-tiered approach 

would discourage graduate and professional schools that charge high tuitions and 

their students who borrow federal loans from using IBR as an indemnification tool. 
16 

• Recommendation #3: Eliminate the maximum payment cap. Borrowers must always pay based on the IBR income formulas, no matter how high their incomes are. 

Additionally, borrowers may not opt to enroll in another repayment plan.2

Justification: The maximum payment cap targets IBR benefits to higher-income 

borrowers either by reducing their monthly payments, increasing the amount of loan 

forgiveness they receive, or both. It can also increase the chances that a borrower 

earning a very high income (over $200,000) would qualify for loan forgiveness. Lastly, requiring that borrowers stay in IBR for the duration of their repayment term 

will ensure that borrowers who benefited from IBR when their incomes were low 

will pay commensurately higher payments should their incomes increase—this helps 

offset some of the initial costs the government incurred when the borrowers benefitted from low payments while their incomes were lower. • Recommendation #4: The U.S. Department of Education and policymakers 

should be forthcoming about the negative consequences borrowers may face when 

repaying through IBR. The Department should provide borrowers with illustrative 

examples of how paying off their loans more slowly could increase what they pay 

and provide clear warnings. Private companies servicing federal student loans 

should clearly indicate to borrowers how much interest accrues on their loans when 

they repay through IBR and how that is likely to increase the repayment term and 

total interest costs they will pay. 

Justification: IBR entails some financial risks for borrowers (those risks exist for 

Old IBR, though New IBR entails far less financial risk for borrowers with debt levels that exceed $20,000). Borrowers may save little per month under IBR and end 

up paying more and for longer due to the added interest costs. Borrowers do make 

a trade-off in paying a minimum monthly payment under IBR over electing to make 

pre-payments, and loan servicers and the U.S. Department of Education should ensure that borrowers are informed of those trade-offs. • Recommendation #5: IBR payments for a borrower who is married but files a 

separate income tax return should be based on the household’s combined AGI. The 

program currently allows borrowers to file separate income tax returns and use only 

the borrower’s income to calculate payments under IBR. This policy should include 

an exception for cases where both spouses are making payments on federal student 

loans under IBR. In that case, each borrower’s loan payments should be based on 

one-half of household income. 

Justification: Married borrowers with low individual, but high household incomes 

can still qualify for IBR (including loan forgiveness) by filing a separate income tax 

return. If these borrowers also have children, they can significantly increase the 

benefits they earn under IBR by designating the children as dependents on their 

annual IBR application since it increases their household size and the poverty exemption they receive under IBR. This provision is another way in which higher-income borrowers (based on household income) can qualify for generous benefits under 

IBR. Ending this provision will ensure that the program’s benefits are targeted to 

borrowers who need the most assistance. The exception for couples in which each 

spouse is repaying a federal student loan will ensure that borrowers in a two-borrower household do not each have to make payments on their loans on their combined incomes—which would essentially be double-counting their incomes. 

• Recommendation #6: Make loan forgiveness tax-free using budgetary savings 

that arise from the other recommendations outlined above. 

Justification: Federal tax law treats loan forgiveness under IBR (except when provided for public service employees) as taxable income. Borrowers who receive loan 

forgiveness (under an IBR that reflects the recommendations outlined here) will 

likely have experienced some degree of financial hardship. Therefore, they are also 

likely to struggle with what could be a relatively large tax bill in the year they receive loan forgiveness. If IBR is meant to aid this type of borrower, then it should 

not impose its own type of financial burden on them. 

• Recommendation #7: Allow all current borrowers to enroll in an IBR that reflects these recommendations. Do not limit it to new borrowers and new loans. 

Justification: Old IBR is available to all borrowers, but Congress and the Obama 

administration have limited access to New IBR to more recent borrowers to reduce 

the cost of the program. The recommendations outlined above would preserve some 

of the benefits of New IBR, but target them to those borrowers with more financial 

need, thereby reducing the cost. The recommendations would further reduce costs 

by limiting benefits to higher-income borrowers compared to even Old IBR. Therefore, policymakers could open the program to all borrowers at little or no incremental cost to taxpayers, and a greater number of borrowers would gain access to 

lower repayments and earlier loan forgiveness. 

• Recommendation #8: Ensure that loan servicers have the requisite income information from borrowers when they begin repaying their loans. Require borrowers to 
17 

agree in their promissory notes to allow their loan servicers and the U.S. Department of Education to access necessary information from their most recent federal 

income tax return. 

Justification: The main impediment to making IBR the automatic and only repayment plan for all new borrowers is that borrowers must first submit information to 

loan servicers before their monthly payment can be calculated and billed. Requiring 

that borrowers authorize the U.S. Department of Education to access the necessary 

information from their tax returns upon signing a promissory note for a federal student loan will ensure that the loan servicer can calculate a borrower’s payment 

without the borrower having to first submit information. 

Repayment Tables for Two Borrowers Under Different Repayment Plans 

The tables below are excerpted from Safety Net or Windfall? Examining Changes 

to Income-Based Repayment for Federal Student Loans.3
18 

Figures for the recommended IBR changes reflect all proposed changes listed in 

this testimony except that borrower income does not reflect household income. All 

borrowers file separate federal income tax returns and designate any children that 

they have as dependents. The interest rate for all repayment plans is the rate the 

borrower would pay under the consolidation plan, which is the weighted average 

rate rounded to the nearest one-eighth of one percent. 

End the Subsidized Stafford Interest Rate Benefit 

Since the passage of the Higher Education Amendments of 1992, all undergraduate borrowers have been able to take out federal Stafford loans regardless of 

income or other need-based tests, at terms that have been generally more favorable 

than those in the private market.4 Prior to the enactment of that policy, the federal 

loan program allowed only financially needy students to borrow.5 These loans had 

always included an interest-free benefit under which the loan would not accrue interest while the borrower was in school. However, when policymakers opened up the 

federal student loan program to borrowers of all income backgrounds in 1992, they 

maintained the interest-free benefit for borrowers who met a needs analysis test 

that accounted for the cost of attendance at students’ institutions, but did not provide a similar benefit for other borrowers. That interest-free benefit remains the distinction between the two loan types that still exist in today’s program: Subsidized 

Stafford loans and Unsubsidized Stafford loans. 

In other words, Subsidized Stafford loans were not created to provide benefits 

over and above those on Unsubsidized Stafford loans. Rather, it is a benefit that 

was always provided as part of the federal student loan program. The Subsidized 

and Unsubsidized Stafford loan distinction remains current policy mainly due to historical circumstances. That fact is made clearer by some of the policy’s shortcomings 

and how it interacts with the myriad changes policymakers have made to the student loan programs in recent years. 

In fact, Subsidized Stafford loans do not always provide the greatest benefits to 

the lowest-income students. Subsidized Stafford loans are awarded to borrowers in 

part according to the cost of attendance of their schools. That means a borrower 

with a high-family income will be eligible for the loans if he attends the most expensive type of institution, while a similarly situated borrower who opts to attend a 

low-cost institution will qualify only for Unsubsidized Stafford loans. This is why, 

in spite of income and assets tests targeting the aid to lower income families, 12 

percent of borrowers who receive Subsidized Stafford loans come from families earning over $100,000 per year. 

Furthermore, the Income-Based Repayment Plan better aligns repayment with a 

borrower’s ability to repay, whereas Subsidized Stafford loans are provided to borrowers based largely on their family income when they enter school. For example, 

borrowers with Unsubsidized Stafford loans begin repayment with higher loan balances than students with Subsidized Stafford loans (assuming everything else is 

equal) because interest has accrued on the loan. Under IBR, the higher loan balance 

does not necessarily mean the borrower will pay more than if he had a lower loan 
19 

balance—monthly payments are based on a borrower’s income, not loan balance. 

Therefore a borrower who earns a persistently low income over his repayment term 

would make the same payments regardless of the size of his initial loan balance. 

Only borrowers with higher incomes in repayment stand to gain from Subsidized 

Stafford loans.6

The Obama administration recommended in 2011 that graduate students be eliminated from the Subsidized Stafford program going forward, and Congress acted on 

that policy, redirecting the budgetary resources to the Pell Grant program. The administration noted that, in addition to the Income-Based Repayment option available to graduate and professional students, ‘‘eligibility for the interest subsidy is 

based on ‘ability-to-pay’ at the time of enrollment, but the borrower realizes the benefit later—typically years later—in the form of lower loan payments after leaving 

school.’’7 The administration also argued that government aid should be targeted to 

the highest-need students.8 All of those arguments apply to the case for eliminating 

the Subsidized Stafford loan interest-free benefit for undergraduate students, particularly if IBR is the only repayment option for borrowers. 

Create a Fixed Formula for Setting Student Loan Interest Rates 

Interest rates on federal student loans are arbitrary and inflexible because Congress set the rates as nominal figures in law based on what would have been a subsidized interest rate in the year 2001.9 They are not based on any formula, nor do 

they bear any relation to changes in related interest rates in the market since then. 

The rate on all newly-issued Unsubsidized Stafford loans as of 2006 is 6.8 percent, 

and under current law will remain so in perpetuity. 

The effect of such a policy is to provide very different levels of subsidies to borrowers depending on when they take out their loans. The subsidy on loans issued 

at the 6.8 percent interest rate in 2007 when the economy was booming and interest 

rates were relatively high was much larger than the subsidy provided to students 

in today’s low-interest rate, slow-growth economy. That means students receive larger subsidies when they are least needed; the policy is both inefficient and unfair. 

In fact, the Congressional Budget Office estimates that the loans issued in fiscal 

year 2013 will not provide any subsidies (meaning the terms provide no value over 

loans in the private market) to the vast majority of borrowers.10 This will be the 

first time that federal student loans provide no subsidy, based on fair-value estimates. 

A better policy would be to set interest rates on all newly-issued federal student 

loans at 3.0 percent, plus a markup equal to long-term U.S. Treasury borrowing 

rates. The fixed rate of 3.0 percent would ensure that the government partially covers the costs of making the loans (i.e. administrative costs and costs associated with 

defaults, collections, and delinquencies), and the markup would allow the loan rates 

to adjust based on long-term interest rates. The interest rates charged to borrowers 

would still be fixed for the life of the loan, but the rate for new loans would change 

each year based on the market rates for 10-year Treasury notes. 

Under that formula, the interest rate for federal loans issued for the 2012-13 

school year would be about 4.9 percent, a big drop from the 6.8 percent rate that 

is currently charged on Unsubsidized Stafford loans. That rate would be available 

on all newly issued Stafford loans to undergraduate and graduate borrowers. 

Because the rate offered on newly-issued loans would adjust annually, it could be 

higher in future years. However, Income-Based Repayment on federal student loans, 

coupled with loan forgiveness after 20 or 25 years in repayment, ensures that the 

rate a borrower pays cannot rise to unaffordable levels regardless of the loan’s nominal rate. It also ensures that borrowers earning higher incomes, those who are most 

able to pay, are the only ones who could face higher interest rates under the policy. 

Income-Based Repayment is effectively an income-based interest rate cap that provides benefits to borrowers based on need, but it determines the cap in repayment, 

rather than at the time of enrollment. 

How IBR Works as an Interest Rate Cap 

The following scenarios were developed using the New America Foundation IBR 

calculator.11

Consider someone with $45,000 in debt from undergraduate and graduate studies 

who works in the government/non-profit sector and earns a starting salary of 

$38,000 (AGI of $34,200) with a four percent annual raise. At an interest rate of 

4.9 percent, she pays a total of $22,281 on her loans over 10 years, and then the 

remaining balance is forgiven under Public Service Loan Forgiveness. At an interest 

rate of 12 percent she still pays $22,281 and the remaining balance is forgiven. 

Even if her interest rate were 0.0 percent, her total payments would still be 

$22,281. 
20 

What if the same person worked in the for-profit sector and therefore qualifies 

for loan forgiveness after 20 years of payments instead of 10? At an interest rate 

of 4.9 percent, her total payments over 20 years are $58,998, and she has some remaining debt forgiven. Increase her interest rate to 12 percent and her total payments are still $58,998. IBR has capped her payments—and the interest rate on her 

loan—because her income is not high enough for the interest rate to matter. As another example, consider a borrower with undergraduate debt of $28,000, who works in the for-profit sector, with a starting income of $29,000 (AGI of 

$26,100) and an annual increase of three percent. She would pay $27,228 on her 

loans over 20 years at an interest rate of 2 percent, 5 percent, or 25 percent. Her 

monthly payments over that time would be no higher or lower under any of those 

interest rates. 

Under IBR, only borrowers with higher incomes would be affected by higher interest rates. But the program still provides a cap even for these borrowers, albeit a 

higher cap. Moreover, monthly payments are still based on income; only the length 

of payment is affected by the interest rate. And high-income borrowers who work 

for the government or non-profit organizations fare even better, because they qualify 

for 10-year loan forgiveness. Imagine a borrower with $40,000 in debt and a starting salary of $50,000 (AGI $45,000), who receives an annual raise of four percent. If she works for a non-profit 

employer, the interest rate on her loan is irrelevant. She will pay $35,247 before 

her remaining debt is forgiven (after 10 years of payments) whether the interest 

rate is 2 percent, 6 percent or 12 percent. However, if she works for a for-profit employer, her higher income means she will pay for longer if the interest rate is higher. But if the rate is 8 percent or higher, she won’t pay all of the extra costs. Instead, she will have much of it forgiven once she reaches 20 years of payments. 

Set One Loan Limit for All Undergraduates, Irrespective of Their Dependency Status 

Policymakers should simplify the federal loan program by eliminating the distinction between dependent and independent undergraduates and allowing both types 

of students to borrow the same amount of loans. Under the New America Foundation proposal, the annual limits for all undergraduates would be $6,000 for a first 

year student, $7,000 for a second-year student, and $9,000 for a third-, fourth-, or 

fifth-year student. The aggregate limit for undergraduates would be $40,000. 

These proposed limits are higher than dependent undergraduates can currently 

borrow on their own but less than independent undergraduates can take out. This 

increase is appropriate due to our proposed elimination of Parent PLUS loans, 

which is outlined later in this document, and the fact that current loan limits for 

independent students can lead to excessive amounts of debt. As of now, an independent undergraduate student who borrows the maximum in federal loans would 

begin repayment with a principal and interest balance of approximately $74,000, an 

amount that would require $486 monthly payments over 30 years to repay under 

the currently available repayment plans. 

End Grad PLUS, but Increase Stafford Loan Limits for Graduate Students 

Policymakers should end the Grad PLUS loan program. This program allows 

graduate and professional students to borrow up to the full cost of attendance at 

an institution of higher education, with no time or aggregate limit. Such a policy, 

especially when coupled with loan forgiveness and Income-Based Repayment, can 

discourage prudent pricing on the part of institutions and prudent borrowing by students. However, policymakers should increase the annual limit on Unsubsidized 

Stafford loans for graduate students from the current $20,500 to $25,500 to replace 

some of the borrowing ability graduate students will lose when the Grad PLUS loan 

program is eliminated. 

If institutions can no longer rely on PLUS loans to fund their high-tuition programs and if the private market is responsive to the ability of borrowers to repay, 

then graduate schools may have to set their pricing based, in part, on students’ expected earnings. Since those in graduate school already have an undergraduate degree and are preparing for a profession, it is more reasonable to expect that loans 

above the Stafford limits be based on prospective ability to repay. Underwriters will 

likely focus most intently on institutional characteristics to determine risk. Consequently, programs that poorly prepare students to repay their debts will find that 

their students cannot access much credit in the private market, which should 

change institutional behavior in terms of quality and pricing. 

End Parent PLUS Loans 

In addition to ending the Grad PLUS loan program, policymakers should eliminate the Parent PLUS loan program. As the cost of attending college has soared, 

so too have Parent PLUS loan disbursements. According to a recent article in The 
21 

Chronicle of Higher Education, the government issued $10.6 billion of Parent PLUS 

loans to approximately one million families last year.12 That is nearly double the numbers of borrowers and an increase of $6.3 billion over the past decade alone. 

Many colleges use these loans when packaging financial aid to fill large gaps in financial aid awards. 

Parents can borrow up to the cost of attendance at the schools their children attend, which means families can easily over-borrow, and institutions have an easy 

source of funds if they wish to raise tuition. Moreover, the federal government does 

not track or publish the rate at which parents default on PLUS loans at each institution. Lastly, the loans carry a relatively high fixed interest rate of 7.9 percent and 

origination fee of four percent, which can pose a financial risk to vulnerable families; and the loans are not eligible for repayment options designed to help struggling 

borrowers, like Income-Based Repayment. 

Limit Loans to 150% of Program Length 

The package of student aid reforms presented here proposes both annual and aggregate limits for federal student loans and gives colleges the flexibility to adopt 

lower limits for their students. We also believe that policymakers should add a new 

program-length limit that would apply in addition to the annual and aggregate limits. The new limit would end loan eligibility once a borrower exceeds 150 percent 

of the standard time needed to complete the degree or program that he is pursuing. 

For instance, a student who borrows $5,000 per year over six years to complete a 

four-year degree would, under this proposal, exhaust his eligibility for federal student loans, even though he did not exceed the annual or aggregate borrowing limit. 

This policy is meant to discourage extended and prolonged enrollments beyond 150 

percent of the time the student would need to complete his or her program. 

The policy would leave in place the annual limit and aggregate limit on borrowing 

for students who may begin one type of program but switch to another. In other 

words, the 150 percent time limit would start over when the student enrolls in a 

new program, but the overall aggregate and annual limits would still apply. Meanwhile, time spent in remedial education would not count toward the 150 percent 

program-length limit. The proposal would also prorate annual loan limits if a student pursues his or her program on a half-time basis. 

History of Federal Student Loan Interest Rates 

Why the Federal Student Loan Interest Rate Is 6.8 Percent 

Since the 1960s, the federal government has supported a loan program that helps 

students pay for the cost of higher education at institutions across the country. 

While the program has undergone many changes and evolved to provide loans to 

students from all income backgrounds, its original purpose remains. The program 

ensures that students can borrow at favorable terms without regard to their credit 

histories, incomes, assets, or fields of study.13 In 2013, students and parents are ex- pected to borrow $106 billion in federal loans, and over $800 billion in federal student loans were outstanding in 2011.14

From the program’s inception until 1992, Congress set the interest rate on student loans at fixed rates ranging from 6.0 percent for loans issued in the 1960s to 

10.0 percent for loans issued between 1988 and 1992.15 Congress enacted variable 

rates in 1992, seeking to better align them with the interest rate the government 

paid private lenders holding the loans and thereby reduce the government’s costs.16

The new variable rates reset once a year and consist of the interest rate on shortterm U.S. Treasury securities plus 3.1 percentage points (a ‘‘markup’’), capped at 9.0 

percent. Congress made minor adjustments to this formula over the subsequent six 

years, lowering the markup and the cap. 

Shortly after the move to variable rates, in 1993 Congress passed the Student 

Loan Reform Act to establish the Direct Loan program.17 Congress intended this 

program, under which the U.S. Department of Education makes loans directly to 

students, to gradually replace the existing program that subsidized private lenders 

to make loans (i.e., the bank-based program). At the time, policymakers also sought 

to more closely link the interest rates borrowers were charged to the rates the government paid to borrow since there would be no further need to link them to subsidies for private lenders.18 In response, the 1993 law pegged borrower rates to 

longer-term U.S. Treasury securities that were similar in duration to the student 

loans, plus a smaller markup of 1.0 percentage point would be calculated for loans 

issued after July 1, 1998.19 This formula would also be used to set the interest rate 

guaranteed to lenders for any loans still made in the bank-based program in 1998 

and later. 

By the mid-1990s, the Direct Loan program phase-in had not gone as Congress 

had originally planned; as 1998 approached, the bank-based program still accounted 
22 

for the majority of newly issued federal loans. However, the pending interest rate 

change for both borrowers and lenders enacted in 1993 was still set to occur in 1998. 

As a result, lenders in the bank-based program—who Congress assumed in 1993 

would not be playing the major role they still were in 1998—expressed concerns that 

the interest rate change would increase their costs and reduce returns to such an 

extent that they would no longer be willing to make federally backed student 

loans.20

Fearing that lenders would flee the program and disrupt loan availability, in 1998 

Congress postponed the pending rate changes until 2003 (a permanent fix was too 

costly) and left the then-current interest rate formulas in place with some minor adjustments (it reduced the markup on the borrower’s annual interest rate from 3.1 

to 2.3 percentage points). Despite this action, lenders participating in the bankbased loan program continued to express worries over the interest rate structure 

change, now delayed until 2003. They encouraged Congress to address it before mid2002 to avoid disrupting student loan availability. 

As an alternative to the pending rate change, lenders and some lawmakers proposed making permanent the then-current formulas (short-term interest rates plus 

2.3 percentage points). But student advocates and some lawmakers opposed this approach because the formula set to take effect in 2003 (variable rates based on 

longer-term U.S. Treasury rates plus 1.0 percentage point) produced more favorable 

rates for borrowers.21 At the time, short-term and long-term Treasury rates were 

similar, meaning that the lower markup built into the pending formula produced 

lower overall rates. 

In late 2001, after months of negotiations, lawmakers proposed a bipartisan compromise that would avert the pending rate change and make permanent the thencurrent interest rate formula for lenders. It also extended through 2006 the existing 

variable rate formula for borrowers but established fixed interest rates at 6.8 percent for Subsidized and Unsubsidized Stafford loans made after July 1, 2006.22

Lawmakers, higher education associations, and student advocate organizations 

championed the bill because the fixed 6.8 percent interest rate that would start in 

2006 was lower than estimates of what borrowers would pay if Congress had maintained the variable formula.23 In selecting a fixed rate, Congress and advocacy 

groups decided on 6.8 percent because it was approximately the average of the projected interest rates set to take effect in 2003 based on longer-term U.S. Treasury 

bills.24 Supporters also cited the certainty that fixed rates provided over variable 

rates as a benefit to borrowers. The Senate passed the bill unanimously in December 2001, the House passed it with overwhelming support in January 2002, and the 

president signed it into law. 

Congress chose to delay the implementation of the fixed rates until 2006—maintaining the existing variable rate formula in the meantime—to reduce the costs of 

the policy over a ten-year budget window. The Congressional Budget Office estimated that adopting fixed rates would reduce the rates for borrowers compared to 

then-current law, increasing costs for the government by $5.2 billion from 2007- 

2011.25 It would have cost more if Congress had chosen to implement the change 

immediately. 

Meanwhile, in the latter half of 2001, the U.S. Federal Reserve was in the midst 

of reducing its short-term benchmark interest rate in response to a mild economic 

recession and the terrorist attacks of September 11th. By the time the ink was dry 

on the 2002 law that established the fixed 6.8 percent interest rate, the Federal Reserve had cut short-term interest rates below 2.0 percent. It had been as high as 

6.5 percent in early 2001. Two more Federal Reserve rate cuts in 2002 and 2003 

brought the rate to 1.25 percent and 1.0 percent, respectively. Given the low-interest-rate environment that began in 2002, it appeared unlikely that a fixed 6.8 percent rate would lower costs for borrowers as supporters had previously argued. 

A 2005 Effort to Block Fixed Rates Sets Stage for Temporary Rate Cut 

Despite the low interest rate environment of the mid-2000s, the fixed rates scheduled to take effect in 2006 received little attention until 2005, when Congress considered proposals to reduce annual budget deficits. That year, Republican majorities 

in the House and Senate began drafting legislation to cut spending and reduce 

budget deficits. Both chambers made changes to federal student loans a large component of their respective proposals, spurred by reforms outlined in the president’s 

budget request. 

The House plan would have canceled the fixed interest rates set to take effect in 

2006, maintaining the existing variable rate formula, which that year set rates between 3.4 and 5.3 percent.26 Sponsors of the proposal argued that variable rates 

would be better for borrowers and taxpayers. The Senate, however, maintained the 

fixed rates set to take effect in 2006.27
23 

To meet deficit reduction goals, both the House and Senate bills made a change 

to the interest rate guaranteed to lenders making federally backed student loans. 

The bills included a provision that required lenders to rebate interest that borrowers paid in excess of the rate at which the government guaranteed lenders.28

The provision cut spending compared to then-current law because it reduced what 

lenders could earn on the loans. However, the Senate bill had a larger deficit-reducing effect because it left the scheduled fixed rates in place, increasing the size of 

the lender rebates. The rebate provision produced $34.4 billion in savings over ten 

years in the Senate bill compared to $14.5 billion under the House’s variable rate 

proposal.29

Why Interest Rates on Some Loans May Double This Year 

The president signed a final version of the deficit reduction bill into law in January 2006, which included the Senate’s proposal to maintain the fixed rate formula 

and impose a rebate on lenders.30 Even though Congress enacted the fixed rates in 

2002, some observers interpreted Congress’ decision to maintain the rates as a Republican-led Congress charging higher interest rates on student loans to reduce the 

deficit. 

In their 2006 campaign platform, A New Direction for America, House Democrats 

claimed that ‘‘Congressional Republicans * * * have allowed student loan interest 

rates to increase, making student loans even harder to repay.’’ The platform document promised to ‘‘slash interest rates on college loans in half to 3.4 percent for students and to 4.25 percent for parents,’’ if Democrats were elected that fall.31

After Democrats won majority control of both the House and Senate in 2006, the 

Congressional Budget Office revealed that the proposal was extremely costly, estimating that the rate cut proposal would cost $52 billion and $133 billion over five 

and ten years, respectively, compared to then-current policy. The rate cut on PLUS 

loans for graduate students and parents accounted for about two-thirds of the cost. 

The high cost of the proposal did not bode well for the Democrats’ campaign 

pledge because the newly elected majority had also pledged to follow Pay-As-YouGo budgeting principles to fully offset new spending with tax increases or other 

spending cuts. The Pay-As-You-Go principles meant that lawmakers would have to 

enact $132 billion in spending cuts over ten years (a substantial sum) within education or other programs, or raise taxes to offset the new spending in the rate cut 

proposal. In the end, lawmakers opted to scale back their original proposal to reduce 

the cost. 

Just weeks into the new session of Congress in January 2007, the new House 

Democratic majority passed a bill to cut interest rates in half, but with significant 

caveats.32 The bill cut rates in half only for a subset of loans—Subsidized Stafford 

loans—which are available only to borrowers from families with middle and lower 

incomes. While both graduate and undergraduate students had been eligible for 

Subsidized Stafford loans, only undergraduate students were eligible for the rate 

cut. The bill left rates unchanged for the largest loan category—Unsubsidized Stafford loans—as well as for PLUS loans for parents and graduate students, despite 

their inclusion in the campaign pledge. All new costs in the bill were offset with 

spending reductions on subsidies for lenders making federally-backed student loans, 

ensuring that the bill complied with Pay-As-You-Go principles. 

To further reduce the cost of the proposal, the bill phased in incremental rate cuts 

starting in the 2008-09 school year such that only loans issued for the 2011-12 

school year would carry rates of 3.4 percent (half of 6.8 percent). Subsidized Stafford 

loans issued after that year would again carry a fixed rate of 6.8 percent. In short, 

the proposed legislation ‘‘cut interest rates in half’’ for loans issued only in one year. 

The changes to the original proposal—limiting the cut to Subsidized Stafford 

loans for undergraduates, phasing it in, and ending it in 2012—reduced the cost to 

$7.1 billion in the ten-year budget window, much less than the earlier estimate for 

the permanent cut for all loan categories. Making the rate cut permanent for Subsidized Stafford loans for undergraduates after 2012 would have cost an additional 

$12.8 billion over ten years.33

In September of 2007, both the House and Senate passed a budget bill that included the rate cut provision, and the president signed it into law.34 The first rate 

cut went into effect for Subsidized Stafford loans issued in the 2008-09 school year. 

Loans issued for the 2012-13 school year were originally set to carry a 6.8 percent 

interest rate, because the 2007 rate cuts would have expired. However, in 2012, 

President Obama included in his fiscal year 2013 budget request to Congress a proposal to extend the rate cut under the 2007 law for one additional year.35 Later that 

year, Congress passed and the president signed into law a one-year extension of the 

3.4 percent interest for Subsidized Stafford loans issued to undergraduates during 

the 2012-13 school year.36 The extension was included on a broader piece of legisla-
24 

tion that included provisions that the Congressional Budget Office estimated would 

offset the $6 billion cost of the extension.37 One of those provisions was a limitation 

on a separate interest rate benefit available on Subsidized Stafford loans that the 

president had also included in his fiscal year 2013 budget request. 

As it stands today under current law, all-newly issued Subsidized Stafford loans 

will be issued with a fixed interest rate of 6.8 percent on July 1st, 2013 and thereafter. 

ENDNOTES

1PAYE: 77 Fed Reg. 66087, (November 1, 2012): http://www.gpo.gov/fdsys/pkg/FR-2012-11- 

01/pdf/2012-26348.pdf. 2014 law: P.L. 111-152 Β2213. 2007 Law: College Cost Reduction and 

Access Act, Public Law 110-84 Β203(c)(1), 110th Congress (September 27, 2007), Available: U.S. 

Government Printing Office, http://www.gpo.gov/fdsys/pkg/PLAW-110publ84/pdf/PLAW110publ84.pdf. The 2007 law set the effective date on and after which borrowers could enroll 

at July 1, 2009. 2The recommended IBR would capitalize a borrower’s accrued unpaid interest once his payments under IBR exceed what he would be required to pay under the standard 10-year repayment plan based on his original loan balance. This is consistent with the practice currently 

under both Old and New IBR. 3 Jason Delisle and Alex Holt, ‘‘Safety Net or Windfall? Examining Changes to Income-Based 

Repayment for Federal Student Loans,’’ New America Foundation (October 2012) http:// 

newamerica.net/publications/policy/safety—net—or—windfall 4P.L. 102-325. 

5 Cervantes, Angelica, Marlena Creusere, Robin McMillion, Carla McQueen, Matt Short, Matt 

Steiner, Jeff Webster, ‘‘Opening the Doors to Higher Education: Perspectives on the Higher Education Act 40 Years Later,’’ TG Research and Analytical Services (November 2005): http:// 

www.tgslc.org/pdf/hea—history.pdf. 6Delisle, Jason and Alex Holt, ‘‘Subsidized Stafford Loans Obsolete and Regressive Due to 

New Income Based Repayment,’’ Ed Money Watch (November 15, 2012): http:// 

edmoney.newamerica.net/blogposts/2012/subsidized—stafford—loans—obsolete—and—regressive—due—to—new—income—based—repayment-7. 7 ‘‘FY 2012 Justifications of Appropriations Estimates to Congress: Student Loans Overview,’’ 

U.S. Department of Education,’’ (March 31, 2011): http://www2.ed.gov/about/overview/budget/ 

budget12/justifications/s-loansoverview.pdf, S-15. 8 Ibid. 

9Delisle, Jason, ‘‘Federal Student Loan Interest Rates: History, Subsidies, and Cost,’’ Federal 

Education Budget Project (February 2012): http://edmoney.newamerica.net/sites/ 

newamerica.net/files/policydocs/Interest%20Rates%20Issue%20Brief%20Final—0.pdf. 10 ‘‘Fair-Value Estimates of the Cost of Federal Credit Programs in 2013,’’ Congressional 

Budget Office (June 2012): http://www.cbo.gov/sites/default/files/cbofiles/attachments/06-28- 

FairValue.pdf. 11Delisle, Jason and Alex Holt, ‘‘New America Releases Income-Based Repayment Calculator 

for Forthcoming Report,’’ Ed Money Watch (October 10, 2012): http://edmoney.newamerica.net/ 

blogposts/2012/new—america—releases—income—based—repayment—calculator—for—forthcoming—report-72603. 12Wang, Marian, Beckie Supiano, and Andrea Fuller, ‘‘The Parent Loan Trap,’’ The Chronicle 

of Higher Education (October 4, 2012): http://chronicle.com/article/The-Parent-Plus-Trap/ 

134844. 13White House Office of Management and Budget. Analytical Perspectives: FY2012 Budget, 

Page 369. http://www.whitehouse. gov/sites/ default/files/omb/budget/ fy2012/assets/topics.pdf. 14White House Office of Management and Budget. Analytical Perspectives: FY2013 Budget. 

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/topics.pdf; Congressional Budget Office. CBO February 2013 Baseline Projections for the Student Loan Program. 

http://www.cbo.gov/sites/default/files/cbofiles/attachments/43913—StudentLoans.pdf. 15Senate Budget Committee. ‘‘2002 Student Loan Law Takes Effect, Lowers Interest Rates.’’ 

Budget Bulletin, August 4, 2006. 16 Until the early 1990s when Congress created the Direct Loan program, private lenders 

made and held all federal student loans. The government guaranteed the loans against default 

losses and guaranteed lenders a minimum interest rate each financial quarter that was based 

on short-term U.S. Treasury securities (plus a markup) if the rate the borrower paid fell below 

this formula in any given financial quarter. Congress terminated the guaranteed loan program 

in 2010 and no new loans have been through the program since July of that year. 17Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, Title IV. 18 U.S. Department of Education. ‘‘The Financial Viability of the Government-Guaranteed Student Loan Program,’’ Page 2, February 1998. http://www2.ed.gov/PDFDocs/stuloan9.pdf. 19Policymakers may also have chosen the new formula because longer-term interest rates are 

less volatile than the short-term rates used to set student loan rates at the time. 20 U.S. Department of Education. ‘‘The Financial Viability of the Government-Guaranteed Student Loan Program,’’ Page 2, February 1998. http://www2.ed.gov/PDFDocs/stuloan9.pdf; Burd, 

Stephen. ‘‘Bill Provides Fix for Dispute Over Interest Rates on Student Loans,’’ Chronicle of 

Higher Education, June 5, 1998. 21Stoll, Adam. ‘‘Memorandum: Student Loans: Replacing the Interest Rate Structure Scheduled to Take Effect in 2003,’’ Congressional Research Service, June 14, 2001. 
25 

22The law also set a fixed rate of 7.9 percent for PLUS loans made to parents of undergraduates. P.L. 107-139. http://www.gpo.gov/fdsys/pkg/PLAW-107publ139/pdf/PLAW107publ139.pdf. 23 Bannon, Ellynne. ‘‘Student Loan Interest Rate Legislation (S. 1762) Will Make College More 

Affordable for Millions.’’ The State PIRGs’ Higher Education Project, January 24, 2002. http:// 

www.pirg.org/highered/media/1—24—02.html. 24 Burd, Stephen. ‘‘Lenders and Student Advocates Seek a Deal on Interest Rates.’’ Chronicle 

of Higher Education, October 12, 2001. 25 25 Congressional Budget Office. ‘‘Pay-As-You-Go Estimate: S. 1762,’’ January 30, 2002. 

http://www.cbo.gov/ftpdocs /32xx/doc3282/s1762.pdf. 26 U.S. Congress. House. College Access and Opportunity Act of 2006, H.R. 609. February 8, 

2005. http://www.gpo. gov/fdsys/pkg/BILLS-109hr609eh/pdf/BILLS-109hr609eh.pdf. 27The law also increased the interest rate charged on Parent PLUS loans made under the 

bank-based program and created a new category of loans that allowed graduate students to borrower Parent PLUS loans for themselves up to the full cost of attendance. 28This would have ended an existing policy that allowed lenders to keep the excess interest— 

sometimes called ‘‘floor income’’ or ‘‘windfall profits.’’ 29 Congressional Budget Office. ‘‘Cost Estimate: S. 1932,’’ January 27, 2006. http:// 

www.cbo.gov/ftpdocs/70xx/doc7028/s1932conf.pdf; Congressional Budget Office. ‘‘Cost Estimate: H.R. 609,’’ September 16, 2005. http://www.cbo.gov/ftpdocs/66xx/doc6648/hr609.pdf. 

The Senate proposal also increased the fixed rates on PLUS loans for parents and graduates 

students to 8.5 percent from 7.9 percent for loans issued under the bank-based loan program 

and was included in the final law. This change also increased the deficit reduction compared 

to the House proposal. 30Deficit Reduction Act of 2005. P.L. 109-171. http://www.gpo.gov/fdsys/pkg/PLAW109publ171/pdf/PLAW-109publ171.pdf. 31 ‘‘A New Direction for America,’’ Office of House Democratic Leader Nancy Pelosi. http:// 

www.democraticleader.gov/pdf/thebook.pdf. 32 ‘‘Estimated Impact on Direct Spending of H.R. 2669 with Possible Extensions.’’ Congressional Budget Office, July 10, 2007. http://www.cbo.gov/ftpdocs/83xx/doc8303/ 

hr2669Ryanltr.pdf. 33While lawmakers needed to offset all the new spending provisions in the bill with spending 

reductions to comply with Pay-As-You-Go principles, they also needed to meet a similar requirement to pass the bill under budget reconciliation procedures which require that new spending 

in a bill be budget-neutral in the latter-years of a budget window. Legislation passed using 

budget reconciliation procedures cannot be filibustered in the Senate and therefore needs only 

a simple majority to pass. 34 College Cost Reduction and Access Act. P.L. 110-84. http://www.gpo.gov/fdsys/pkg/PLAW110publ84/pdf/PLAW-110publ84.pdf. 35White House Office of Management and Budget. FY2013 Budget, Page 97. http:// 

www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf. 36Moving Ahead for Progress in the 21st Century Act. P.L. 112-557. http://www.gpo.gov/ 

fdsys/pkg/PLAW-112publ141/pdf/PLAW-112publ141.pdf. 37 Congressional Budget Office. ‘‘Cost Estimate: H.R. 4348, MAP-21,’’ June 29, 2012. http:// 

www.cbo.gov/publication/43368. 

Chairman KLINE. Thank you. 

Mr. Draeger, you are recognized. 

STATEMENT OF JUSTIN DRAEGER, PRESIDENT AND CEO, NATIONAL ASSOCIATION OF STUDENT FINANCIAL AID ADMINISTRATORS 

Mr. DRAEGER. Thank you, Chairman Kline, Ranking Member 

Miller, and members of the committee for this invitation to testify. 

The National Association of Student Financial Aid Administrators represents 3,000 colleges and universities from across the nation. Collectively, our financial aid administrators serve 97 percent 

of all federal student aid recipients and today I would like to share 

some of the practical implications of our current student loan policies that aren’t working for students. 

Today, it is estimated that nearly 40 million Americans have outstanding student loan debt and at current projections, the number 

of people with federal student loans will soon exceed the number 

of people receiving Social Security or food stamps. 

In other words, federal student loans could soon be the United 

States’ largest federal assistance program. That puts added pressure on us to make sure that we get these policies right and keep 
26 

federal loans accessible, affordable, predictable, and fiscally sustainable. 

The current structure of federal student loan interest rates is out 

of step with current market rates and is confusing for students and 

parents. The current interest rate on federal unsubsidized Stafford 

loans is near 7 percent. The current interest rate on federal PLUS 

loans for graduate students and parents is nearly 8 percent, and 

this is after a 4 percent off the top origination fee. 

These rates make it nearly impossible for financial aid administrators to stress the benefits and safeguards of the federal loan programs compared to private loans. The federal loan programs help 

students avoid default through safeguards such as deferment, forbearance, loan forgiveness, income-based repayment, and discharge 

for disability and death. All of this is overshadowed when private 

market loans are currently offered at much lower rates. 

Yes, the interest rate on subsidized Stafford loans is currently at 

3.4 percent, much closer to market rates, but the subsidized Stafford loan program only serves a fraction of all federal loan borrowers and half of them, half of the subsidized Stafford loan borrowers, are also borrowing unsubsidized Stafford loans at double 

the rate. 

If financial aid weren’t confusing enough, we have created a situation essentially where 4 million students have one loan with two 

different interest rates. 

We recognize that to you as lawmakers must find the right balance between benefits to students and risk to taxpayers for the 

source of this funding. 

Within that effort, NASFAA is advocating for a long-term, market-based solution by returning to a variable interest rate that is 

determined based on cost of government capital and origination, 

cost of proper loan servicing, and future market risk. 

Moving to a rate based on the market with cost built in ensures 

students and parents have access to safe loans at a competitive 

rate all while creating stability in the loan programs. 

Federal student loans could further be strengthened through 

some additional policy changes unrelated to interest rates and this 

is the second area I would like to address today. 

First, institutions need more flexibility in providing counseling 

and limiting borrowing to ensure students are academically prepared, understand their loan obligations, and are able to keep loan 

borrowing in check. 

Currently, federal student loans are considered entitlement aid 

and schools are not permitted in any practical way to limit parttime students from borrowing at full-time rates or to deter students 

enrolled in 2-year programs from borrowing up to 4-year levels. 

Schools aren’t even able to require additional loan counseling 

over and above minimal federal requirements for students enrolled 

in programs that statistically produce a disproportionate share of 

defaulters. 

Financial aid administrators need an expansion of professional 

judgment which is already granted in law to limit or at least slow 

borrowing for specific groups of identifiable students with discretion to allow borrowing up to the full load limits on a case-by-case 

basis. 
27 

Second, to prevent over borrowing delinquency and default, we 

must streamline consumer tests and pare down the amount of information we heap on students in the name of a good consumer disclosure. 

With the help of one of our member institutions we have compiled this three-ring binder, which I won’t lift for you, that contains 

all consumer disclosure required under Title IV of the higher education act. 

In the last year, we have counted no less than eight additional 

proposals from the administration and members of Congress to add 

to this binder. The path forward on better consumer disclosure will 

not be found in more paperwork, but instead finding what works 

for students. 

Third, make the repayment process and deferment process as 

easy as possible, possibly through employer withholding, and by 

implementing ways to automatically enroll students in income 

based repayment before they enter default. 

Whether one likes the direct loan program or not, the fact remains that with one holder of all federal loans, who is the federal 

government, we have an opportunity to take a giant step forward 

in essentially eliminating loan default as we know it. 

Of course, the best way to strengthen loan programs is to ensure 

that low income families have adequate grant funding and that includes at the institutional, state, and federal levels and were very 

grateful for the bipartisan support we have seen over the last few 

years in supporting programs like the Pell grant that keeps many 

low income students from having to borrow at all. 

For those families that need to fall back on loans, the strongest 

program will be one where interest rates are fair and understandable. There are additional safeguards in place to deter over borrowing and where consumer information is streamlined. Thank 

you. 

[The statement of Mr. Draeger follows:] 

Prepared Statement of Justin S. Draeger, President and CEO, 

National Association of Student Financial Aid Administrators (NASFAA) 

CHAIRMAN KLINE, RANKING MEMBER MILLER, AND MEMBERS OF THE COMMITTEE: 

Thank you for inviting me to testify today. The National Association of Student Financial Aid Administrators, known as NASFAA, represents more than 17,000 financial aid administrators who serve more than 16 million postsecondary students each 

year. Our membership spans more than 3,000 colleges and universities from across 

the nation. Collectively, NASFAA schools serve 97 percent of all federal student aid 

recipients. 

The job of the financial aid administrator has evolved over the last five decades 

as more students rely on federal, state, and institutional aid and programs have become more complicated, however the core mission remains the same: to ensure that 

no qualified student is denied access to postsecondary education due to a lack of financial resources. We have been pleased to work with legislators on both sides of 

the aisle, including many of you, to ensure continued funding for Federal Pell 

Grants and other vital forms of federal student aid, and we look forward to working 

with you to strengthen the federal student loan programs. 

Almost 40 million Americans—both parents and students—have outstanding student loan debt (Lee, 2013). Based on current projections, in just a few short years, 

more Americans in this country will have outstanding student loans than receive 

Social Security (Social Security, 2013) or food stamps (Food Research and Action 

Center, 2012). And with federal loans making up 90 percent of the total student 

loan market (College Board, 2012), federal student loans will soon be the largest 

U.S. federal assistance program. Given these numbers, it’s imperative that we get 
28 

federal student loan policies right. We have a collective interest in ensuring that 

federal loans remain accessible, affordable, predictable, and fiscally sustainable. 

Today I want to give you some of the practical insights on what financial aid administrators experience when working directly with students and parents on student loan issues. These insights will demonstrate why our current student loan policies—and how we handle interest rates in particular—aren’t working well for students and families. I’ll divide my comments into two parts, first focusing on student 

loan interest rates and second focusing on the loan programs in general. 

The current structure of federal student loan interest rates is out of step with 

market rates and thereby confuses students and families. Students and parents 

often question why federal student loan interest rates are higher than nearly all 

other installment loans, particularly for families with good credit. And the truth is, 

there is no good, reasonable answer to that question. 

The Federal Stafford Loan program is divided into two parts: subsidized Stafford 

loans where the government pays the interest on the loans during periods of enrollment and deferment and unsubsidized loans, where interest accumulates while the 

student is enrolled in college. Federal PLUS loans may be taken by graduate students or parents of undergraduate students if they have no adverse credit history. 

The current interest rate on federal unsubsidized Stafford Loans is near 7 percent. The current interest rate on federal PLUS loans for graduate students and 

parents is worse, at nearly 8 percent (and this is after a 4 percent off-the-top origination fee). Families ask, how can this be? Mortgage rates are currently below 4 

percent and interest rates on private education loans for borrowers with good credit 

are also much lower. In fact, one major lender just announced a private education 

loan for graduate students with no origination fees, no prepayment penalties, and 

interest rates between 2.25 and 7.5 percent (Sallie Mae, 2013)—all of which are better than the current terms for federal PLUS loans. 

While it is true that the interest rate on subsidized Stafford loans is currently 

at 3.4 percent—much closer to market rates—it is equally important to understand 

that overall, the subsidized Stafford loan program serves only a fraction of all federal loan borrowers. In fact, half of all subsidized Stafford loan borrowers also borrow unsubsidized Stafford loans, which results in students having an annual Stafford loan debt with a portion of their loans at 3.4 percent and another portion at 

6.8 percent. If financial aid weren’t confusing enough, we’ve essentially created a 

situation where roughly 4 million students have basically one loan with two different interest rates (U.S. Department of Education, National Center for Education 

Statistics, 2007-08 National Postsecondary Student Aid Study). 

The point is that few students are benefiting exclusively from the current 3.4 percent interest rate and, even after last year’s temporary extension by Congress, the 

3.4 percent interest rate is set to double to 6.8 percent this July. 

From a public policy standpoint, it is generally better for students to borrow within the safety of the federal loan programs before using capital from private markets. 

The federal loan programs offer safeguards to help students avoid the dire consequences of delinquency and loan default. They contain deferment rights and mandatory forbearance options, loan forgiveness options, income-based repayment, and 

safeguards to protect students, parents, and co-signers against the collateral financial damage of total and permanent disability or death. And most importantly, federal student loans represent a public investment in students who otherwise wouldn’t 

qualify for private market loans due to credit restrictions. They create opportunity. 

Unfortunately, the current interest rate disparities between federal loans and private loans overshadow all of the benefits of federal student loans. This is naturally 

confusing to families, since financial aid administrators—not to mention required 

Truth in Lending Act (1968, as amended) disclosures—counsel families to use federal loans as their first option. 

This interest rate discrepancy will continue to be a problem as long as we have 

fixed federal student loan interest rates. Prior to 2006, federal student loan interest 

rates were variable and changed annually based partially on the cost of government 

borrowing. (Interest rates were determined annually by adding on some additional 

basis points above the 91-day T-bill auctioned each May.) The numbers show that 

had we stayed with a variable interest rate in 2006, all student borrowers in the 

Stafford and PLUS loan programs would actually have fared better than they have 

under the fixed interest rates of the last six years (See Appendix). 

Based on Congressional Budget Office projections (2013), returning to a variable 

interest rate would also save students money into the foreseeable future, since the 

91-day T-bill is projected to stay at or below 1 percent through 2017. Of course we 

acknowledge that making a change back to a 91-day T-bill could be costly. 

One of the unintended consequences of our current interest rate policy is the unexpected revenue being returned to the federal government. In Fiscal Year 2013, the 
29 

government is expected to earn 64 cents for each dollar lent to graduate students 

in the federal PLUS loan program, according to the Congressional Budget Office 

(2013). While we certainly want these programs to be fiscally sustainable, it is 

equally important to remember that the intent of the federal loan programs is to 

provide affordable and safe financing options for students who otherwise would not 

have had the opportunity to receive postsecondary education, and who go on to become productive taxpaying members of our society. 

Unfortunately, our current student loan interest rate policy has undermined the 

very feature fixed interest rates were supposed to provide: predictability. For the 

last two years we’ve run up against harsh budget realities that have called into 

question the sustainability of fixed interest rates and made them anything but predictable. 

This is the second year in a row policymakers have been left scrambling to keep 

interest rates down for subsidized Stafford Loan borrowers. Last year we kept interest rates from doubling from 3.4 percent to 6.8 percent for these borrowers at a cost 

of roughly $6 billion. To partially offset that expense, Congress reduced eligibility 

for subsidized Stafford loans. As has become accepted business practice, we made 

another piecemeal patch that took funding away from some students to provide it 

to others, except in this instance we provided one benefit and took away another 

from the same students. In effect, we robbed Peter to pay Peter! 

NASFAA continues to advocate for a long-term, market-based solution to these 

problems by returning to a variable interest rate, where the rate is determined 

based on the following: the cost of government capital and origination (without any 

reliance on origination fees), the cost of proper servicing and loan counseling, and 

future market risk. This should all be underscored by the idea that at no time 

should federal student loans turn into a profit- making venture for the federal government. We recognize that you as lawmakers must find the right balance between 

benefits to students and risks to taxpayers, who are the source of this student loan 

funding. 

Several proposals have called for a variable fixed interest rate, or an annual fixed 

interest rate, where the interest rate would change for new loans originated each 

year, but would then remain fixed for the future life of the loan. Such a policy would 

ensure that federal loan rates are closer to market rates while simultaneously providing some degree of predictability for current borrowers. 

Of course, interest rates are only one issue—albeit an immediate one—that needs 

to be addressed to strengthen the student loan programs. Federal student loans 

could further be strengthened through some additional practical policy changes. 

This is the second area I would like to address today. 

Despite many anecdotes in the mainstream press about the student loan bubble 

and runaway student debt, the majority of student loan borrowers are leaving 

schools with a manageable amount of loan indebtedness. Unlike the horror stories 

we often read, only 2 percent of students who first enrolled at a postsecondary institution in 2003 had borrowed more than $50,000 by 2009. Over 40 percent of that 

cohort did not borrow at all and another 25 percent borrowed less than $10,000 

(College Board, 2012). Unfortunately, the hyper-focus on statistical outliers—those 

students who have racked up $100,000 in loans—diminishes our ability to focus on 

those students who find themselves most economically harmed by student loan debt. 

Who are these students? If we were to build a statistical profile of the average 

federal student loan defaulter, he or she would likely be a student who went to 

school for a very short period of time, usually less than one year, accumulated a 

small amount of loan debt, had a low GPA, and attended either a community college 

or proprietary institution. Two out of every three borrowers who enroll in college 

for one year or less will fall delinquent or default outright on their student loans, 

many on less than $10,000 in total loan debt. Of all student loan defaulters, 70 percent dropped out of college (Loonin & McLaughlin, 2012). 

Given these statistics, we need to examine policies that give institutions more 

flexibility in providing counseling and safeguards to ensure students are academically prepared, understand their loan obligations, and are able to keep loan borrowing in check. 

Under current federal regulations, federal student loans are considered entitlement aid. Schools are prohibited from requiring additional loan counseling for students who appear to be over-borrowing or who are most at risk of defaulting. In addition, schools are not permitted, in any practical way, to limit part-time students 

from borrowing at full-time rates, or to deter students enrolled in two-year programs 

from borrowing up to four-year levels. Likewise, schools cannot halt or even slow 

over-borrowing by students enrolled in academic programs that produce a disproportionate share of loan defaults. In other words, students are currently entitled to bor-
30 

row the maximum loan limits, and can only be deterred from over-borrowing on an 

individual, case-by-case basis. 

Financial aid administrators, particularly at the community college level, need additional authority to limit or at least slow borrowing for specific groups of students, 

with discretion to allow borrowing up to the full federal loan limits on a case-bycase basis (NASFAA, 2013.). That would flip the current approach, to instead allow 

across-the-board reductions in loan eligibility for identifiable categories of students 

with expanded borrowing permitted on a case-by-case basis. 

Additionally, more can be done to protect parent borrowers from over-borrowing. 

Since the recession, more schools are reporting instances of parents objecting to 

their own Federal PLUS loan approvals because they their income is insufficient to 

repay the debt. Current PLUS loan underwriting standards simply examine whether a parent has any ‘‘adverse credit,’’ without considering whether a parent is financially able to repay the loan. 

We would not want to mirror or duplicate commercial underwriting standards in 

the federal programs, since the purpose of the loan programs is to provide a public 

investment in college-ready students who otherwise would be unable to obtain credit. However, a simple debt-to-income ratio on parent loans would at least take into 

consideration a parent’s ability to repay the loan based on their current income. 

Under the Federal Family Education Loan Program (FFELP), which has since been 

phased out in favor of the Direct Loan Program, some lenders utilized debt-to-income ratios as part of their parent PLUS loan underwriting standards. In the Direct 

Loan program that simple financial stress test is not conducted. The result is that 

parents with no adverse credit, or even no credit, can be approved for tens of thousands of dollars of loans without any evaluation of their true ability to repay. If the 

mortgage meltdown taught us anything, it is that basic and proper underwriting not 

only protects lenders, it also protects borrowers. 

Another factor in preventing over-borrowing and loan default is loan counseling. 

Current loan counseling requirements seem to be based on the principle that more 

is better. But anyone who has ever signed a home mortgage loan knows that receiving mountains of consumer information does not necessarily improve understanding—it often has the opposite result. We must streamline, consumer test, and 

pare down the amount of information we heap on students and parents in the name 

of good consumer disclosure. With the help of one of our member institutions, we 

have compiled this three ring binder that contains all of the consumer disclosures 

currently required under Title IV of the Higher Education Act (1965, as amended). 

Within the last year, we’ve counted no less than eight additional proposals from the 

Administration and members of Congress for even more consumer disclosures. The 

path to smarter decisions on student loans and college costs will not be found in 

even more paperwork; it will be found through customized, streamlined, and consumer-tested information that gives students a complete picture of their student 

loan responsibilities and loan costs. 

In many cases, averting student loan default can be as simple as making the repayment process as easy and safe as possible for students and parents. Automatic 

enrollment in income-based repayment would ensure that no borrower’s repayment 

amount will ever exceed their ability to repay. NASFAA has worked with Congressman Petri to explore whether this can be accomplished through the current federal 

loan programs using payroll withdrawal and federal withholding. We believe we’re 

closer than ever to being able to institute repayment pathways that ensure student 

loans are repaid on time and remain affordable. Whether one agrees or even likes 

the Federal Direct Loan program, the fact of the matter is that with one originator 

and holder of federal loans—the U.S. government—we have an opportunity to take 

a giant step forward in nearly eliminating student loan default. 

Finally, the best way to strengthen the loan programs is to ensure adequate grant 

funding at the institutional, local, state, and federal levels. Our federal student aid 

programs are founded on the idea that grants, not loans, are the best way for qualified, low-income students to obtain access to higher education. Polls show time and 

again that the public supports continued funding of higher education and we’re 

grateful for bipartisan support for programs like the Pell Grant. For those families 

that need to fall back on loans, the strongest program will be one where interest 

rates are fair and understandable, additional safeguards are in place to deter overborrowing, consumer information is streamlined and delivered in a way that is easy 

for students and parents to understand, and loan repayment is simple and affordable. 

Thank you for your time. I am happy to answer any questions. 
31 

REFERENCES

College Board (2012). Trends in student aid, 2012. Retrieved from http:// 

trends.collegeboard.org/student—aid 

Congressional Budget Office (2013, February). The budget and economic outlook: 

Fiscal years 2013 to 2023. Retrieved from http://www.cbo.gov/sites/default/ 

files/cbofiles/attachments/43907—BudgetOutlook.pdf 

Food Research and Action Center (2012). SNAP participation increases in November 

2012. Retrieved from http://frac.org/reports—and—resources/snapfood— 

stamp—monthly—participation—data/#2nov 

Higher Education Act of 1965, Pub. L. No. 89-329 § 111, U.S.C § 1001 (1965) (enacted). 

Lee, D. (2013). Household debt and credit: Student Debt. Retrieved from http:// 

www.newyorkfed.org/newsevents/mediaadvisory/2013/Lee022813.pdf 

Loonin, D., & McLaughlin, J. (2012). The student loan default trap: Why borrowers 

default and what can be done. Boston: National Consumer Law Center. Retrieved from http://www.studentloanborrowerassistance.org/blogs/wp—content/www.studentloanborrowerassistance.org/uploads/File/student—loan—default—trap—report.pdf 

NASFAA (2013). Report of the NASFAA Task Force on Student Loan Indebtedness. 

Washington, DC: NASFAA. Retrieved from http://www.nasfaa.org/indebtedness—report.aspx 

SallieMae (2013, March). Sallie Mae announces lower interest rates for graduate 

students, effective April 1. Retrieved from https://www.salliemae.com/about/ 

news—info/newsreleases/2013/Lower—Int—Rate—Grad—Loans.aspx 

Social Security (2013, February). Monthly statistical snapshot, January 2013. Retrieved from 

http://www.ssa.gov/policy/docs/quickfacts/stat—snapshot/2013—01.pdf 

Truth in Lending Act of 1968, Pub. L. No. 90-321, § 82, 12 Stat. 146. 

U.S. Department of Education, National Center for Education Statistics, 2007—08 

National Postsecondary Student Aid Study. (2013). Chart showing share of Stafford loan borrowers. NPSAS:2008 Undergraduate Students. Retrieved from 

http://nces.ed.gov/datalab/powerstats/output.aspx 
32 

Appendix B - Annual and Aggregate Direct loan Program Limits 

_\'~a r Un,lc'1(r.oduH' C 

Sttond-\ 'tar Undcr2ra ,lua' t 

Third_\ 'urand Rtyund 

Un"t'!"tr.odua' c 

P"'l'a ""' ' COUnMI'urk fur 

£ n rollmen. in an 

Umlc'1(nlllua'. Pro)!ram 

P"'I,ara 'ur)' COUl"Mwork fur 

En roll())t'm in B 

Gr.odua.clProfenional 

Pro~r m 

COUI")OO,,'url.: fnr Tead .. r 

Crrtiroca tiun/C""lfntiat 

Gr.odua •• JProf ... ional 

Pro"''''' w an L.imit ~: 

Applicable '0 undcrgradu:ItCS 

enro lled in progr:lm less ,han"n 

acade",ic )-ear (A Y) 

Pro,...t("11 W an Limits: 

Applicabl e to u,K1ergradu:lt.s 

enrolled in f'l;"maining period or 

enrollm.nlloss than an A Y 

(when prOgr:lnl length is one A Y 

or longer) 

.~ Annu .. 

LOIn Limil for 

Audlomi( Year 

(Subsidized .nd 

Unsubsidiud 

Dirull..oansj 

S3.~00 

S.UOO 

SS.SOO 

S2.6H 

SUOO 

SS.SOO 

'" 

Addilion.1 

Un. ubsidized 

Limil for 

~pendlonl 

Siudlonli Who~ 

Parrn" C.n 

Borr .... PLUS 

$2.000 

".000 

".000 

Addilionl l Un. ubsidiztd 

Limi1 for Indrpmdlon1 

Stu"",,, Ind ~ndenl 

Siudenls Who~ Parmls 

Cannol Borr .... PLUS 

".000 

".000 

51.000 

".000 

S7.OOO 

51.000 

S20.500 

Annual loan limil roo- grade lc,-cl. multiplied by ,he ItsSCr or: 

M of we<: s in ~~, 

'ofllttl,inAY 

0. ' _of ef'l;"diVc1oc l hoursj n _,,-hieh_s,udc n,-will enroll 

• ofcrcdiVclock hou ... in A Y 

AlIl1ualloan limi' roo- grade lel'O!. mul,iplied b) : 

t,of c",di~e ock hours in II-hieb s,udc n,-\\ ill enroll 

'ofcrcdiVe oc~ hou ... in A Y 

M"~: If a [o"",><;ial oM ",wl"'Sll"(jler ~Yn::u,d proyssl(JIJ,,1 JudE"'ml a~tIl(Jnl,.fo'" ,k",,,,klOl "u,klOl '" ajfor 

",,~ , uluuruM,ull Di"u/,'(}{mfomlJ kcau.~ II~ "",k~/:' pa,.."" '''' long" fi"",ocially .uppon 110. """"III. ~',II 

nI)/ '''ppon II .. "udtllJ in i1 .. jull'''' "mJ"'/~u!O co",p/'" 1M P". Applic"'iaNforP"krol Si~,k/~ A!d(f:'I/'-S4). 

' #g,,,;III)·I. II",il.d 10 II,. applical>l. &u~ 01111",,1 ~1U~milliu" 10.1/1 Ilnlll pi", S}, {)(J() P" """,kmic , .. '" //I 

",Ii/"i"",,1 uluumid,zM loall jull(lJ, 

!l'Mto f-er ~rio<h 01 ",,,,/1m,,,, begllllllns on or ofi" 7 I 11. Era/hili" "nd prop.",,,,,,1 "",k"" "" II(} long.r 

.I'g/bi. fer {)j"CI Surui;I<:<:d {.A)(l"'. 
33 

" . 

" "' 

" ,; 

Pl.VS (for parentS of 

dependenl ""dorg.rad ll:l(cS "nd 

gm<iu",eIprofcssional 

51udo"",) 

Blw Anou l 

loan Limit for 

Audemic Year 

(Subsidiud and 

Uuubsidiud 

Dirffl Loans. 

'" 

'" 

Additional 

Unlumidiud 

Limitfo. 

Drpradnol 

51uHol$ WhoM' 

' anfltsC.n 

Borrow PLUS 

Additional Unsuhsidiznl 

Limn for Independent 

Studftlls and Drprndml 

Students WhOSC' ' annls 

CannOl Borrow PLUS 

$20.'00" 2.~OO· 

(for 9·mon,h A Y) 

520.500" 516.667' 

(f<Jf"/].momhAY) 

520.' 00" $20.000' 

(for 9·momh A Y) 

$20,SOO ~ $26.667' 

(forll·m"",h AY) 

COSl OfallCn(\anCC (COA) ",inus cs(in'alcdl'inanciai as.siSUlncc (EFA) for 

loan period ("'afe: l'I.USfi,mis (lfYI ",,.,,bsilli:ed. G'a<hml' profession'" 

s/",kms m/til romp/elr 1M FAI'SA am/ b. g"Yn "', "pporJllmty to oppi}'fiJr 

'Mi, In"",mllm elogobolll!>' In "","l>silil:.<1 /),=, /.om1 jim'" fim.! 

°hlC",,,ud " ... "bJ/(/.:~d ,,,,,,,,,,1/,,,,,, /Imll ",'a"oN~ f".. c<""in I>('"hh pro",,,/,,,,. ".tk"lJ <h~ 10 plws< O~I <>f"" 

lfmlll, H,"'ctlllOll ;EHWan<, l.<NIn (lIf:"O.) Pros"''''. rh. 9_"'0",1, '1ICn',,,.d u/U~rui<li",d loall "mil muM N 

p""",,,lfor P"'l<tl''''1 """lnS 1m <>eoJ'l/Ijc ,.<1# of /0 Of' II "'01011 ... f"Qr ",kl/I/(",,,I jnji:mllmlon. IU pagtl J·92 

,J"o"gh 3_94 of'''' 2011 I] I'SA HBIl<Ibouk. 
34 

Direct Loan Program Aggregate Loan Limits 

A""'PI~ Combinfd Lo.R Limit: 

Au.~a ~ Loan Lim;l: Audemick~1 Subsidized Borrowin .. 

Slibsidizfd and UnSilbsidizrd 

8orro"'iRg' 

jmni","m slibsidilfd) 

o.,pcndenl UndergnduOio SJI.OOO Who.e Pa rrnl Ca n iJorroM' sn,ooo (rn .. ,;mu". $23.000 $ub$;di,cd) PlUS 

In<101",n<10"1 U"de'1(ra,luato 

and o.,l",nolo"1 Un,Io'1(r"du.le sn,ooo S57.500 

Wh""" Pa rrnl Ca nnOi BonuM- (rnax;m"". $23,000 sub$;d;,cd) 

PlUS 

Graduald Pror . .. ional SM.SOO SJ3~.500 

(rn.,;mu". $65.500 ... b$;di~cd ) 

Gradual. in Puhlk lI o .. lIh. 

Ma'iers or Doclunol .~ .., in 22~.OOO lI u ll" Ad".in;'lnoll(>n. Df1!.rtt $6DOO (m .. ,,;",un> $65.500 .ub<idi,.cd) In Cllnk"l .nul<'Il . Dor",r 

of Pharn.",,)' or hirtll'r~<lk 

IliM:lor "r AII"palhi< i\1.dkine. 

lrol'. lh k Me,liein •• 

o.,nli. lr,.. \'olorinal')' 5224.000 Modkino.OI,lomoll')\ $65.500 (rn.ximum $65.500 5ub<idif.cd) Podia!rk M.<1i(i .... 

Nalurop_,hk MC'dki .... or 

Nalul'ol,,,,h,. 

PLUS (for pare"I' ofdcpcn<il:nl 

unMrgradu"o$ and for No "UreS'". limil$ 

gradu"lelpmfc$$ioMI SludonlS) 

"TN """"''''' OIl IN " AU " .... S"" COltOMMd 1_" /)1."" S .. ruul ...,d attd mubJltIJ:~d 1lo""""lng CQIY •• m .... p"'unt 

IN Mal ""'Oknt ofDin'<1 L,.>t>'" IhiIl ""'>' ", ho.....,..·~d f(W II", .""k,,," <~ ,."''' prog"'''' of ".ily_ If IN ""'k'" 

I,,"r Mro/I, I" "prog"'''' M';ln " luw<,. 'WSn'I!"" (;()",hi"",l/oan 11",11. ,/" Jlud"" ",'.,1J '" ,,,- 'WS1'<If"" 

rombmro I""m I,,,,it applicahl~ '0 M, or "-,. ...... progm ... TN '''''''" prine,pi< "pplin if'''- ""'otlt" of a "ud<m', ~/il!ih,It/), /<W ,,,- ""kllli",,,,/ UtUul»!tI,,~d Io<m II .. I/J clti<ng.-' dIU 10 a chil"K" I" ,kpt.~klt()' JlOIU' f""'" 

I",""",,,,,,, ,,, "'pt",k", or" cl><>.'i!' ;n ,/", ,,,,,/,i/O/), of" Jrpm'k'" "u,k",' pam" ,,, 00",,'" ,,1'UJs' 7'1><>, h, 

,,,- " .. 0"' .... "",kr ,,,- b"'''''''~d ",kM;,,,,,,1 .,"urui<liud /t",m I",,;, do . ><>1 co"," ',,"'0'" ,/", """ QM1'<S"" 

ro ltl lm~d Itxm I,,,,;,, 
35 

Appendix C - Dlrecl Loan Counseling RequlremenlS 

The lollowinacompllatlon Includes III current OlrKt LNn Pr",rom requirements re loted to 

In~ l counsellna Ire.qulred befor. I flm-Ume bouower cln "'c.fII.t .... fint Io..n 

Instlllmen1) Ind e.it counselinll (required w .... n I SIOOent celloes hllf.time enro ll ment), 

COunseling Requirements Inltl. 1 Exit 

Counseling Counseling 

Conduct w~h Iny first-time borrower of subsidized, unsubsidized, or 

... dult. PLUS loan befo", rele ~na the flm Insllilment of Iny Io..n , 

proceed. 

MlY be provided in person, on wr~ten form that borrowe r mustsiin Ind 

rei urn to «hoot online, o rlhroulh Interlctflle e lectroni< melns with , 

borrowers I cknowledCI"ll rece ipt of mlterills 

Must take reasonable steps to ensure t .... borrower receflles the counoelinc , m,""rllls, Ind partlclpat.s In I nd complet. sthl counoe lin8 

Someone w~h ex"ertioe In H ie IV pros .. m, mu,1 be reason.bly availa ble , , 

shortly followi"ll counoellncto Inswer borrower que.lion. 

Provide Ind/or explain: 

· Use of the mister promissory note (MPN) , , 

· Seriousr.en Ind Importance of l .... repOlymenl obli81t1on , , · Conoeque""e. oflo..n deflult, 1""ludlncodveroe credit reports, federol , , 

delinouent debt (olle<:lion procedu re., ond 111" Olion 

· The borrower's oblipllon 10 repOlY tM fulllo..n lmount .ven If tn. 

borrowe r dOi!' not complete 1M prollrim, "ke.longer thin normlO l to 

complete tM Pf",rom, i. unlble to obtain employment u~ , , 

completion, or Isotherwloe dl'~llsfled with or does not receflle 

educationa l or other se"'1<" purchl sed from the school 

· Example. of monthly repaymenl.mounl$ ~j.fd II ","riOU' r.nee. of 

stude nt Indebtedr.e .. in subsidized, u"subsidized,lnd craduI,e PLUS 

loins, dependinaon t .... lwe. of !olns lhe borrower has obta ined, or , , 

I verag" cumulat"", Indebtedne" of other borrowers In the ~me 

prOCrams of study IS t .... borrowe r Illhe ~me school 

· To e xtent practlc.ble, .ny efflOCt 1<.~p ln8 the loan will h ..... on I , 

student's elilibility for 01 .... ' form. of stude nt a id 

· Inform.tion on how ;nle resl accrues Ind Is copit.lized duri"ll pe,iods , 
36 

wMn inlerest is nel lIlIid bV tM borrower or ED 

· Hisor Mroption to IIlIV unsubsidized loon interest while In scllool " 

· School's defin ition of half·time enrollment, durl", re,ular terms I nd 

Summer periods, I nd conseque""es 01 net rnaintaini .... holf.time 

enrollment " 

· Importance of contlainllthe appropriate scllool offices il he or she 

witrodraws prior to completin,the pro,rlm of study SO Ih" school can " provide uit counseli ..... i""ludi", inlOfmiltion rellardinll hisor Mr 

replyment options and loon consolidation 

· Information on the Nltional Student Loan Data System (NSLOS) Ind " " how to .« .. , hi. or her records 

· Names and conlOeI Information of IndividUllls to rontact with 

question, rellardln, hi' or h .. rilhts Ind re,pon,lbllitle, or loon lerm, 

inC cond~iorIs " " 

· For fi"Hi"'" ,"'duate PLUS borrowers. bonower's option to PIV " .",dUllle PLUS Inlerest while In school 

· For each ,raduate PLUS borrowe r who has previously rflOeived a 

subsidized or un.ubsidized loin, comllllri.on.of m .. imum intere.t 

",te . for un.ubsidized loan. and fot IIreduate PLUS, periods when " int.rut.ccrue, on unsubsidized loan Ind on ,raduale PLUS, I nd 

points It which unsubsid ited Ioans.nd llradu>te PLUS enter 

repl yment 

Must ensure e. it counselln, I. conducted with nch sub,idized and 

unsubsidized Io.n •• nd ,r"du"te PlUS OOrrt>IWr shortly before he Or she " cease. all .. " holf·lime enrOlimenl in person, byaudiovi.ual presentation, 

online, or throu,h Interactive mean. 

If borrower leaves school without ,,1IooI's knewledie Or fills to complete 

counselinll. provide counseli", bv e lectronic meansorbv rnaili", written 

malerlal. to t M borrower's I.st known addr ... within 30 day, ofle.,nlnl " th"t . borrower hi, left tM "hool Or hiS failed to oomplete uit oounselinl 

If studenl is enrolled In study I brol d or corresponde""e and school chooses 

10 provide lhe oorrower written .. II coun,elinl malerlals, mu>! mail the 

malerial, wiU,in 30 days after borrowercompleles pr08ram " 

Provide and/or e. pllln, 
37 

Chairman KLINE. Thank you. 

Dr. Mercer? 

STATEMENT OF DR. CHARMAINE MERCER, VICE PRESIDENT 

OF POLICY, ALLIANCE FOR EXCELLENT EDUCATION 

Ms. MERCER. Good morning. Chairman Kline, Ranking Member 

Miller, and members of the committee, good morning and thank 

you for this opportunity to testify today. 

The title of this hearing, ‘‘Keeping College Within Reach,’’ is both 

timely and appropriate for discussing various aspects of federal 

support for higher education, including student aid and loans. 

The federal student aid system, as initially designed, was intended to ensure access to college for students who would otherwise 

be unable to attend. Federal aid has helped countless numbers of 

students pursue their higher education aspirations since 1965, 

when the Higher Education Act was signed into law. 

The last decade has witnessed many changes to the student aid 

system including eliminating subsidized loans for graduate and 

professional students, mandatory funding for Pell, and decreasing 

the number of semesters for which students are Pell eligible, to 

name a few. 

Each of these changes occurred outside of the full HEA reauthorization and, although they are seemingly small, they have had a 

significant impact on the cost of the program, did little to stem the 
38 

rising college costs, and in some instances, negatively changed the 

composition of the recipient population. 

Worse yet, many of these changes have done little to halt the 

ever increasing and dangerous amount of debt that students assume. In fact, student loan debt is fast approaching $1 trillion, and 

the number of borrowers and the average amount of debt have increased by 70 percent in just 8 years. 

Incremental changes in some instances are necessary and unavoidable, but by their very definition they fail to address the student aid system in its entirety. 

These incremental changes have done little to respond to skyrocketing college costs and often, due to the rush to pass them, 

their unintended consequences are not fully explored. 

The time has come for Congress to reauthorize the HEA so that 

it responds to the 21st century needs of students, institutions of 

higher education, and our nation. 

A thoughtful reauthorization of this critical piece of legislation 

will require time, deliberation, and compromise. In the interim, 

other exigencies such as the pending interest rate increase on subsidized loans will require legislative action prior to a full reauthorization. 

However, to the extent practicable, these types of changes should 

be addressed with consideration for the broader context in which 

they exist. For example, if the current interest rate on subsidized 

student loans were to double, this would have a disproportionate 

impact on the neediest students since they are the recipient of 

these types of loans. 

A recent report by the Pew Research Center notes that student 

loan debt is 24 percent of household incomes for families in the 

lowest income quintile. The report states, and I quote—‘‘The relative burden of student loan debt is greatest for households in the 

bottom fifth of the income spectrum, even though members of such 

households are less likely than those in other groups to attend college in the first place.’’ 

The nation needs a comprehensive plan to promote access, completion, and affordability for these and other students. Today, more 

than any other time in recent history, postsecondary educational 

attainment is critical for individuals and the nation as a whole. 

The United States’ ability to maintain its international position 

as an economic powerhouse requires the country to have a highly 

educated and skilled workforce. 

The 21st century requires individuals to possess knowledge and 

skills that prepare them for college, a meaningful career, and economic security. Absent these skills, many Americans will remain 

un- or underemployed, and the nation’s economy will stagnate or 

decline. 

The federal student aid system has previously focused on access 

exclusively, but access alone is not enough; completion must also 

be a goal. Although very well-intentioned, the federal student aid 

system is complex and poorly aimed at getting students to finish. 

Each year, there is a significant federal investment made in students at the K-12 and postsecondary education levels. However, the 

investment at both levels sees little return unless students complete what they start. 
39 

Failing to complete college means there is little to no return realized other than often times unmanageable amounts of debt without 

a degree. Changes to the HEA should be directed at the twin goals 

of access and completion. The reality is that all students are not 

equally financially equipped to take advantage of postsecondary opportunities. 

It is critical that public policy maintain the focus on making 

higher education affordable and accessible for the lowest income 

and neediest students that the market might otherwise leave behind. 

The Alliance for Excellent Education recently released a report 

based on a comprehensive examination of the federal student aid 

system. The paper includes recommendations for how to change 

many of the existing programs to create a system whose components are purposeful towards promoting access to college as well as 

completion. 

These recommendations are a part of a broader package and resulted from thinking about the system in its entirety rather than 

a single aspect or individual programs. 

The alliance respectfully encourages Congress and this committee to approach these issues in a similar fashion. 

Undeniably, these are difficult fiscal times. However, there are 

no quick fixes to the nation’s unacceptably low postsecondary completion rates, rising college costs, and student loan debt. 

What our nation needs now is a thoughtful and purposeful consideration of postsecondary education policies. Students must continue to have access to college and be appropriately incentivized 

and supported to complete in order to achieve individual prosperity 

and to become an integral part of the nation’s economy. 

I thank the committee for taking on this important issue in focusing attention on keeping college within reach. Thank you. 

[The statement of Ms. Mercer follows:] 

Prepared Statement of Charmaine N. Mercer, Ph.D., 

Vice President of Policy, Alliance for Excellent Education 

Chairman Kline, Ranking Member Miller, and members of the Committee, good 

morning and thank you for this opportunity to testify today. The title of this hearing, ‘‘Keeping College Within Reach,’’ is both timely and appropriate for discussing 

various aspects of federal support for higher education, including student aid and 

loans. 

The federal student aid system, as initially designed, was intended to ensure access to college for students who would otherwise be unable to attend. In fact, in his 

1965 speech to Southwest Texas State College, after the signing of the Higher Education Act, President Lyndon Johnson said, 

‘‘To thousands of young men and women, this act means the path of knowledge 

is open to all that have the determination to walk it. It means a way to deeper personal fulfillment, greater personal productivity, and increased personal reward 

* * * an incentive to stay in school.’’ 

President Johnson’s remarks suggest that the federal student aid system would 

function to keep college within reach for those who desired to attend. Since 1965, 

federal aid, consisting of grants, loans, work opportunities, and tax credits, has 

helped countless numbers of students pursue higher education aspirations. 

In the nearly 50 years since the passage of the 1965 Higher Education Act, it has 

been fully reauthorized eight times and each reauthorization has attempted to balance Congressional and Administration priorities; mounting budget deficits; and demands from students, families, and the general public, with changes in postsecondary education, workforce demands, and the economy. Outside of the comprehensive reauthorizations of HEA, there have been numerous incremental changes, pri-
40 

marily directed at eligibility requirements, the need-analysis formula, and increased 

aid limits. 

The last decade has witnessed many changes to the student aid system, including 

several changes to the loan programs, such as elimination of subsidized loans for 

graduate and professional students; mandatory funding for Pell Grants; and decreasing the number of semesters for which students are Pell eligible, to name a 

few. Each of these changes occurred outside of a comprehensive reauthorization, and 

although they are seemingly small, they have had a profound impact on the costs 

of the student aid programs, done little to stem the rise in college costs and associated debt, and in some instances, negatively changed the composition of the recipient population. 

Arguably, many of the changes that have occurred outside of a comprehensive reauthorization have been beneficial yet short sighted. For example, eliminating yearround Pell Grants allowed the maximum award of $5,550 to be maintained, but reportedly, it also significantly reduced the number of students taking additional 

courses during the summer—which typically leads to increased completion rates. 

Worse yet, many of these changes have done little to halt the ever increasing and 

dangerous amount of debt that students rack up due to increasing college costs, 

among other things. In fact, student loan debt is fast approaching a trillion dollars, 

and the number of borrowers and the average amount of debt have increased by seventy percent in just eight years. Incremental changes in some instances are necessary and unavoidable, but by their very definition, they fail to address the student 

aid system in its entirety. These changes have done little to respond to skyrocketing 

college costs and often due to the rush to pass them, their unintended consequences 

are not fully explored. 

Congress, starting with this Committee, is now positioned to thoroughly examine 

the Higher Education Act, including federal student aid programs, and to consider 

both the known and unintended consequences, and to produce legislation that continues the federal commitments to ensuring access, tackling college costs and soaring debt, and promoting completion. 

Focusing exclusively on student loans—or more specifically, the interest rates on 

subsidized loans for undergraduate students—fails to notice the forest for the trees. 

The complexities of the federal student aid system require that it be examined 

in its entirety. Looking solely at loans doesn’t address the shortfalls of grants. Addressing the shortfalls of grants doesn’t consider weaknesses in higher education tax 

credits. Fixing higher education tax credits doesn’t, in turn, remedy the challenges 

and limitation of the campus-based programs. Addressing any one aspect of this system is necessary but individually, each is not sufficient for true reform of postsecondary aid programs and promoting student success and completion. 

The time has come for Congress to reauthorize the HEA so that it responds to 

the 21st-century needs of students, institutions of higher education, and our nation. 

A thoughtful reauthorization of this critical piece of legislation will require time, 

compromise, and deliberation. In the interim, other exigencies such as the pending 

interest rate increase on subsidized loans will require legislative action prior to a 

full reauthorization. However, to the extent practicable, these types of changes 

should be addressed with consideration for the broader context in which they exist. 

For example, if the current interest rate on subsidized loans were to double, this 

would have a disproportionate impact on the neediest students, since they are the 

recipients of these types of loans. A recent report by the Pew Research Center notes 

that student loan debt is twenty four percent of household income for families in 

the lowest income quintile. The report states, ‘‘The relative burden of student loan 

debt is greatest for households in the bottom fifth of the income spectrum, even 

though members of such households are less likely than those in other groups to 

attend college in the first place.’’ The nation needs a comprehensive plan to promote 

access, completion, and affordability for these and other students. 

Today, more than any other time in recent history, postsecondary education attainment is critical for individuals, communities, and the nation as a whole. The 

United States’ ability to maintain its international position as an economic powerhouse requires the country to have a highly educated and skilled workforce. 

The 21st century ushered in a technology-driven and globally connected era that 

requires individuals to possess knowledge and skills that prepare them for college, 

a meaningful career, and economic security. Absent these skills, many Americans 

will remain unemployed or underemployed, and the nation’s economy will stagnate 

or decline. In fact, Anthony Carnevale of Georgetown University estimates that 

2012 marked the year when more than 60 percent of all jobs required some form 

of postsecondary education; further, approximately 20 million new jobs now require 

a bachelor’s degree or higher. The federal student aid system must help the United 

States meet this increased demand, while continuing to ensure access. 
41 

Traditionally, the federal student aid system exclusively focused on access, but access alone is not enough, completion must also be a goal. Although very well intentioned, the federal student aid system is complex, interrelated, and poorly aimed toward the goal of finishing a postsecondary program of study. 

Each year there are significant federal investments made in students at the K— 

12 and postsecondary education levels. However, the investment at the K—12 level 

sees little return unless students complete a program of study at the postsecondary 

level. Similarly, at the postsecondary level, if students fail to complete a program 

of study, there is little to no return realized other than often times unmanageable 

amounts of debt without a degree. 

Changes to HEA should all be directed at the twin goals of access and completion. 

Higher education for students is an advantage that society at large benefits from. 

However, the reality is that all students are not equally financially equipped to take 

advantage of postsecondary opportunities. 

It is critical that public policy remain capable of making higher education affordable for the lowest-income and most-at-need students that the market might otherwise leave behind. Increased educational attainment helps individuals achieve their 

personal goals, improves their surrounding community, and aids the recovery and 

growth of the economy. 

The entire federal student aid system should be thoroughly examined with these 

twin goals—access and completion—in mind. This examination must come by recognizing the evolving demands of our global society and our nation’s current economic 

status. 

The Alliance for Excellent Education recently released a paper based on a comprehensive examination of the federal student aid system. The paper includes recommendations for how to change many of the existing programs to create a system 

whose components are purposeful toward promoting college completion. The recommendations are arranged according to four tenets: 

1. creating institutional supports and accountability; 

2. simplifying the federal student aid system; 

3. focusing aid on the highest need students; and 

4. providing support for middle class families. 

In the paper, the Alliance makes specific proposals in each of these areas, but ultimately the goal of these objectives is to ensure that students get from high school 

commencement to postsecondary completion. 

The Alliance believes that students and institutions have a mutual commitment 

to each other for success, with the federal student aid system helping to frame and 

support this relationship. Being admitted by an institution of higher education is 

not enough; colleges and universities must do their part to provide the ancillary 

supports and services that promote student success from the day they arrive on 

campus to the day they leave with a certificate or degree. At the same time, students must be committed to their own personal success. Students must work to be 

prepared, stay enrolled, and receive the postsecondary credential that they committed to pursue and were supported to receive. These two parties—institutions and 

students—owe it to each other to work collaboratively to cross the finish line. 

The Alliance sought to change the existing student aid landscape and focus funding in a way that benefits the most students. For example, the Perkins Loan and 

Supplemental Education Opportunity Grant programs currently support a deserving, but ultimately narrow, student population. If these funds were redirected toward postsecondary programs that better address retention and completion and 

produce best practices for other higher education programs, a larger student population could be better served. Similarly, if the current $5 per Pell Grant recipient 

that goes to institutions were redirected toward student aid, more grant aid could 

be provided to the neediest students, thereby reducing the need to borrow or at least 

decrease the amount of borrowing. 

It’s important to note that these recommended changes are a part of a broader 

package and resulted from thinking about the system in its entirety, rather than 

a single aspect or individual program. The Alliance respectfully encourages Congress and this Committee to approach these issues in a similar fashion. 

These are undeniably difficult fiscal times. However, there are no quick fixes to 

the nation’s unacceptably low postsecondary completion rates, soaring borrowing 

levels, and debt. 

How and why funds are spent deserve careful consideration toward what ultimately produces better results, that is, continued access to and increased completion 

of postsecondary education. 

What our nation needs now is a thoughtful and purposeful consideration of postsecondary education policies. Students must continue to have access to postsecondary education and be provided with the necessary incentives to complete higher 
42 

education, achieve individual prosperity, and become an integral part of the nation’s 

economy. 

As I have mentioned, students and institutions are equally important stakeholders and there is room for appropriate balance between accountability and incentives for both groups to change behavior for the benefit of the nation. 

I thank the Committee for taking on this important issue and focusing attention 

on keeping college within reach. 

Chairman KLINE. Thank you. 

I think all of the witnesses for excellent testimony and observing 

our sophisticated lighting system. 

Mr. Delisle, you were very clear in what you thought about caps 

in light of the various repayment options, income-based repayment 

options and so forth. You were pretty clear. 

I would like to hear from the other three of you, or just sort of 

quickly, the pros and cons of putting an interest rate cap. 

Dr. Lucas? 

Ms. LUCAS. Okay. Well, I believe—I agree with Mr. Delisle that 

putting on a tight cap is both expensive and a move back to fixed 

rates. 

However, I think that setting a cap at a relatively higher level 

could be useful in protecting students from periods where interest 

rates are unusually high and they have trouble getting out of those 

loans in other ways. 

So I would say that I would be happy to see no cap. I would also 

be happy to see a cap set at a fairly high rate, say 9 or 10 percent. 

I would not endorse a tight interest rate cap. 

Chairman KLINE. Okay, thank you. 

Mr. Draeger? 

Mr. DRAEGER. When we look at an interest rate cap, the last 

time that we had a cap on interest rates when they were variable, 

we were living in a time when we didn’t have widespread availability of income-based repayment. 

So to us, this gets at basically keeping the cost of the loan down 

and there is a lot of different ways we can do that. Whether it is 

through cap or an upfront subsidy, or whether it is by capping the 

total amount of interest that could ever accrue on a loan as has 

been done in another proposal from a member of this committee, 

there is a lot of different ways we can keep the cost of the loan 

down, and we are open to engaging the conversation about any of 

those ways. It doesn’t have to be just an interest rate cap. 

Chairman KLINE. Dr. Mercer? 

Ms. MERCER. I would say that, first and foremost, it is most important that you start from kind of what your policy goals are in 

terms of access and completion. So to the extent that a cap would 

not preclude students from being able to enroll in school and complete, if that serves that goal well, then that is at least where we 

should start. I am not sure if it is appropriate not to have a cap 

because I think a safeguard in the system needs to be present. 

Chairman KLINE. And Mr. Delisle, your thought was that, with 

the income base repayment plan, you were in effect addressing the 

issue of a cap without actually putting interest rate cap in? Is that 

correct? 
43 

Mr. DELISLE. Sure, there are about five or six examples in my 

written testimony that people can look at but I just, I will give you 

one for example. 

Consider somebody with $45,000 in debt from undergraduate and 

graduate studies who works in the government or nonprofit sector 

and earns a starting salary of $38,000 with a 4 percent annual 

raise. 

At an interest rate of 4.9 percent on the loan, she pays a total 

of $22,000 on her loan over 10 years and then the remaining balance is forgiven under public service loan forgiveness. 

At an interest rate of 12 percent she still pays $22,000 on her 

loan. If her interest rate is zero she still pays $22,000 on her loan. 

Chairman KLINE. Thank you. Wow. Somehow it doesn’t seem 

possible. 

Going to you Mr. Draeger, you addressed something that I hear 

all the time from institutions where you have advisors who say we 

can’t advise the student not to take this maximum loan. We know 

they shouldn’t, but we can’t do it. Do you think we can put into 

policy here, in a statute, a policy that would allow that and still 

avoid the discrimination? 

Mr. DRAEGER. Sir, I think we would have to be very careful in 

instituting a policy where schools could limit or at least slow borrowing for groups of identifiable students. 

Certainly we wouldn’t do that based on any prohibited characteristics or classes; race, sex, religion, national origin, those things 

have to be specifically prohibited. But there are concrete examples, 

I think, where schools and particularly low cost institutions would 

very much like the ability to at least introduce additional counseling over and above the minimum federal requirements or prohibit borrowing, perhaps for all students at an institution, for parttime students, for students in specific academic programs where we 

know the outcomes may not support the level of debt that they are 

taking on. 

Schools would welcome that authority so that they could perhaps 

be a check and a balance for students to make sure that they are 

not getting in over their head. 

In sort of a conflict, schools are held responsible for the number 

of students that default on their loans and they are also held responsible at least in public and in the press by how much debt to 

their students take on, yet they have very few if any tools at their 

ready to address that in any meaningful way. 

Chairman KLINE. Thank you. 

Mr. Miller? 

Mr. MILLER. To continue on that line of question, Mr. Draeger, 

so you would counsel them how? I mean your institution is offering 

this course of study for this credential or this degree and you would 

counsel them, don’t do that? 

Mr. DRAEGER. So, for example, right now, if we look at the statistics, the average statistic of a borrower who has defaulted, it is not 

normally what you hear in the press. The stories in the press usually revolve on a statistical outlier, someone who has racked up 

tens of thousands of dollars of debt and we know the average 

amount of debt is much less. 
44 

If you look at the defaulted borrower, people in student loan default, 70 percent of them have dropped out of school normally in 

the first or second year and it doesn’t seem fair for students that 

may not be academically prepared to load them up with debt without some additional counseling over and above current, minimal 

federal requirements. 

Right now if an institution tries to institute additional counseling 

over and above what the—— 

Mr. MILLER. I understand that, but you had suggested also that 

you may not want them to engage in some courses or curriculums 

because they have a high default rate. 

Mr. DRAEGER. What we would say is—— 

Mr. MILLER. Why are you offering those? 

Mr. DRAEGER. If there is a program, for example, where we 

know—let’s use teacher education or childcare. In some states that 

is a license requirement that they have to get a certification, but 

the amount of loan debt that they are taking on isn’t going to be 

supported by their wages. 

If they could provide some additional counseling—— 

Mr. MILLER. So it is not a question of whether they pursue that 

occupation or credential, it is a question of what is the appropriate 

loan—or they should certainly be advised of the chances of repaying this loan or for getting into trouble given the low pay of 

childcare workers if you will. 

Mr. DRAEGER. That is correct. 

Mr. MILLER. Okay. It is not that you have curriculums out there 

and you don’t jettison but you don’t think people should take them. 

I wasn’t quite sure—— 

Mr. DRAEGER. No. The other example, Mr. Miller, is examples of 

part-time students who may be running up their loan amounts at 

a full-time rate which schools right now can’t stop and so they run 

out of loan eligibility. 

Mr. MILLER. Why is that happening? Because they are working? 

Because they are doing what? 

Mr. DRAEGER. It could be because of work. It could be because 

they don’t recognize the amount of loan debt that they are taking 

on despite minimal warnings, but right now, those students—or it 

could be because they are transferring in from another school 

where they have taken on a significant amount of debt. 

Mr. MILLER. I think again, in my state, I think the community 

colleges are getting much more specific about what you need to do 

to complete and what you need to do to complete essentially in 2 

years. Now whether courses are available or not we all know is a 

problem. 

And the question is, are people borrowing money to follow this 

track to get the lower division requirements taking care of so that 

they can transfer or get a credential or get a badge or whatever it 

is they are pursuing, and are they on track, and is this loan 

amount appropriate. 

Because it goes to what Mr. Mercer raised, this question of completion, and I don’t think we should punish part-time students. I 

don’t think you are suggesting that, but we know that some students have to struggle whether they are borrowing money or not 
45 

because they may be supporting themselves, working and the rest 

of that. 

So Mr. Delisle says well if they knew—if they could see—if they 

knew more about loan forgiveness up front, they might make a different decision. Is that what you are—is that correct? 

Mr. DELISLE. Yes, and I don’t think they need to have very optimistic—they can have even very optimistic assumptions about their 

future earnings and still be fairly comfortable in borrowing a lot of 

money and ensure that it will be forgiven. 

I should point out, though, this is only for graduate students because there are no limits on how much they cannot borrow on the 

federal student loan program. 

Mr. MILLER. We are not going to weave this all in my question 

here, but I think the three of you are hitting essentially on the 

same points. And I am going to start with the idea of completion 

because absent completion then we do have a problem. We have 

high debt and nothing, essentially nothing to show for it. 

But the question of then how do you make that flexible enough 

for those students—we will continue to pursue this, but you know, 

I also think the colleges, certainly community colleges, have to put 

more as to what is it that you are doing here and what do you 

want to accomplish. 

Because I think having people wander around and continue to 

borrow money without some sense of a goal—I understand people 

change their majors, their ideas. I did 100 times—of course if have 

any major you can come to Congress, so it worked out well. 

This is how I get myself into trouble. Okay, let’s start over again. 

But I think the institutions have to play a role here too in terms 

of guidance about what really happens at the end of this process 

and are you on track or not. 

Are you now borrowing your third—what would be your thirdyear scholarship money and you are still about a year—you know, 

you are still 6 months away from completing your second year. Is 

that the kind of counseling are talking about? 

Mr. DELISLE. I think that kind of counseling is needed and hopefully is occurring on most campuses. What we are talking about is 

saying could we stop somebody from borrowing so that they would 

end up running out of loan funds before they reach the end so at 

least they would have some mandatory additional counseling or at 

least recognize. Right now a school can send out a disclosure but 

that doesn’t necessarily mean the student has read it. 

Mr. MILLER. Okay, thank you. 

Chairman KLINE. Thank you. 

Mr. Petri? 

Mr. PETRI. Thank you, Mr. Chairman. I would like to commend 

you for scheduling a hearing on this important and pressing issue 

for an awful lot of people in our country. 

We all have far too many constituents, particularly young people, 

struggling with student loans and I am glad that you are taking 

the time to take a look at this important issue. 

As almost everyone is aware, the default rate on federal student 

loans is very high. According to recent statistics, roughly 13 percent of borrowers will default within 3 years of entering repayment. 
46 

Default can be financially ruinous for anyone, but particularly 

young people just getting started. 

Mr. Draeger, I was struck by the portion of your testimony that 

was just referred to recently that described the typical characteristics of students who default. Though much of the media attention 

is focused on the level of student borrowing, no doubt an important 

issue, it is striking how many students default on manageable levels of debt. 

And when one looks at our current student loan system, it is 

easy to see how so many students could fall through the cracks. We 

have rightfully recognized that student loan borrowers face many 

ups and downs during their career. We have added a wide array 

of protections, numerous deferments, forbearances, repayment options, and so on in recognition of that. 

But in doing so, we have created a system that is so complex that 

it can be baffling even for the policymakers who work with it every 

day, let alone students trying to navigate it for the first time. 

While certainly not a solution to all of the problems we face with 

student loans, I have always felt that simple, universal incomebased repayment has the potential to accomplish the goals of the 

various protections we have created but in a way that is intuitive 

and automatic for borrowers and doesn’t force them to navigate our 

current labyrinth of paperwork and bureaucracy. 

Many students who will fail to navigate the current bureaucracy 

and fall into default despite the fact that they could have repaid 

their loan under a system that was more responsive. 

So Mr. Draeger and Mr. Delisle, in your respective organizations, 

recent reports about reimagining federal student aid, each of you 

recommended making some form of income-based repayment as the 

sole or automatic method of repayment for federal student loans. 

Could you elaborate on the thinking behind your respective recommendations and what you think the benefits of income-based repayment would be? 

Mr. DELISLE. I will go first here. Well we know that borrowers 

currently have a wide range of options that they can choose to 

repay their loans. They can choose consolidation, which extends the 

repayment term all the way up to 30 years. There is income-based 

repayment, income contingent repayment. There is 3 years of forbearance for everybody. 

But, when you look at the data of what percentage of people are 

in what repayment plans and they are all repaying their loans 

under this standard 10-year repayment plan which is a pretty good 

signal that people aren’t availing themselves of all of the benefits 

of these programs. 

And to the extent that default or difficulty in repaying is a function of they don’t have the money to pay because of their income, 

then getting people enrolled in income-based repayment should address that problem. 

Now I should point out—and that is why we recommended that 

students, everybody be put into income-based repayment and one 

of the reasons why we propose this is that if 10 percent or 15 percent of income is the right percentage of somebody’s income, if they 

are low income, for paying their student loan, then it has got to be 

the right percentage for people who have a high income. 
47 

And right now, it is the people who have high incomes who don’t 

use income-based repayment because we have other repayment 

plans that are more generous for them. So we have got essentially 

a regressive student loan repayment plan. 

Mr. DRAEGER. I would say from an institutional perspective, it is 

extremely frustrating is that Congress has put into place so many 

protections to keep students out of default, yet we have so many 

students that default. 

The current national average of defaults in this country is 

around 13 percent, higher if you took the entire portfolio, and nearly every one of those students that went into default could have 

avoided it if they had utilized the deferment, forbearance, and income contingent options available to them. 

What automatic IBR, income-based repayment, does is place students in a situation where their loan payments will always be reasonable, they will always be protected from the dire consequences 

that come with student loan default. 

Chairman KLINE. Thank you—yes? 

Mr. MILLER. May I ask for unanimous consent to include in the 

record of the comments by students from the Association of Michigan State University, from American University, and from the National Campus Leadership Council? 

[The information follows:] 

MEMO

Date: March 12, 2013 

To: Andy MacCracken, Executive Director, National Campus Leadership Council 

From: Evan Martinak, Chairperson ASMSU 

RE: Student Loans and Debts 

Student debt is harmful students in a number of ways. Current undergraduate 

students who are borrowing are faced with annual tuition increases and rising costs 

associated with living expenses. These costs can ultimately lead to the accruement 

of more debt for those who are unable to have the full cost of tuition and related 

expenses covered by federal loans. 

Nationally, student debt levels have eclipsed $1 trillion dollars, surpassing credit 

card debt and all other forms of private liabilities. 

As with most schools in the current higher education system, many Michigan 

State University students rely on Stafford loans to carry them through their degree 

attainment. As of 2011, 45% of college graduates from Michigan State University 

have, on average, accumulated $23,725 worth of college related debt. Such high debt 

levels can severely hinder a student’s ability to attend a post-graduate institution 

or to complete any unpaid internship. High levels of unpaid debt also serve as a 

liability in the event of personal bankruptcy, as individual college debt is incredibly 

difficult to reduce in such an instance. 

When parents cannot afford to accept PLUS loans, the standard federal loan for 

parents with dependant children attending college, Stafford loans make it possible 

for thousands of students to attend MSU. In FY 2010-2011 and academic year, MSU 

lost about 40 million in funding from the state government. This forced MSU to increase tuition by 6.9% to cover the cost of lost funds. With state and federal aid decreasing, the availability of loans makes an integral difference to overall affordability of an MSU degree. 

All of Michigan State University’s current Stafford Loans are disbursed with fixed 

interest rates. Had Congress not acted in 2012, interest rates on such loans would 

have doubled. Yet these interest rates and types of loans are not applicable to every 

student debtor, and thus more action would be welcomed in reducing individual student debt on an even larger scale. Low and fixed interest rates for student loans 

are better borrowing options than private loans, and with interest rates only fluctuating from 1-3% on average, it does seems rational to request a continuation of 

these low, fixed rates. 

The Associated Students of Michigan State University (ASMSU) has several initiatives to try and lower costs for MSU students. Currently, ASMSU is pursuing leg-
48 

islation that would allow local businesses of East Lansing to have no sales tax on 

textbooks during the beginning of semesters, in order to encourage local commerce 

and lower costs for students. ASMSU also offers interest free loans of up to $300, 

free blue books, free iClicker rentals, and free legal services to help settle some of 

the financial burdens associated with college. With students being dependent on 

these services and Stafford loans, it is imperative that the student government continues to emphasize the importance of low interest rates to provide every student 

with the best educational opportunity and experience. 

OFFICE OF THE PRESIDENT

Memorandum 

To: Education and the Workforce Committee 

From: Emily Yu, President, American University Student Government 

Date: 12 March 2013 

Subject: Student Loan Interest Rates 

College affordability has been an increasing concern for students at American 

University, and all campuses across the country, since the recession. My peers and 

I all realize that student debt has accumulated at unprecedented and uncontrollable 

rates. This not only poses a significant burden on us while we are in school and 

for our foreseeable young adult lives, but it also restricts the opportunities we are 

able to take in our careers, as we must think about finding jobs that will support 

us enough to may our loan repayments. 

Students spoke out last year to keep interest rates from doubling for a multitude 

of reasons: because we realize the growing costs of higher education are not sustainable and that the federal government should have a key role in providing affordable 

and accessible education. The doubling of the rate would have set an uncertain 

precedent for us and future generations of college students, as we would no longer 

have the option of low interest rate Stafford Loans to help us get over financial barriers to our institutions. Additionally, students depend on the fixed rate federal 

loans to make long-term plans for their finances. Whereas private loans have shown 

to contribute much more to harmful borrowing for students, this makes fixed rate 

federal loans even more critical in being a financially feasible and healthy borrowing 

option for students. 

Student debt is an issue we must all tackle together; the federal government, private institutions, and students alike need to all take action because we share the 

responsibility. American University is one such private actor making the hard decisions in order to ensure affordable education for our students. This year, the university administration, aware of growing national trends and the criticism its received 

in the past of being ranked a high debt school, took serious action to correct this 

wrong and to prevent future accumulation of debt on its students parts. The university administration engaged students in its budget process for the creation of the 

FY 2014- 2015 budget. In the end, we achieved the lowest tuition rate increase in 

40 years and a $1.46 million increase in financial aid. When legislators and decision 

makers work with students, we can all achieve our shared goals. 

There are so many reasons as to why ensuring that student loan interest rates 

stay low is important to all parties. For students, loan interest rates determine our 

ability to afford to attend our institutions, they impact the quality of our lives after 

graduation, and they affect our abilities to pursue certain careers and other life 

goals for years to come. For institutions of higher learning, their efforts to reduce 

costs, such as those demonstrated by American University, need to be matched by 

federal government action in order to have the largest impact possible for its students. And for you, our nation’s legislators, it is crucial that we invest in opportunities for us, the nation’s youth, so that we are able to keep moving our country forward. 

Summary of Student Perspectives on Student Loans 

Prepared by the National Campus Leadership Council for the 

House Committee on Education and the Workforce 

INTRODUCTION

With student debt skyrocketing, student leaders around the country have consistently put college affordability at the top of their campus agenda. The National Campus Leadership Council (NCLC) works with 300 student body presidents, who collectively represent 4.5 million students and every state. Over the last year, NCLC has 

sought to better understand prevalent perspectives among campus leaders and help 
49 

share those views to inform policymakers and opinion leaders as they shape the national discourse. 

On May 1, 2012, NCLC released a letter drafted by two student body presidents 

and signed by 280 of their peers around the country urging action to prevent student loan interest rates from doubling. To our knowledge, no other issue has 

sparked such united action among so many student governments nationally. It is 

important to note that the letter’s signatories urged the freeze on Stafford loan interest rates as a ‘‘first of many steps in a real effort to address the level of student 

debt and reduce the excessive need for borrowing.’’i

Our team hopes that the any actions or recommendations by the Committee on 

Education and the Workforce are next steps toward student-driven, comprehensive 

improvements to the federal financial aid system. Students are particularly interested in helping create a more permanent solution to ensure student loans are affordable and open access to higher education for more young Americans. Student 

perspectives on student loan reform are summarized below. 

Campus Perspectives 

The following are prevalent ideas among student leaders around the country, 

which should be considered as Congress identifies a more comprehensive solution 

to keeping student loans affordable and college financially accessible. 

I. The federal financial aid program, including loans, must be student-driven 

Students leaders have experiences and perspectives that are critical to identifying 

practical steps forward. Most student body presidents are working with their university administrations and state legislators to keep costs down and public investment high. These efforts are important to consider when shaping federal policy. 

Whenever possible, young voices need to be a part of the conversation. 

At public and private institutions alike, high student engagement yields decisions 

that better serve student needs. Emily Yu, student body president at American University worked closely with administrators this year to achieve the lowest tuition 

rate increase at the school in 40 years and a $1.46 million increase in financial aid. 

She said, ‘‘When legislators and decision makers work with students, we can all 

achieve our shared goals.’’ii If these efforts can be successful at the campus level, 

the federal government should work with student leaders to make sure programs 

reflect modern student needs. 

II. Debt burden and repayment options must be clear and predictable 

A frequent observation among students is that financing college is complicated 

and at times overwhelming. The fixed rates of the Stafford loan program have been 

important to helping students better understand their long term finances, while 

variable rates often offered by private lenders are difficult to understand and 

present significant financial challenges to young Americans as they graduate and 

start repaying loans. 

Xavier Johnson, student body president at University of Texas San Antonio said, 

‘‘Fixed interest rates present an option that is easier to plan for, so in the long run, 

fixed rates will be the most effective in keeping the costs to students low.’’iii These 

sentiments are echoed around the country among student leaders. Predictability 

helps students plan for repayment long term, which is why private loans, which 

typically have variable rates, result in higher default rates. 

III. Low interest rates make a difference 

When interest rates were scheduled to double in 2012, students were at risk to 

owe an extra $1000 for the same loan and education. The intensity of student response demonstrates what $1000 means for a college student or recent graduate. As 

default rates rise and high youth unemployment rates linger, the financial aid system should do all it can to minimize debt burden and make sure graduates’ discretionary income is going into the economy instead of repaying loans. Making federal 

loans more attractive than private, sometimes predatory lending through low interest rates should be a goal of the Stafford loan program, offering safe, viable options 

for student borrowers. 

At the University of Iowa, where the class of 2012 graduate with an average of 

$26,296, student body president Nic Pottebaum asserts that higher interest rates result in reduced graduation rates as students take on more debt.iv Indeed, this holds 

with national data that indicate about thirty percent of student borrowers drop out 

of college. As the need for a college education grows with tuition, students are forced 

to work through school. 

The sequester will cut up to 70,000 Federal Work Study positions, adding financial stress and creating a greater need for student borrowing for lower income students.v
50 

IV. Student debt is not just a student issue 

Student debt negatively affects companies trying to sell goods and employers trying to fill jobs. The economy already sees the effects of overwhelming debt burden 

as recent graduates have to pay of loans instead of make major life decisions to buy 

a home or start a family.vi A recent Wall Street Journal article described a relatively new aversion among young people to any type of debt, including liabilities 

from credit cards, mortgages, and car loans.vii Additionally, homeownership among 

young people is at a thirty year low, largely driven by burdensome student debt.viii

Nic Pottebaum, University of Iowa, noted that ‘‘[High debt] can permanently destroy these hapless student’s credit scores or permanently sentence students to a life 

of disappointment if they cannot graduate for financial purposes.’’ix These problems, 

when concentrated on our generation, present significant challenges to our generation as consumers and affects the rest of the economy. Xavier Johnson from UT San 

Antonio said ‘‘Debt levels can persist well into and beyond the time a graduates 

reaches the age of thirty. This means that money that could be going into investments, savings, or consumption is instead going to repay debts; which in turn creates a lower standard of living for graduates.’’x

Conclusion 

Student debt is an overwhelming problem for students around the country and 

threatens important aspects of our economy. Accordingly, the federal student loan 

program should reflect student needs, promote predictability, and remain affordable. 

As student leaders noted in the 2012 open letter urging a freeze on Stafford student 

loan interest rates, ‘‘There has long been a promise that, if a student goes to college, 

works hard, and does well, they will have a more prosperous future ahead of them. 

Student loan debt is severely undermining that prospect.’’ As young people we need 

our elected leaders to take steps necessary to secure our future prosperity and the 

long term health of the American workforce. 

ACKNOWLEDGEMENTS

Several student body presidents sent NCLC memos detailing their campuses experiences with student loans. They include Emily Yu from American University, 

Jeanne Wilkes from Delta State University, Evan Martinak from Michigan State 

University, Ryan Beck from Missouri University of Science and Technology, Nic 

Pottebaum from University of Iowa, Ashley Mudd from University of Louisiana, and 

Xavier Johnson from University of Texas San Antonio. Their contributions, in addition to countless interviews over the last 10 months, shaped this summary. 

ENDNOTES

i ‘‘Student Loan Interest Rates.’’ 2012. http://www.nationalcampusleaders.org/student-loaninterest-rates ii Yu, Emily. ‘‘Memorandum: Student Loan Interest Rates.’’ American University Student Government. 12 March 2013. iii Johnson, Xavier. ‘‘Memorandum: Student Loan Interest Rates.’’ University of Texas San Antonio Student Government. 12 March 2013. ivPottebaum, Nicholas. ‘‘Student Loan Interest Rates: University of Iowa.’’ University of Iowa 

Student Government. 12 March 2012. vO’Sullivan, Rory and Brian Burnell. ‘‘Millennial Unemployment: Drops to 12.5% but Sequestration Could Increase It.’’ Young Invincibles. 8 March 2012. http://younginvincibles.org/2013/ 

03/millennial- unemployment-drops-to-12-5-but-sequestration-could-increase-it/ viShellenbarger, Sue. ‘‘To Pay Off Loans, Grads Put Off Marriage, Children.’’ Wall Street 

Journal. 17 August 2012. http://online.wsj.com/article/ 

SB10001424052702304818404577350030559887086.html viiShah, Neil. ‘‘Young Adults Retreat from Piling Up Debt.’’ Wall Street Journal. 6 March 

2013. http://online.wsj.com/article/SB10001424127887323293704578334761823150672.html viiiThompson, Derek. ‘‘The End of Ownership: Why Aren’t Young People Buying More 

Houses?’’ The Atlantic. 29 February 2012. http://www.theatlantic.com/business/archive/2012/ 

02/the-end-of-ownership- why-arent-young-people-buying-more-houses/253750/ ixPottebaum, Nicholas. ‘‘Student Loan Interest Rates: University of Iowa.’’ University of Iowa 

Student Government. 12 March 2012. x Johnson, Xavier. ‘‘Memorandum: Student Loan Interest Rates.’’ University of Texas San Antonio Student Government. 12 March 2013. 

Chairman KLINE. Without objection. 

Mr. MILLER. Thank you. 

Chairman KLINE. Mr. Andrews? 
51 

Mr. ANDREWS. Thank you, Mr. Chairman. One comment I would 

make about the discussion of income contingent repayment is we 

have two federal policies working at cross purposes. 

We claim we want students to take advantage of income contingent repayment, but the gainful employment rule that was proposed does not give institutions credit for a loan being in repayment if the student chooses that option which is I think a pretty 

contradictory view. 

Dr. Lucas, I want to ask you about your proposal to switch to a 

different accounting method for student loans, for direct student 

loans at least, and this is a very abstruse, theoretical debate that 

has enormous consequences in the real world in which we live. 

I looked at the chart that you put at the bottom of page four. If 

we stuck to the present system, in the 10-year window between 

2010 and 2020 the loan program is scored as raising $96 billion, 

reducing the deficit by $96 billion. 

If we switch to your method, it would be scored as adding $140 

billion to the deficit. So this is a very big deal. It is a quarter of 

a trillion dollar difference over a 10-year period, which has profound policy implications for how much we charge students and 

families and what impact it has on taxpayers. So I wanted to get 

into and understand the theoretical underpinnings of this. 

You say that the present system fails to account for the full cost 

of the risks associated with government credit assistance. That is 

the core of your argument. So in a sense, I think you are arguing 

that the projections that we make based upon present discount 

rates and default rates and whatnot understate the cost and overstate the benefit which therefore makes them inaccurate. 

But we don’t really have to have a theoretical argument about 

this. Since 1993, at least a third of the loans in the system have 

been direct student loans. What has that 20 years of history actually produced on a cash basis with respect to direct student loans? 

In other words, if we added up the defaults that the taxpayers 

had to cover, the administrative costs the taxpayers have borne, 

and then subtracted from that or I guess subtracted from that, the 

revenues that have been collected on direct student loans and also 

the interest cost—we have to subtract that out—what is the cash 

scoreboard over the 20-year basis? 

Ms. LUCAS. Okay. So to address the general issue, I just want to 

say a word about the concept—— 

Mr. ANDREWS. If I may though—— 

Ms. LUCAS. Okay, on the cash basis I can’t give you the number. 

It is certainly true that the cash payments have probably covered 

the cash outflows from those programs. 

Mr. ANDREWS. Well, if we just go back to that than for a minute. 

If you have that information, if any of you have that information, 

it would be great if you could supplement it for the record. 

I truly appreciate the fact that there is a theoretical difference 

between cash and an accrual basic counting. I don’t quite understand it, but I know there’s a theoretical difference. 

But I think I just heard you say that if you add up over the 20- 

year period, the revenues that came into the federal treasury on direct student loans and subtracted from that the loan defaults the 

taxpayers had to cover, the administrative costs we had to cover, 
52 

and the interest we paid to acquire the funds to make the loans, 

that we are running a surplus on that. Is that right? 

Ms. LUCAS. When the government makes a loan, they are incurring a liability to taxpayers and that liability has a cost today. 

That is the logic of the accrual accounting. 

Mr. ANDREWS. If I may, I get the theory, but my narrow question 

here was on a cash basis, I think I just heard you say that the direct loan program has produced more dollars in income than it sent 

out in spending. Is that correct? 

Ms. LUCAS. I don’t have those numbers before me. I believe that 

if you were to account for credit on a cash basis, which I think 

would be a bad idea and it is not the law you would come to a different conclusion, but that accrual is the right way to think of it. 

Mr. ANDREWS. I understand—no, I appreciate the theoretical difference. Just for those of us who are not economics professors, one 

way I would look at this is that the core of your position as I understand it is that it costs us really more to run this program then 

the present accounting method reflects. 

Well, I would like to look at what the actual facts are in that 

over a 20-year period. And it is my understanding—and I—again, 

please supplement the record, but it is my understanding if you 

add up the loan payments received and you subtract from that the 

cost of acquiring the capital, the administrative costs of running 

the program, and the defaults taxpayers had to cover, the treasury 

has come out ahead on that. Is that true? 

Ms. LUCAS. The fact is that the government gives students loans 

on terms that are far more favorable than what the private sector 

is willing to offer them, but at the same time, the government 

books those loans as showing a significant profit. And so there is 

a disconnect between thinking that the market price of the loan is 

one thing and the cost to the taxpayer is another thing. 

If we were to buy a tank for $50 instead of $1 million we can’t 

set the price of tanks—we can’t set the price of loans. 

Mr. ANDREWS. I will say I know the Defense Department is glad 

that we don’t use that in accounting. I am not sure we should use 

it on students either. 

Chairman KLINE. Dr. Foxx? 

Ms. FOXX. Thank you, Mr. Chairman. 

Mr. Draeger, what is the most important benefit for students in 

the federal student loan programs? A low interest rate on the front 

end, or repayment options and other assistance on the backend? 

Mr. DRAEGER. Unfortunately, we would have to go off of anecdotal information on this because we don’t have any statistical 

studies that show what is most important to students beyond the 

fact of the availability of the dollars. 

That is what is covering the cost of their education. So there is 

little evidence to prove that interest rates, particularly since half 

of our subsidized Stafford loan borrowers are also borrowing unsubsidized Stafford loans at double the rate, or that interest subsidies 

in and of themselves up front are really driving college access. 

More it seems to be that it is the availability of the dollars which 

is, that is what is most important to them up front and then our 

job is to figure out how we implement some sort of safeguards to 
53 

make sure that those students stay on the straight and narrow 

path of repayment. 

Ms. FOXX. Thank you very much. 

Mr. Delisle, you look like you wanted to make some comment 

after Mr. Andrews’ comments and I wondered, did you want to respond? 

Mr. DELISLE. I did and I now have the distinct advantage of 

making those comments now that he has left the room. 

What Congressman Andrews was essentially purporting is that 

we should measure risk looking backwards when we know what already happened. That is a ridiculous concept. Most of the cost to 

the federal student loan is the risk of that they might not be repaid 

or we might not know how much they will be repaid. 

And by saying, well, can’t you just look at what happened and 

then value it? That is essentially—you wouldn’t value the cost of 

insurance going forward based on essentially that happened— 

something that did or did not happen in the past. 

This is another example for—you can look at a well-known program, the troubled asset relief program. So going forward, we know 

when we made those loans, when Congress made those loans to investment banks, we knew that we were subsidizing them. We were 

making rates at half the going rate in the market at a time of incredible market turmoil. 

When looking backward, we got all the money back. So was it a 

cost or was it not cost? I would imagine most people here would 

say making loans to investment banks at half the going market 

rate is definitely a cost even if you collect everything they said they 

would pay you. 

Ms. FOXX. Thank you very much. 

Now I would like to ask each witness if you would answer this 

question: as the committee begins to reauthorize the Higher Education Act, what are some key principles that should guide how we 

review and reform federal student aid programs? 

Please keep in mind we probably have about 3 minutes and there 

are four of you. So if you could do about 40 seconds, maybe we 

could get to everyone and we will start with Dr. Lucas and go 

down. 

Ms. LUCAS. Thank you. I will say very briefly that I think what 

is important is to maintain the broadest of access to higher education and affordability. 

In the interest of maintaining affordability, it is important to 

rethink student loans as well as other assistance. I think we have 

to think about controlling costs in a way that is not so prescriptive 

as it diminishes the high quality of higher education in the United 

States, which has really been an engine of mobility and growth in 

this country. 

Ms. FOXX. Thank you. 

Mr. DELISLE. I will be very brief. I would say do not allow graduate and professional students to borrow an unlimited amount of 

money with the option for loan forgiveness on the backend. 

Ms. FOXX. Very good. Thank you. 

Mr. Draeger? 
54 

Mr. DRAEGER. The principal that we adhere to when examining 

the student financial aid programs is that no qualified student be 

denied access to higher education due to lack of financial resources. 

It may not mean choice to every school, that we will pay for 

every school, but basic access to postsecondary education. 

Ms. FOXX. Thank you. 

Dr. Mercer? 

Ms. MERCER. Thank you. I would say the twin principles are 

both access and completion; focusing on one without the other 

doesn’t serve us well. Students reap the biggest benefits, the nation 

reaps the biggest benefits when students enroll and complete college. 

Ms. FOXX. Thank you, Mr. Chairman. I yield back. 

Chairman KLINE. Thank you. 

Mr. Scott? 

Mr. SCOTT. Thank you, Mr. Chairman. 

I would warn the witnesses that there is a monitor in the back 

so that somebody who has left may still be able to hear what is 

being said. 

Mr. Draeger, following up on your statement about denying access, what portion of students now do you think cannot attend college because they can’t afford it? 

Mr. DRAEGER. The number one cited reason in study after study 

of why students don’t go to college, whether I think both perceived 

and real, is lack of funding to attend. 

So students either feel that they don’t have enough money to attend, they come from a background that won’t allow them to attend, and even if they are academically prepared, the number one 

obstacle that is cited over and over again is the cost. 

And so whatever we can do to let students know about the availability of funds like the Pell grant program, student loans, Federal 

work-study, supplemental grants, I think we will continue to make 

strides in college going rates. 

Mr. SCOTT. What portion of students would like to be on the 

work-study program that can’t get on because of insufficient funding? 

Mr. DRAEGER. The work-study program is a very popular program on college campus. And a couple of years ago we saw an increase in work-study dollars. Schools were very excited to be able 

to put that to work. 

Work-study has the added benefit of helping students complete 

because it actually integrates them into the campus. So it is one 

of the more popular programs that schools like to administer. 

Mr. SCOTT. And are Pell grants at a sufficient level to guarantee 

access? 

Mr. DRAEGER. Our supposition is that we have appreciated the 

bipartisan support for the Pell grant funding. We think Pell grants 

could always see an increase. They have not kept pace with the 

cost of college and in the past have not kept pace with basic costs 

of inflation; recognizing that you all have to balance understanding 

balancing of budgets along with that. 

Mr. SCOTT. Several months ago, there was a change in the PLUS 

Loan Program. Can you tell me the effect that had on student financial aid administrators? 
55 

Mr. DRAEGER. In the fall, we understand that the Department of 

Education introduced an additional underwriting criteria that 

looked back approximately 60 days to see if there were any delinquencies in a parent’s credit or if they were delinquent on any 

other federal loan payment. 

That resulted in denials of PLUS Loans for students who were 

already admitted and enrolled, and I think this gets to the point 

if we want to continue to not disrupt students and their ability to 

attend college, any changes, dramatic changes we make in the 

availability of financial aid ought to be done in the future for new 

students who are getting aid or new borrowers. 

Mr. SCOTT. What portion of students were adversely affected by 

that change? 

Mr. DRAEGER. I don’t have those numbers at my disposal, but I 

can look to submit them for the record. 

Mr. SCOTT. Thank you. 

There are a number of proposals on the table. Do any of them 

allow you like a mortgage to midstream lock-in a set flat rate, a 

fixed rate, like you can a mortgage rather than a variable rate that 

fluctuates with the market? And would that be a good idea? 

Ms. LUCAS. I believe that the proposals for introducing marketbased rates would preserve the fixed rate. Many of those proposals 

would preserve the fixed rate nature of the loans so if the student 

had 20 years to pay it would be at a fixed rate that was determined 

in the year they took out the loan. 

The change would be that loans that were originated in different 

years would bear different interest rates that moved along with 

market interest rates. 

Mr. SCOTT. But there would not be a variable interest rate on the 

individual loan? It wouldn’t go up and down with the market? 

Ms. LUCAS. No, just like you said, as with a mortgage, students 

would get a fixed rate and they would have the option to prepay 

it. So if they had the opportunity to refund at a lower rate—— 

Mr. SCOTT. How do mortgages reset their interest rate every couple of years? 

Mr. Delisle, if you don’t have a discharge at the end of income 

based repayment, wouldn’t some people be paying virtually for the 

rest of their lives? 

Mr. DELISLE. Oh, sure, and we haven’t recommended that you do 

away with loan forgiveness. We said it’s the combination of unlimited borrowing authority for graduate students plus three limits on 

repayment. 

One of them is loan forgiveness at 20 years or 10 years. Another 

is between zero and 10 percent of their adjusted gross income, and 

the other limit is another limit for high income earners that the 

payment stops going up. 

If you have unlimited borrowing up front, three separate limits 

on the back, that is essentially a great big moral hazard and a 

message to students to borrow away. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Chairman KLINE. Thank you. 

Dr. Roe? 

Mr. ROE. Thank the Chairman for having this and the members 

for being here. 
56 

I am gonna—there are some of us that are the same vintage that 

I am here and I want to go back in time a little bit and just express 

to you I came from a family that, my father worked in a factory, 

my mother was a bank teller. I was able to go to college. I worked. 

Remember the time when you worked your way through college? I 

was able to go to college and medical school and graduate in 7 

years from both of those with no debt. 

Now think about that today. I have served as a foundation board 

member of two colleges where I attended—the one where I attended and was president of the foundation board to help students 

make it more affordable and I continue to serve on the foundation 

board now. 

And I think it is one of the greatest challenges we face in America today are the student loans and the cost of college and I don’t 

know what is causing it to go up at seven, eight, and 10 percent 

per year, but it is unsustainable. I can tell you that. 

You cannot go out and see young people—I see students graduate 

from graduate school and law school and medical school with 

$200,000, $250,000, $300,000 in debt. It is unbelievable and they 

will be 50 years old or older paying that off. 

Where we live in Tennessee you can certainly buy a very nice 

house for what the cost of many student loans are today and 

these—and I see them in people who are teachers that are going 

out with $50,000 and $60,000 and $70,000 loans. I don’t know how 

they ever get out of that and I think your point about no—on the 

other end—I think you made your point very, very well. 

I am going to ask a couple questions. One, we have got a trillion 

or so—y’all have told us approximately $1 trillion which now exceeds credit card debt in student loan debt. Is the bubble out there? 

And the number I read, 35 percent of students who are paying 

those, or loan recipients it says here, are paying those back are 90 

days and above in arrears now. 

Is that bubble real? And what happens when it collapses to the 

taxpayers? Any of you can take that. 

Mr. DELISLE. Well, I will point out of that trillion dollars that is 

outstanding, the median monthly payment is $190. That is from 

the Federal Reserve Bank. The median monthly payments on student loans is $190, monthly payment $190. 

But, I also want to point out that you talked about somebody 

with $200,000 in debt paying for 30 years. Not under current policy. That person wouldn’t pay for longer than 20 years under the 

income-based repayment plan. 

They could choose to pay for 30 years by not enrolling in incomebased repayment, but I think that the program is set up now where 

you can even earn a very high income and have that debt forgiven. 

So our proposal was to essentially move the loan forgiveness for 

people who borrow more than $40,000 from 20 years to 25 years. 

It doesn’t sound like a big change, but it is a really big change for 

people who go to graduate school and it essentially requires them 

to pay a little bit more because they borrowed a little bit more. 

Mr. ROE. I guess the problem I have with that is to—here you 

are at 50 years old paying off a student loan that you acquired and 

I think certainly from the standpoint of the counselors at the school 
57 

is to let the students know what you are getting into, what you are 

going to pay off later. 

There is a cost out there and I certainly think you need to do a 

better job of allowing an 18-year-old, a 19-year-old, or a 20-yearold say, hey, look, this money is going to have to be repaid and that 

colleges are going to have to do a better job in controlling the cost 

because as I said, no one, including Bill Gates, is not going to be 

able to go to college if it keeps going up like this. 

Mr. DRAEGER. I think one of the concerns that is often overlooked 

in the whole college debt conversation as Jason pointed out, is the 

loan payments seem manageable for most graduates who graduate 

with an average of $25,000 in loan debt. 

There is a whole another part of this which is the amount of debt 

that parents take on to send their students. So when you talk 

about those who are in their 40s, 50s, these are folks who are also 

probably parents who took on a substantial amount of loan debt. 

One of the things that is missing in terms of safeguards, particularly on parent PLUS loans, is a simple assessment of their ability 

to repay the loan based on their current income. 

So there is no, for example, debt to income ratio on parent PLUS 

loans. Again, we don’t want to disrupt current enrollments, but for 

new borrowers or students down the road I think it makes sense 

to examine additional safeguards. 

If the mortgage bubble taught us anything, it is that appropriate 

underwriting not only protects lenders, it also can protect borrowers. 

Mr. ROE. Mr. Draeger, one of the things that happened too, I 

think, is the economy hasn’t done well. It has encouraged students 

to stay in college longer and acquire more debt. 

I thought for a minute, Mr. Draeger, you brought the health care 

bill with you when you have had that stack of papers out front of 

you when you first brought that here. I thank you for your testimony and I certainly appreciate the concern and I think we certainly can work on this. 

I yield back. 

Chairman KLINE. Thank the gentleman. 

Mrs. McCarthy, you are recognized. 

Mrs. MCCARTHY. Thank you, Mr. Chairman. I appreciate the 

hearing. 

Dr. Mercer, I want to follow up with something that you have 

talked about in your testimony. You mentioned in your testimony 

that there have been a number of changes in the last decade to student aid that have occurred outside of reauthorization. Can you 

identify one or two of the changes that you believe has done the 

least amount to help stem costs of college for the average student? 

Ms. MERCER. I am sorry, you said that has done the least to help 

stem the cost of—— 

Mrs. MCCARTHY. Right. 

Ms. MERCER. I am—well I would say probably limiting the number of semesters that a student can actually use their Pell—they 

can have—receive Pell to go to college. If anything, that is a policy 

that was actually intended to help students expedite the time that 

it took for them to complete their degree, and thereby controlling 
58 

for costs both at the institutional level but more from the student 

perspective, for them to be able to move through the system. 

So undoing that, in effect, leads to increased costs more so on the 

student perspective and it had no impact on the institution for 

them to change their policies in terms to helping advance students 

and move them through the system. 

Mrs. MCCARTHY. One of the things I wanted to follow up on as 

we talk about these loans and it was just talked about as far as 

parents being able to carry that loan. We are talking about one student. What happens when there are two or three students in college? They might be stepped, but there is still three students. 

I mean, you know, unless you are extremely wealthy, that is a 

little bit steep for a parent and certainly the goal is to have their 

children go to college if that is what they want to do. So I mean, 

technically, the parents are looking for everything they can, obviously the children are doing what they need to do, but I don’t know 

whether anybody has actually really thought about that on what 

the loan is on for the parents. 

I know things are better today. Grandparents can help technically. I guess that is what I am supposed to be doing, but I mean, 

when you think about it, it is mind boggling as far as that goes. 

Just to follow up on you, Mr. Draeger. When I hear everybody talking about also that these loans that are being taken out, Mr. Hinojosa and I, for years, we have been pushing financial literacy. 

Now you said that the colleges can’t give certain information to 

the student or to the parent. Would they be able to work it under 

the—a way of financial literacy to have them understand what they 

are actually getting into? 

Mr. DRAEGER. So schools aren’t prohibited from delivering information. The real problem is that we have a lot of information that 

we give them. 

Mrs. MCCARTHY. Right. 

Mr. DRAEGER. The issue is really that the school is prohibited 

from requiring any additional steps that is not mandated in legislation before a student gets their loans. So to require a student, for 

example, to build out a budget to say why is it if you are, for example, a part-time student borrowing at a full-time rate, let’s walk 

through this and make sure that you understand why you need 

this money before we approve the loan. 

Right now, schools aren’t able to introduce or mandate those 

types of steps. So I think financial literacy is a huge part. In fact, 

many schools are partnering with former state-based agencies that 

operated in the Federal Family Education Loan Program that were 

part of the state or part of another nonprofit to try to develop and 

deliver more meaningful and engaging financial literacy to students, but again, unless it has teeth, I think we are always—it appears we are just delivering more information that they might not 

pay attention to. 

Mrs. MCCARTHY. So let me ask you, why do you think the language is in there that the college can’t give more information? 

Mr. DRAEGER. I think at the time, when student loans were developed, this was viewed as entitlement aid and that the school 

should not come between a student and the total amount of financial aid that they are entitled to, and that includes loans. 
59 

But as demonstrated by this hearing and a lot of the things we 

see in the press, there is rising concern about the amount of family 

debt as you talked about the parents—the family debt that is being 

taken on and I think from the school perspective, we are questioning can we play a better and a more significant role with some 

teeth to be able to stop and ask students do you really need this 

much, this money in loan debt. Let’s think through this together. 

Mrs. MCCARTHY. Because one of the things I know—and this 

committee certainly worked on that—is educating especially new 

college students on when they went to register on all the credit 

cards that were available for them. 

It was a big debate here because a lot of them were not prepared 

to pay those particular debts down. So it is complicated, but thank 

you. 

I yield back. 

Chairman KLINE. Thank you. 

Mr. Walberg? 

Mr. WALBERG. Thank you, Mr. Chairman. It is a bit surreal to 

be sitting here on a committee talking about student loan debts 

and trying to come to a solution when we are having a great deal 

of difficulty in dealing with $16.5 trillion debt that we have the 

with no real activity that we see in the pipeline to accept proposals 

that would reduce that debt and balance, but that is another point. 

Right now in my home state of Michigan we are facing an unemployment rate of just below 9 percent, and though I represent Hillsdale College, that really doesn’t find any involvement in our topic 

today. Yet I do represent some of the students from the some of 

world’s greatest research universities like the University of Michigan, Michigan State, private religious-based institutions like 

Spring Arbor and Siena Heights University, Adrian Olivet Colleges, and community college systems in Lansing, Jackson, and 

Monroe that are models of academic and employer cooperation. I 

am pleased with that. 

But right now, we are working with all hands on deck to keep 

our graduates in the state employed and primarily because of student debt and limited job opportunities. 

The federal student loan program was created to help students 

pay for the high cost of tuition, but over the last 20 years, students 

in Michigan have seen their federal government gradually move to 

overtake all aspects of the student loans which has gotten us into 

a mess where we find ourselves now. It is my opinion. 

We know that the student loan interest rates are not the sole 

issue facing Michigan students and other state students; however, 

as college tuition continues to skyrocket and students face staggering amounts of debt, we must enact comprehensive solutions 

that put our schools and our parents and our communities and 

next-generation on a path to prosperity. 

So following in Mrs. Foxx’s questioning, just briefly, I ask of all 

of you, if any of you know of any state or any—excuse me—any 

study showing the relation between the ever increasing higher education costs and the lack of any real present disincentive to student 

debt. Any studies that show any comparison, any relation of high 

cost of education versus the student debt? 
60 

Mr. DRAEGER. I would be happy to submit some of these studies 

to the record. The ones that we have looked at have shown that 

that even in periods where financial aid wasn’t increased, grants 

or you kept the annual and aggregate loan limits steady college 

costs have continued to go up and so the function between financial 

aid and debt which is a function of cost just doesn’t seem to correlate. 

We haven’t seen that corollary function. So I would be happy to 

submit that, those studies, for the record. 

Mr. WALBERG. Well, I would appreciate that. 

Mr. DELISLE. I mean this is a pretty difficult thing to pin down 

but I think that there is a couple things we should keep into context. You know, an undergraduate, a dependent undergraduate in 

their freshman year can borrow $5,500 through the federal student 

loan program. 

It is hard to imagine that that amount of subsidized credit really 

moves the needle on tuition, but now if you look at graduate programs where the student can borrow up to the full cost of attendance as set by the institution for as many years as they want to, 

you can get two, three, four, five graduate degrees and just keep 

borrowing and pay for your cost-of-living while you are there. 

My guess is if there is a place where loose and very cheaply 

available federal credit is pushing up the price of college education, 

it is definitely in the graduate programs. 

Mr. WALBERG. I appreciate that. That is probably an area we 

ought to look to find disincentives to encourage our costs of education to moderate at some point and that probably ought to be 

part of our quest. 

I also would guess that providing further incentives to families 

to save for college education would be helpful in the process. 

Mr. Draeger, about how many students are benefiting from the 

subsidized Stafford loans currently being offered a 3.4 percent rate? 

Mr. DRAEGER. By our estimates, looking at NPSAS data, about 

7.5 million. 

Mr. WALBERG. How many of these students also obtained subsidized loans with PLUS and Stafford? 

Mr. DRAEGER. Just about half of them. So 4 million of our subsidized borrowers are also borrowing in the unsubsidized Stafford 

loan program. 

Mr. WALBERG. Are there any private lenders able to offer loans 

to Michigan or other state students at significantly lower rates? 

Mr. DRAEGER. We have seen private lenders who are currently 

marketing rates lower than the federal loan limit—or excuse me, 

federal interest rates, particularly for Stafford and PLUS. 

The unknown question, the answer that I can’t give you, is what 

the distribution is; how many people who apply for those private 

loans are actually getting them. 

What makes it difficult for financial aid administrators is trying 

to explain the benefits of staying in the safety of the federal loan 

programs when private loans are being marketed at a lower rate. 

Mr. WALBERG. Thank you. 

Chairman KLINE. The gentleman’s time has expired. 

Mr. Tierney? 
61 

Mr. TIERNEY. Thank you, Mr. Chairman, and thank you for having this hearing, Mr. Chairman. I think it is good to begin the discussion and certainly we have to address the doubling of the subsidized Stafford loan, but we have to go on beyond there. Obviously 

we can’t stop there. We have to think a little bigger. We have to 

look at the responsibility over the whole realm of that. 

But I wanted to try to put this conversation in a little context. 

Most of my constituents think it incredibly unfair that Wall Street 

banks can go to the Federal Reserve and borrow money at almost 

no interest rate at all, yet they turned around and look what they 

have tomorrow to go to college and they find that comparatively exorbitant compared to that. 

Now, the people on Wall Street are the ones that just about 

wrecked our financial system taking these reckless risks and yet 

they can go it get a deal. All that the people who are trying to do 

when they graduate is added to the nation’s productivity, innovation, and creativity, but they get a bad deal in comparison on that. 

So that is the context in which I work. A lot of people coming 

into my office and wanted to know what the heck is going on. 

Dr. Lucas, you mentioned that one of the reasons—and correct 

me if I got this wrong—but one of the reasons why interest rates 

should increase and not be fixed is that lenders need to be assured 

their return on capital will increase to account for that inflation. 

Is that fair? 

Ms. LUCAS. I said that if inflation were higher that is what the 

market would require. 

Mr. TIERNEY. It would. All right, and you are saying if that 

doesn’t happen that it is a cost to the taxpayer. 

Ms. LUCAS. I am saying that when you fix loans as they are now 

when inflation goes up you are still charging students the same 

rates, which makes the loans further below market rates. 

Mr. TIERNEY. Below market rates on that. But what if the lender 

was a not-for-profit? What if the lender was somebody that said, 

you know, I am happy to cover my costs? And I think that there 

is a value to covering my costs and not getting that profit back or 

on that basis because I think it is good public policy to have more 

people graduate from school, increase our productivity, our creativity, and all of that going forward, then that is a whole different 

consideration, right? 

Ms. LUCAS. I agree with you completely that it may be good public policy to keep the interest rates on student loans low. My comments about changing the accounting for them had to do with the 

transparency and recognition of the true costs which would make 

it easier for Congress to decide to use student loans in judicious 

proportion to other types of aid, but as far as—— 

Mr. TIERNEY. So we would get to see—so we would get to see 

what our public policy was is what you are saying. You get transparency and you know what profit you weren’t making and be able 

to decide whether or not that was commensurate with the policy 

plusses that you thought you might get. So they can make that 

kind of decision on that basis. 

And I think that is great, but—and I think that is the kind of 

discussion we ought to have around here but I don’t think we ought 

to lose sight that it is—you know, we are not a for-profit organiza-
62 

tion and we talk all the time about—our rhetoric speaks to the idea 

of needing more college graduates and all of our employers need it 

and we need it for our productivity and for our creativity and our 

innovation, but our policies and our interest rates still counter to 

that. 

You know, making it difficult for people to pay off loans. Some 

people don’t even go to college because they see the frightening 

costs going forward. So I think we ought to have that discussion 

but not lose sight of the fact that there is a value to not making 

a profit so much. 

And if we thought we had to make up that money somehow, 

maybe we wouldn’t give billions of dollars in tax subsidies to oil 

companies every year. So basically shoveling money out the door to 

them as a gift with no real public policy plus back on the other 

side, or if we thought we had to make it up, maybe we would put 

a transaction tax on those very Wall Street people that almost 

drove us into ruin and slow down the volatility of the electronic 

trades and at the same time for the value of what the proposal I 

have seen is the cost of about 1 cup of coffee, one dollar for every 

800 cups of coffee and we get a plus on the way the market runs 

and also get them to start contributing to fixing what is going on 

in the country and get us more graduates on that. 

That is all I really wanted to cover on that, but I do think on 

the other part of that, Mr. Chairman, is that at some point we have 

to start looking at making sure that the people that have these college loans and they are getting collections on the other end get 

treated the same as people that have borrowed for other purposes. 

I mean, Donald Trump can walk into bankruptcy, clear his 

record, and go out and start investing the next day, but a student 

that falls on some calamity and can’t repay their loans cannot go 

into bankruptcy at all and never gets a restart. I have a number 

of people that come into my office that just keep having trouble 

with the collection process, penalties, interest going up and up on 

them and they seem to never be able to get out. 

So I think we need some consumer protections. We need to take 

a look at why students are one of the very few groups that can’t 

get the protection of bankruptcy that our Constitution generally affords everybody else, and then we will have truly looked at this on 

a larger scale on that basis. 

So I thank you, and I yield back. 

Chairman KLINE. Thank the gentleman. 

Mrs. Roby? 

Mrs. ROBY. Thank you, Mr. Chairman. I would like to thank all 

of the witnesses for being here today and just want to talk about— 

last district work week I organized a roundtable discussion with 

Alabama’s Department of Postsecondary Education Chancellor, 

Mark Heinrich, and presidents of Alabama’s community colleges in 

my district. 

And we had a great discussion about the impact that federal policies and regulations have on their colleges in addition to college affordability and as you can all agree, here in the United States we 

are fortunate to have a diverse educational system. 

Students can use federal financial aid and many other scholarships and funding sources to attend their school of choice; public, 
63 

private, proprietary, 2-year, 4-year, certificate, undergraduate, 

graduate, et cetera. 

And for these student loan programs to remain available, we 

have got to strengthen them. So I just have a couple of questions. 

Mr. Delisle, historically the interest rate for PLUS loans are 

often a little bit higher than the rates of the Stafford loans. So my 

question is do you believe that the higher PLUS loan interest rates 

deters graduate students or parents from borrowing and obtaining 

a postsecondary education? 

Mr. DELISLE. Well, I do think on the parent side, I think there 

something that you might want to be concerned with which is there 

is a little bit of an adverse selection issue where the interest rate 

on a parent’s PLUS loan, the APR, is 9 percent. 

I know we talk about the 7.9 percent, but the APR is really 9 

percent once you add in the 4 percent origination fee. Department 

of Education, by the way, I think is the only financial institution 

that can tell you what the interest rate is on your loan without telling you what the APR is. 

So the APR is 9 percent. So parents, the people who think that 

is a bad deal can go somewhere else and borrow—they can get a 

home equity loan or they can use savings or they could borrow in 

the private market and get a variable rate. 

People who are stuck paying the high rate are people who can’t 

find any other means of credit, people who are those that are probably most likely to find that repaying a loan at 9 percent APR is 

difficult. 

Then on the back end, if you look at graduate students who borrow those loans, they will get out of school, say they find a job and 

they find a high-paying job; who is going to pay back the loan first? 

The person who is making the money that can pay back that Grad 

PLUS loan or refinance it in the private market frankly. There are 

companies out there that are doing that. 

So what is left in the loan pool? It is people who can’t pay quickly. You have essentially on the front end you have selected out the 

good risk and then on the back end you are further selecting out 

the good risk and you are left with a pool that is most risky. 

Combine that with the generally, you know, I think, 

mischaracterization that the program makes money for the federal 

government when you have those kinds of dynamics going on, I 

think it is unusual. So this is one of the problems with the interest 

rates in the PLUS program. 

Mrs. ROBY. Okay. Thank you. 

And Dr. Lucas, what factors do banks consider when they look 

to originate student loans versus the factors that the federal government takes into account? 

Ms. LUCAS. Yes, well the federal government treats student loans 

as an entitlement, so they basically don’t take into account any financial factors of the student but rather the costs of attendance. 

A private lender would look at credit history, credit ratings, 

whether income is sufficient to afford the repayments, wealth, and 

so forth. So it is quite different. 

Now student loans are valuable just because they don’t look at 

those things. The justification for student loans is a student might 

have no credit history, no credit score, so the government is step-
64 

ping in and providing credit where it might not be available in the 

private sector, and the government is purposely doing it at a rate 

that isn’t attainable in the private sector because that is what students need to have the opportunity to pursue an education. 

So there is certainly a justification for the way the government 

has structured the program. Just to repeat, I feel that those kinds 

of subsidies are completely appropriate and they are the role of the 

government and credit markets. It is problematic when you make 

these below-market loans and you claim that not only have you 

helped the students but you have created profits that the government can spend elsewhere. 

Mrs. ROBY. Thank you. 

My time is running out. I have one more question for Mr. 

Draeger, but I am going to submit it to the record for an answer. 

So thank you, Mr. Chairman. I yield back. 

Chairman KLINE. Thank the gentlelady. 

Mr. Holt? 

Mr. HOLT. Thank you, Mr. Chairman. 

I think the witnesses. 

You know, there are lots of details that I would like to get to 

about whether low income borrowers are more likely to be harmed 

by being locked into a higher interest rate if we have variable interest rates. There is a lot to be said about—or a lot to be discussed 

about income-based repayment, but I have got to get to the basic 

question here that has not been cleared up this morning. 

And that has to do with—let me ask you to get that for me there 

again—whether this actually costs taxpayers or not, and if it does, 

whether this is something that we want; whether this is a public 

good that we are requiring here. 

The CBO issued a paper this year that says CBO estimates that 

new loans and loan guarantees issued in 2013 in the amount of 

$635 billion would generate budgetary savings of $45 billion over 

their lifetime, thereby reducing the budget deficit. 

However, using a fair value approach, which we have heard discussed this morning, CBO estimates that those loans and guarantees would have a lifetime cost of $11 billion, thereby adding to the 

deficit. 

Now the witnesses here seem to be, at least Mr. Delisle in particular, seem to be offended that the federal government might consider offering risky loans at better rates more favorable than the 

market, then the private sector would offer. 

In fact, Mr. Delisle, you said it was ridiculous to look backward 

to see whether we might recover—the taxpayer might recover 

money. It seems offensive that the government might be pursuing 

an interest that the private lenders were not willing to pursue. 

That is why we are here. We are trying to look after the public 

good, not just the return on investment for a particular bank, and 

therefore we don’t need to match what they do. 

We may be better, as Mr. Tierney has said and others, we may 

be better off as a nation to have more people educated in college 

and educated in graduate school and so it is interesting—you use 

the phrase ‘‘moral hazard.’’ 

Now, you know, for oil companies or financial businesses who are 

encouraged to shift more and more risk to other people while they 
65 

make out like bandits—and I use that term advisedly—that is a 

moral hazard—that is not a moral hazard, but for students to shift 

some of the risk to society at large is a moral hazard, where you 

seem to be putting an emphasis on the word moral as if the shame 

here is that we are creating a generation of scofflaws. 

No, what we are trying to do is create a generation of innovators, 

a generation of doers and makers, a generation of educated people, 

and until we face that point and get that question out from under 

this, it doesn’t make sense to talk about whether we want variable 

loan repayments or income-based loan repayments. 

And I think we are just talking past each other here this morning. I realize—I don’t know how to put this into a question, but I 

just was so frustrated to hear this, this morning. Did you really 

mean, Mr. Delisle that it was ridiculous to look historically whether the taxpayer gets the money back and not at the rate that a 

bank would have gotten it back? 

Mr. DELISLE. I think it is ridiculous to value risk when you know 

what happened. That was my point of view. There is no way, if you 

were going to make a bet on a coin toss and then place your bet 

after you knew the results, there is no more risk in the transaction. 

That is essentially the issue, but I did say that I do support—— 

Mr. HOLT. With all respect, you make a bet on a coin toss after 

you have seen that coin tossed 1,000 times and you know how biased it is, then you make your bet. 

Mr. DELISLE. And there is still some chance going forward. 

Chairman KLINE. The gentleman’s time has expired. 

Dr. Heck? 

Mr. HECK. Thank you, Mr. Chairman. 

Again, thanks all of you for being here and I approach this debate from somebody who is still paying off their student loans. I 

don’t know how Dr. Roe did it, but I am still in repayment and 

from somebody whose daughter just began her student loan repayments, so I see it from both sides. 

Mr. Delisle, you suggested that a fixed rate at some index plus 

a percentage, I think you said 3 percent at the time of issue, that 

would remain constant and I am assuming that is even into the repayment period, so that is fixed. And I think that potentially has 

some merit because I get periodic notices of my student loan payment changing by plus or minus $5, but there is always a question 

as to what the rate is going to be. 

But as was mentioned by Dr. Lucas, if loans are disbursed by semester, theoretically you could have a situation where you might 

have eight or more student loan rates depending on how long it 

takes you to complete your education. Is there a downside to the 

fact that you are going to have eight or more separate loans at different interest rates during the course of your academic career and 

then into repayment? 

Mr. DELISLE. That is true. That is what would happen. Under 

the proposal that we have discussed though, the rate would only 

readjust once a year. So wouldn’t happen in the middle of the 

course of your school year, but theoretically, yes, you could have 

multiple loans. 

Now you can consolidate and them so that you get one weighted 

average interest rate on the loan. But that is a downside that peo-
66 

ple will have different rates, but there is really no way around 

that. You can’t give people fixed rates that are based on something 

that are then always the same. They are mutually exclusive qualifications on what you are trying to do. 

Mr. HECK. And at risk of bringing up the term ‘‘moral hazard’’ 

again, but I believe that you mentioned moral hazard in a context 

of a system that is actually encouraging people to borrow more 

money than they need to borrow and if that is the case, would you 

believe that there is also a moral hazard in the loan forgiveness at 

10 or 20 years and that the fact that we are having people sign a 

contract or a promissory note with the idea that after 10 or 20 

years they may not be liable for the amount that they signed for 

on the bottom line? Is that not another potential moral hazard? 

Mr. DELISLE. Yes, and that is what the moral hazard is and the 

moral hazard is not in the undergraduate programs because we 

subject borrowers to a strict loan limit. They can’t borrow an unlimited amount of money, so on the front end—you have either— 

you have capped it—essentially how much they can borrow on the 

front end. 

And if there are, you know, sort of well-founded public policy rationales for having an undergraduate loan program and Dr. Lucas 

mentioned them which is that these are people who you won’t get 

a fully functioning credit market. 

So I you know, I reject a little bit the way that Congressman 

Holt characterized my earlier testimony in that I fully support a 

federal student loan program and one that makes subsidized credit 

available to all students, but the issue is on loan forgiveness and 

the Grad PLUS program where you can borrow an unlimited 

amount of money and not have to pay it all back any longer than 

20 years and then it is forgiven. 

That is where the moral hazard is and we have run the numbers 

with a calculator that we developed at the New America Foundation that is publicly available, and we have run literally thousands 

of income scenarios and borrower debt scenarios through this, and 

word will get out. This is a newly available program but people will 

soon figure out that there is really no difference in repayment between borrowing $100,000 or $150,000. There is really no difference. So what would you do? 

Mr. HECK. Mr. Draeger, you mentioned earlier that you referred 

to the safety of staying within the federal student loan system 

versus going outside to private loans. Can you explain what safeties there are within the federal student loan system that are not 

out with the private-sector loans? 

Mr. DRAEGER. Essentially, the federal loan programs provide 

safeguards and checks available for students and parents to ensure 

that if their loan payment is ever more than their income that they 

can remain within an income-based repayment currently. 

There is loan forgiveness so that people who enter aren’t deterred from entering public service or other nonprofit service where 

they are not going to have a large income. There are protections 

against death and disability so that your loan debt isn’t passed on 

to others in your family or doesn’t persist after you are permanently disabled. 
67 

So those are the protections that are available to students. It is 

difficult to point those out to them when they are seeing advertised 

rates that just aren’t aligning up with the federal interest rates. 

Mr. HECK. And then if you could, just very briefly in the time 

remaining, as the representative of more than 17,000 financial aid 

administrators, what singular change to the federal financial aid 

system should be this committee’s priority to strengthen the federal 

student loan program? 

Mr. DRAEGER. We think going back to something that was mentioned earlier, we would love to see a comprehensive discussion on 

reauthorization of the Higher Education Act because it is difficult 

to make an adjustment to one program and not expect unintended 

consequences in another. So the piecemeal approach that has been 

taking place through budget is less desirable than taking these as 

a whole. 

Mr. HECK. Thanks, and I am hopeful that we will reauthorize it 

before its 2014 expiration date. 

Thank you, Mr. Chair. I yield back. 

Chairman KLINE. Thank the gentleman. 

Mr. Courtney? 

Mr. COURTNEY. Thank you, Mr. Chairman, for holding this hearing. 

And again, I want to thank Mr. Delisle actually for your testimony which sort of walks through the history of Stafford student 

loan and again, I think, you know, in response a little bit to the 

Chairman’s opening comments, the box we are in right now in 

terms of fixed rate Stafford loans was created in 2002, and I realize 

that there is frustration about the fact that the cut to 3.4 percent 

in 2007 was kind of a piecemeal solution, but the fact is, is it was 

an attempt to try to ameliorate the fact that 6.8 by the time 2007 

rolled around was out of sync with the market which a number of 

the members have pointed out and certainly that was the case last 

year. 

I think frankly that was the power of the President’s message 

when he was on the road which is that people were seeing home 

mortgage rates at 3 percent and kids were going to see their rates 

go up to 6.8 percent. Hopefully we can find that sweet spot to try 

and adjust the system. 

But again, it is a challenge because of that 2002 budget baseline 

that everything costs money when you are trying to sort of fix this 

thing and—but I think again, we have got to sort of step back and 

recognize there is a social value here about making higher education affordable. 

I was with the Connecticut Department of Labor last week. We 

have about an 8 percent unemployment rate in our state, but for 

people with 4-year degrees it is 4 percent. People who have a high 

school degree it is 12 percent and that shows why, you know, we, 

all of us as Americans have skin in the game in terms of trying 

to come up with a system that again tries to create opportunity because we all benefit from it and it is a social benefit that we 

shouldn’t allow arbitrary budget rules to necessarily interfere with. 

We should try and sort of get it right. 

Mr. Delisle, your sort of concern about graduate education being 

sort of too—lacking in skin in the game for students; I am just try-
68 

ing to just sort of understand—we had a hearing a couple days ago 

in the wake of Newtown where we had school-based mental health 

testimony about the fact that there is a crisis right now in terms 

of finding pediatric psychiatrists and adolescent psychiatrists. 

I mean, the cost of medical education, which is certainly part of 

that graduate school tier that you are focused on is too high for a 

lot of critical professions like pediatric psychiatry to be affordable. 

So if we have a policy for loan forgiveness that again is trying 

to address critical workforce needs in this country, which again, the 

mental health system we all know in the wake of December 14, is 

desperate for help. 

I mean, do you include those types of initiatives in terms of criticizing loan forgiveness? 

Mr. DELISLE. Well, what we suggested is that the timing of the 

loan forgiveness be somehow linked to the amount that you borrowed. So if you borrow more, that the loan forgiveness would happen after 25 years of payments rather than 20. 

We haven’t made any sort of statement on the loan forgiveness 

provision for nonprofit government and religious employees at 10 

years of payments. Obviously, the graduate students are going to 

benefit quite a bit from that because they are going to have the 

most debt, but, I mean, I see that as a slightly separate issue since 

that is a program that essentially is providing a subsidy in one way 

or another to people who are working in jobs that Congress believes are valuable. 

I do think, however, though, that it is a very, very un-transparent way to provide a subsidy to those people. I am not even sure 

that they know they are getting it. 

Mr. COURTNEY. So for a medical student right now who maybe 

would aspire to going into a specialty area that frankly does not 

compensate as well as being an orthopedic surgeon or whatever, 

you know, we have, I think, a duty to make sure that we are helping people make that choice and loan forgiveness when you are 

talking—I mean, medical students are coming out with $200,000 or 

$300,000 in debt. 

And if you are saying well be a, you know, pediatric psychiatrist 

where you are going to be basically you know living you know a 

pretty meager existence, that is just not an option for people—and 

I—so where does that fit in to your sort of critique? 

Mr. DELISLE. Well, I mean, I would say right now under current 

policy, it is not an issue. I mean, and you have made recommendations to changing current policies—— 

Mr. COURTNEY. Actually, the Affordable Care Act has a loan forgiveness program for adolescent psychiatry and pediatric psychiatry which expires this year. 

Mr. DELISLE. Well, the student loan program though is permanently authorized, loan forgiveness for public service, nonprofit—— 

Mr. COURTNEY. Wait a minute. 

Mr. DELISLE [continuing]. It is permanently authorized. 

Mr. COURTNEY. But a pediatric psychiatrist is not a nonprofit—— 

Mr. DELISLE. Oh, if they are not—oh, so if they are working in 

a for-profit, then they get loan forgiveness after 20 years. 
69 

Mr. COURTNEY. I mean, that is the way the professions are structured. 

Mr. DELISLE. And then they—so if it is in a for-profit, that they 

get loan forgiveness after only 20 years’ payments—— 

Mr. COURTNEY. Well, I—— 

Mr. DELISLE [continuing]. Regardless of their income. 

Mr. COURTNEY. I just think, you know, that is a blind way to—— 

Chairman KLINE. The gentleman’s time has expired. 

Dr. DesJarlais? 

Mr. DESJARLAIS. Thank you, Mr. Chairman. 

There are so many things about this issue that are troubling to 

me and I feel like we have just been kind of missing the point as 

we talk about what the federal government should do, what the interest rates should be, and that is just the personal responsibility 

of the students. 

I, like my colleague Dr. Roe, am a little more seasoned, maybe 

not quite so much as him, but I graduated medical school in 1991 

with $120,000 in debt. My lowest interest on my loan was 9 percent. My highest was 18 percent. And I couldn’t have gone to college and medical school without Pell grants and loans so I am very 

much in favor of the programs, but they have to be managed properly. 

You know, this ship is sinking because of mismanagement and 

educational institutions continue to raise costs because we continue 

to throw money at that. 

Pell grants just 6 years ago helped 5 million students at the cost 

of $12 billion. Now we are helping 9 million students at the cost 

of $43 billion. So that ratio isn’t working. We are subsidizing student loans. Student loans have almost become an entitlement and 

as Mr. Draeger said, I don’t think we are educating students and 

Mr. Delisle also. There is no disincentive for kids to be responsible. 

It is very easy for us to be cavalier up here when we talk about 

federal government or federal loans, but all you out there are taxpayers, and the federal government is made up of taxpayers. There 

aren’t federal loans; there are taxpayer loans. We are paying these 

loans and we should be able to get a return on investment. 

If you educate a student and they get a good job, then they 

should be able to come back, pay off these loans, become a taxpayer, and this should all work out, but it is not working out because we are not looking at the real problem. 

When a lot of us went to college, you went to sign up and it was 

a 4-year plan. You were going to graduate in 4 years. You took 16 

credit hours. I have got a senior graduating right now that is looking at his colleges, almost every one of them starts at a 12-credit 

hour program. There is no way to finish in 4 years. 

So are we creating lazy kids? Have we gotten to the point that 

we want so much for our future generations to have it better than 

we did that we have handicapped ourselves and we have done that 

through spending? 

You look at the federal government debt, and it is at almost $17 

trillion and it is rising. These student loan debts now surpass—I 

think as Dr. Roe said, auto loan and credit card debt combined in 

this country, and we are making it a situation where they don’t 

have to pay these back in a reasonable fashion. 
70 

When I got out of medical school with 18 percent interest loans, 

I didn’t want to go buy a new house and car, I wanted to get those 

loans paid off and did so in 7 years because I was so privileged, 

in my mind, to get those loans and have the ability to go to college 

and go to medical school, but now I don’t think kids have that 

same level of education and we are failing at a bunch of levels. 

The institutions are failing by looking at the money they can 

make with prolonged student participation and the graduation 

rates are abysmal. I mean, I think that right now in a 4-year institution, if you go back to the 2004 class, only 38 percent are graduating 4 years, 53 percent at 5 years, and 58 percent at 6 years. 

So your taxpayer dollars are not being invested wisely and the 

problem I think is in the education of the students, the responsibility of the educational institutions, and then the good proper parenting of the federal government to use the money wisely. 

If you all were private lenders right now, were going to take over 

this program, you would look at it like we are all looking at it 

today. You would look at it cannot lose money and I think that that 

is what we need to be focusing on to fix this problem. 

So, Mr. Draeger—someone brought up earlier work-study too. I 

did work-study and that was great. What if we shifted some of this 

Pell Grant money into work-study and people actually learned responsibility and worked? 

When you go to college, you are poor; I mean, you are poor in 

college and not just, I mean, that is actually part of the fun of it. 

If you are not poor, then you have money and the student loans 

shouldn’t be an issue anyway. 

So, you know, we have got to be realistic in what we expect. We 

have kind of created this false sense of prosperity in our country 

here today with the federal government and that is why we have 

this debt problem. 

So is there a way that we can start to push for a 4-year program 

again, more responsibility, and is there a way to shift study funds? 

Mr. Draeger and Mr. Delisle, you both had great comments. I will 

give you just a few seconds to chime in on all that philosophy. 

Mr. DRAEGER. So to answer the question about can we do more 

particularly with financial aid to push students through college at 

a faster rate, one of the things that was rescinded fairly recently 

without a lot of study was year-round Pell grants; the ability for 

students to attend all the time throughout the year as opposed to 

a traditional academic year. 

And there were concerns about the cost of the program, there 

were concerns about misestimates on how many students would 

utilize it, but that was a good example of how we can make financial aid more agile to meet the needs of modern students, which is 

allow them to enroll ongoing so they can get through their program 

at a lower cost and become productive members of society. 

Mr. DELISLE. Well, one of the things that we proposed in a paper 

that we recently released at The New America Foundation is that 

you time limit loan eligibility. Right now, loan eligibility is just an 

aggregate and annual number mostly pulled out of thin air. So you 

could borrow essentially for 7 years to complete a 2-year degree. 
71 

And that is an area where you might want to align the amount 

you can borrow or for how long you can borrow with the types of 

programs you are pursuing. 

Chairman KLINE. The gentleman’s time has expired. 

Ms. Bonamici? 

Ms. BONAMICI. Thank you very much, Chairman Kline and 

Ranking Member Miller, for holding this important hearing today. 

I have a group of students visiting today from the great city of 

Hillsboro, Oregon, they are with the Mayor’s Youth Advisory Council, and I assure you they are very interested in this topic, so thank 

you. 

Before I ask my question, we have a letter here from Robert 

Reischauer, the former director of the CBO, stating opposition to 

the fair value accounting, and I would like to make sure that that 

is entered into the official record. 

[The information follows:] 

ROBERT D. REISCHAUER, 

5509 MOHICAN ROAD, 

Bethesda, MD 20816, January 23, 2012. 

Hon. CHRIS VAN HOLLEN, 

1707 Longworth HOB, Washington, DC 20515. 

DEAR REPRESENTATIVE VAN HOLLEN: I am writing in response to your request for 

my views on the desirability of adopting ‘‘fair value accounting’’ of federal direct 

loan and loan guarantee costs in the budget as proposed in H.R. 3581. I strongly 

oppose such a change. 

The accounting convention used since enactment of the Credit Reform Act of 1990 

already reflects the risk that borrowers will default on their loans or loan guarantees. Under Credit Reform, costs already are based on the expected actual cash 

flows from the direct loans and guarantees (with an adjustment to account for the 

timing of the cash flows). H.R. 3581 proposes to place an additional budgetary cost 

on top of the actual cash flows. This additional cost is supposed to reflect a cost to 

society that stems from the fact that, even if the cash flows turn out to be exactly 

as estimated, the possibility that the credit programs would cost more (or less) than 

estimated imposes a cost on a risk-averse public. Under the proposal, this extra cost 

would be the difference between the currently estimated cost of direct loans and 

loan guarantees to the federal government and the cost of those loans and loan 

guarantees if the private market were providing them. 

A society’s aversion to risk may be an appropriate factor for policymakers to take 

into account in a cost-benefit assessment of any spending or tax proposal but adding 

a cost to the budget does not make sense. Nor is clear that the cost of societal risk 

aversion should be based on individual or institutional risk which is what the private market reflects. Inclusion of a risk aversion cost for credit programs would be 

inconsistent with the treatment of other programs in the budget (many of which 

have costs that are at least as uncertain as the costs of credit programs—for instance, many agriculture programs and Medicare) and would add a cost element 

from a traditional cost-benefit analysis without adding anything based on the corresponding benefit side of such an analysis. It would also make budget accounting 

less straightforward and transparent. 

H.R. 3581 represents a misguided attempt to mold budget accounting to facilitate 

a cost-benefit analysis, with the result that neither the budget nor the cost-benefit 

analysis would serve their intended purposes well. 

I would be glad to discuss these issues in more detail if you would like. With best 

wishes. 

ROBERT D. REISCHAUER. 

Chairman KLINE. Without objection. 

Ms. BONAMICI. Thank you, Mr. Chairman. 

I appreciate the discussion that we have had about financial literacy and making sure that students and their families understand 

what they are undertaking when paying for a college education. 
72 

And Mr. Draeger you talked about disclosure and you have your 

big, big binder with disclosures in front of you. 

But we have also talked about what has happened in the financial markets and drawing some analogies there, certainly with 

mortgage brokers having more of a fiduciary responsibility to make 

sure that their customers or clients get the best deal possible. I 

think we need to have a discussion about making sure that students really understand what is the best package before them and 

it is my understanding that at the height of the private loan market in 2007 and 2008 about half of the undergraduate private loan 

borrowers still had capacity to take out additional federal loans. 

So I wonder how we could better ensure that students understand the differences between private and federal loans and ensure 

that they are really made aware if there are federal loans that are 

available to them, that they have that information, that they really 

exhausted all of the federal options. 

And Mr. Draeger, if you would like to take that, please. 

Mr. DRAEGER. Be happy to. I think you will find widespread 

agreement amongst institutions, student advocates, students, and 

even loan providers that the best way to do that is to require school 

certification on private education loans. 

That no private education loan should be made without the 

knowledge and the certification of a financial aid office; that the 

student is indeed enrolled, and if they are considering a private 

loan that they fully understand the terms and conditions and disparities between the private education loan and the federal loans. 

Ms. BONAMICI. And how much more work is there to do probably 

some institutions are already doing that but not all. 

Mr. DRAEGER. The work would be minimal because they are already doing this on all federal loans. So it is basically a duplication 

of a process that they have already mastered and one that I think 

most private education lenders, reputable ones, would welcome as 

well because they want to make sure those students are in fact enrolled for the period of time that they are taking the loan for. 

Ms. BONAMICI. Thank you so much. 

I wanted to turn to Dr. Mercer. I appreciate your attention to the 

issue of access and completion because completion is an important 

part of getting through our investment, and our taxpayers’ investment in education. 

I had to Oregonians visit my office yesterday and they both went 

through school with the support of Trio programs and they talked 

about how TRIO had changed their lives and really played a critical role in making sure that they ultimately succeeded. 

So access was crucial, but they wouldn’t be here today without 

the support of the programs that break down the barriers and help 

them continue and complete their studies. 

So Dr. Mercer, what are the biggest barriers to completion that 

college students face? And what role do loans play in the challenges 

to degree completion? And if you could distinguish between private 

loans and federal loans in talking about that. Thank you. 

Ms. MERCER. Thank you. I think as one of the panelists indicated 

before, most students generally report that cost of going to school 

as the biggest challenge that they tend to experience and our con-
73 

versation today has largely focused exclusively on obviously the acquisition of loans and the impact that that has. 

What we haven’t really touched upon obviously is the role of 

grant aid and how that makes a difference as well as how you can 

incorporate an appropriate amount of work into a student’s schedule to ensure because there is research that substantiates that an 

appropriate amount of work actually does encourage students to 

move through and complete degree. 

The pivotal part and as you mentioned, TRIO, is the lack of the 

institution’s role in terms of not just counseling because that is obviously is a part, but supporting students to move through the system. By definition, most of the individuals who are receiving this 

aid have need. Often times they come with other indicators of risk 

such as probably low preparation or being married, having children, things that make it more difficult for them to move through 

the system and not less. 

So failing to provide them with support outside of just counseling 

and understanding the amount of loans one is borrowing is really 

a critical piece of that. And that is one of the parts in the report 

that the alliance recently released talking about student aid, is 

that it needs to be comprehensive and there needs to be appropriate amount of institutional supports built in to make sure that 

students are able to move through the system. 

With respect to loans, I would say loan volume obviously and 

keeping that appropriately managed for students as they move 

through the system is critical whether that be private or the federally supported program. I am not sure the distinction really exists 

except for the fact that there are many safeguards built into the 

federal program that don’t exist in the private market. 

Ms. BONAMICI. Thank you. 

Chairman KLINE. The gentlelady’s time has expired. 

Mr. Grijalva? 

Mr. GRIJALVA. Thank you, Mr. Chairman. I appreciate the hearing. I appreciate the time. 

I am still trying to get my head around some concepts that I 

heard today. That irrespective of the amount of money you borrow 

or the interest rate that you still ended up paying the same 

amount. I am going to have to work on that one a little bit. 

And also what a horrible and ridiculous idea that students might 

get a better deal from a government administered loan as opposed 

to a private sector loan. Those two concepts are things that I am 

still having trouble understanding fully; or why there is opposition. 

Mr. Draeger, you recommended I think that colleges be—you are 

recommending that colleges be given greater authority, to limit students eligibility for loans, and the monitoring of those loans; however, your organization’s recent RAD white paper said, and I 

quote—‘‘Restrictions on federal loan borrowing could drive students 

to borrow under less advantageous private loan programs, discourage some students from enrolling, or cause more enrolled students 

to drop out due to lack of funds.’’ 

Given that statement in your white paper, what evidence can you 

point to that would outweigh the risks of forcing all of those three 

bad consequences and the statement about the limitation that you 

have been talking about. 
74 

Mr. DRAEGER. I appreciate you bringing up our ‘‘Reimagining Aid 

Delivery and Design’’ paper where we put forth ideas that—— 

Mr. GRIJALVA. I know, answer that part of the question. 

Mr. DRAEGER. Well, my answer is that we recognize the limitations of our own proposals. If you had a requirement for private 

student loan certification, then all of that would be running 

through the financial aid office and you could mitigate the risk of 

students going into the private market without the knowledge 

of—— 

Mr. GRIJALVA. And in that report, if I may, sir—and in that report you also I am sure have provided data documenting the over 

borrowing problem that has been mentioned here today, that the 

committee would—that you could share with the committee. Do you 

have that data? 

Mr. DRAEGER. Sure. We can submit that. 

Mr. GRIJALVA. Okay. That would be great. 

I also—one kind of general question, you talked about the 13 percent default and the focus being on the graduate student, let me, 

for anyone that wants to respond, in that 13 percent default on 

loans, are you making a distinction between for-profit colleges and 

not-for-profit colleges and public colleges and institutions of higher 

learning and community colleges? 

Is there a distinction being made and is the gravity of the default 

higher in one area than in another? And if so, what restrictions or 

strategies in terms of student loans would you recommend to this 

committee in order to bring let’s say—let me guess that the forprofit college has a higher default rate—how would you bring 

those—— 

Let me begin with Dr. Mercer, if she has a comment. 

Ms. MERCER. I am sorry, from what my limited research on, in 

this area, is that default rates do generally tend to be higher at forprofit institutions. Often times, you have to look at the reasons 

why students are defaulting on their loans. 

Obviously, a lot of it is simply that students don’t have money 

whether they are aware or knowing that they should—— 

Mr. GRIJALVA. If I may, doctor. I think a part of it is that the 

point that the revenue source is part of the profit line. And so recruitment strategies and obligating students to a certain amount of 

loans does increase the likelihood, and as all the witnesses said, 

you know, pre-counseling, post counseling in terms of loan acquisition is very important points that have come up in this hearing, 

but when the bottom line is at stake here, does that ethic follow 

as closely as it should be? 

Ms. MERCER. Right. There probably needs to be much greater attention paid to how these students are being selected and moving 

through the system and the aid that they are receiving. 

I think you also have to consider the quality of degrees that students are receiving, or if they are receiving degrees at any institution, to ensure that the amount of loan that they have assumed positions them once they complete, if they complete, to be in a position to be able to repay. 

Mr. GRIJALVA. I don’t know how much time I have. I don’t think 

I have much time. 

Thank you, Mr. Chairman. I yield back. 
75 

Chairman KLINE. Thank the gentleman. 

Mr. Polis? 

Mr. POLIS. Thank you. Am I the last speaker, Mr. Chair? 

Chairman KLINE. You are the cleanup batter, sir. 

Mr. POLIS. Excellent. It is a long-standing tradition of this committee to save the best for last. So I am very exalted to be in this 

position. 

My first question is about online education. My district is the 

home to the global program of Colorado State University, University of Colorado also has an online programs; students across the 

country. 

One concern I have is that federal loan programs are still oriented towards the bricks and mortar model with regard to cost of 

living and other requirements which aren’t really applicable for online universities. 

How do we make sure that federal loans for online courses are 

treated the same as loans for traditional classes and don’t deal 

with them in a discriminatory way just because some of their cost 

factors are different? I will open it up to whoever wants to comment on it. 

Mr. Draeger? 

Mr. DRAEGER. Can I ask one clarifying question? Do you mean 

discriminated in terms of limiting them, making them smaller even 

though they still have educational expenses? 

Mr. POLIS. Exactly. Currently, a component of the loans are designated for cost-of-living which is not necessarily an appropriate restriction for online; however, they have other expenses that are not 

appropriate for the off-line. 

Mr. DRAEGER. Right. So I think there is an idea that if you are 

taking an online course that doesn’t require as much time, and so 

therefore you must be working a full-time job and therefore don’t 

need living expenses built into your cost of attendance. 

The truth of the matter is, a rigorous online course is going to 

require the same amount of time that a blended or brick-and-mortar course would. So I think it is important that we continue to examine online courses in the context of these folks may not be doing 

a full-time job and a full online course and be able to do those 

things simultaneously just like brick-and-mortar. 

Mr. POLIS. So would you recommend considering either making 

the definition of some of the cost of living requirements more general or simply having less restrictions on it to ensure it doesn’t discriminate against innovative curriculum delivery methods? 

Mr. DRAEGER. My sense is that that is—some of those decisions 

are best left at the institution, which is why we are asking for 

broader authority to be able to adjust some of those—the limits of 

borrowing based on academic program or enrollment so that 

schools can take a look at their student populations and adjust accordingly. 

Mr. POLIS. And the next question is for Mr. Delisle. To avoid accountability and oversight, I have heard of several examples where 

colleges might be masking high default rates by grouping campuses 

for purposes of reporting that a high rate at one campus might be 

masked by a low rate at another. What should be done to prevent 
76 

colleges from using this kind of tactic to evade responsibility and 

prevent transparency around student debt? 

Mr. DELISLE. Well, we actually prefer repayment rate to default 

rate for—— 

Mr. POLIS. Whatever term you use. 

Mr. DELISLE [continuing]. Assessing because it is going to show 

you even though people who don’t default, but graduate with a 

high debt to income ratio or are struggling to repay their loans in 

that their loan balance is growing and not shrinking, which is 

something we allow to happen in the student loan program and 

still be in good standing. 

We think that those types of measures are more robust and better accountability measures than the cohort default rate. And I 

should point out that this—the cohort default rate that everybody 

is referencing is the 2-year and sometimes 3-year cohort default 

rate—is not the lifetime default rate on these loans. The lifetime 

default rate on federal student loans is somewhere around 20 percent. 

Mr. POLIS. But the issue I am trying to get at is how do we avoid 

masking through combining campuses so that it is reported in a 

way that may look optimal on paper but may mask deficiencies at 

some campuses vis-a-vis others. 

Mr. DELISLE. I mean, it is something I guess the Department of 

Education would have to look at and how they allow institutions 

to define with what is their ID, what is the actual jurisdiction of 

a particular campus, but I am sure that they are able to get around 

that in some way. 

Mr. POLIS. Any other comments on that issue? 

And finally, last year I introduced a ‘‘Know Before You Owe Act’’ 

which would require private lenders to certify borrowers are enrolled in school and also it would require higher education institutions to inform students about their federal financial availability 

and eligibility. What we found is that some students were actually 

buying—while they had extra federal capacity, were still borrowing 

at higher commercial rates. 

Briefly, for Mr. Draeger for the remainder of the time, how can 

we help students who are stuck in private loans make sure that 

they are aware of the opportunities that exist in low-interest federal loans? 

Mr. DRAEGER. The best way to do that is by ensuring that the 

financial aid office has a comprehensive understanding of all of the 

offerings that a student has. That includes from the private markets. So a private student loan certification would ensure the financial aid office is brought into that decision. 

Mr. POLIS. Thank you. 

And I yield back. 

Chairman KLINE. I thank the gentleman. I want to thank the 

witnesses for excellent testimony in answering our questions. I 

think you cleared up some things and frankly for some of us, we 

are more confused. But that is okay. We are going through a process here where we are addressing a problem that is increasingly 

recognized as a problem for our country, for students, for schools, 

and so we are going to continue to press on with this. 

Mr. Tierney, any closing remarks? 
77 

Mr. TIERNEY. Just very briefly, Mr. Chairman. Again, I want to 

thank you for having this hearing and beginning the discussion. 

I want to thank all of our witnesses for their contribution. It was 

valuable to all of us. We shouldn’t lose sight of the fact, obviously, 

that were really looking at students and their families and trying 

to reach a policy goal here of graduating people with the appropriate credentials and abilities to help drive our economy forward 

and to give us a competitive advantage amongst other countries on 

that and to be innovative and creative on that. 

So in that context, in the context of what is a good investment 

for this country and for the taxpayers, is I think the basis which 

we ought to consider all of the things that we heard today and I 

think we made a good start. 

So thank you. 

Chairman KLINE. Thank the gentleman. 

There being no further business, the committee stands adjourned. 

[An additional submission of Chairman Kline follows:] 

Prepared Statement of the Education Finance Council 

The Education Finance Council is the trade association representing nonprofit 

and state agency student loan organizations across the country. EFC commends the 

Committee for examining the current federal student aid system in order to benefit 

students and families. The members of EFC share this goal and believe there are 

several short- and long-term solutions to improve the system. In the short term, the 

student loan experience for borrowers can be enhanced through improvements to the 

Not-for-Profit (NFP) servicing program. Over the long term, the PLUS loan programs must be eliminated so students can choose consumer friendlier loans and fair 

value federal budget accounting must be implemented to provide an accurate account of the impact of federal student lending on the federal deficit, and ultimately, 

taxpayers. 

The NFP servicing program, created by Congress, allows eligible not-for-profit student loan organizations to provide high quality loan servicing under the Direct Loan 

Program. NFP servicers that are under contract have been working closely with 

staff from Federal Student Aid and are taking extraordinary steps to ensure their 

borrowers are getting the best possible loan servicing experience. Customer service 

has been a focus of all NFP servicers and despite the difficult accounts they have 

been allocated to date, the NFP servicers have received customer service survey results and produced delinquency results that approximate those of the other, larger 

servicers. The benefits borrowers and the federal government are realizing can be 

enhanced by allocating more loans to the NFP servicers. Increasing allocation of 

loans, including newly originated Direct Loans, provides a reliable source of accounts NFPs can receive so that they can supply the high quality of service that 

Congress expects them to bring to more Direct Loan borrowers. The federal government benefits by increasing the allocation because any additional accounts beyond 

the initial 100,000 allocation means pricing equal to what is paid to Title IV Additional Servicers. 

Improving the NFP serving program provides near-term efficiency for the Direct 

Loan program, but Congress must look beyond programmatic enhancements to the 

current federally-based student aid system and consider significant policy changes 

to truly create a better student aid system. Congress should eliminate both the 

graduate and parent PLUS programs and encourage schools to shift borrowing to 

consumer-friendly programs offered by nonprofit and state agency providers. As college costs continue to climb, students and parents need to be provided with alternatives to high interest rate loan products, such as the PLUS programs. Current 

policies that favor steering borrowers who need reasonable financing options beyond 

grant aid and Stafford loans into 7.9 percent PLUS loans are depriving them of options that will lower their debt burden. Nonprofit alternative loan programs feature 

fixed interest rates below the percent rate for PLUS loans and have consumerfriendly features such as low or no fees, institutional certification and flexible repayment terms. Moreover, nonprofit and state agency alternative loan programs have 

default rates that range from less than one percent to three percent. Finally, information available on nonprofit and state agency loans programs far exceeds what the 
78 

1The Parent PLUS Trap, accessed March 11, 2013 at http://chronicle.com/article/The-Parent-Plus-Trap/134844. 2GAO-05-874 ‘Federal Student Loans: Challenges in Estimating Federal Subsidy Costs’, October 26, 2005/ 3Student Loans: Overview and Issues, RWP 12-05 at p. 15. 

Department provides for PLUS loans. For example, as the Chronicle of Higher Education reported ‘‘U.S. Department of Education doesn’t know how many parents 

have defaulted on [PLUS loans]. It doesn’t analyze or publish default rates for the 

PLUS program with the same detail that it does for other federal education loans.’’ 1

By contrast, nonprofit and state agencies actively monitor and disclose default rates 

and employ a range of steps—including reducing the amount borrowed from the outset, to ensure that students and parents are not taking out more than they can handle. 

Finally, Congress must accept fair value rather than the current Federal Credit 

Reform Act (FCRA) method of estimating costs and savings for federal student aid 

programs. Adopting fair value accounting will allow policy makers to accurately 

evaluate new student aid programs that provide value to students, parents and taxpayers. 

The debate about government accounting for student loans is not new. Dating 

back to 2005, the flaws of estimating costs under the FCRA method have been detailed. GAO pointed out: 

‘‘Additional federal costs and revenues associated with the student loan programs, 

such as federal administrative expenses, some costs of risk associated with lending 

money over time, and federal tax revenues generated by both student loan programs 

are not included in subsidy cost estimates.2

The Kansas City Federal Reserve Bank has acknowledged the benefits in utilizing 

fair value accounting to assess the cost to the federal government of the Direct Loan 

program. In their 2012 report Student Loans: Overview and Issues, Kelly D. 

Edmiston, Lara Brooks and Steven Shepelwich point out: 

‘‘Fair value estimates, which make additional adjustments for risk and also include administrative costs, provide a more complete picture of the cost of federal 

student loan programs. Fair value estimates calculated in March, 2010 CBO report 

projected a net cost of about 11 percent of lending for 2012. New direct loan volume 

is projected to be $121 billion in FY2013, yielding a net budget cost of $13.3 billion. 

About $28 billion in consolidation loans is expected, which would likely add an additional $3 billion. Using fair value accounting principles, the student loan program 

would account for about 0.4 percent of the president’s FY2013 budget outlay request 

of $3.8 trillion.’’ 3

Fair value accounting gives Congress the ability to effectively consider alternatives to the Direct Loan program including securitizing loans held by the government and allowing the private sector to originate and service loans to credit worthy 

borrowers. 

There is room for much improvement in the federal student aid system. Programmatic changes to certain elements such as the NFP servicer program can provide immediate benefits, however broad policy changes such as the elimination of 

the PLUS programs and a shift to fair value accounting are needed to create a fundamentally better, more sustainable system. EFC members have played a significant role in helping students and families finance higher education for decades and 

stand ready to help coordinate and implement beneficial changes to the student aid 

system. 

[Additional submissions of Mr. Draeger follow:] 

[The report, ‘‘Reimagining Financial Aid to Improve Student Access and Outcomes,’’ may be accessed at the following Internet address:] 

http://www.nasfaa.org/advocacy/RADD/RADD_Full_Report.aspx 

[The report, ‘‘Report of the NASFAA Task Force on Student Loan 

Indebtedness,’’ dated February 2013, may be accessed at the following Internet address:] 
79 

http://www.nasfaa.org/EntrancePDF.aspx?id=13507 

[The report, ‘‘Report of the NASFAA Award Notification and 

Consumer Information Task Force,’’ dated May 2012, may be 

accessed at the following Internet address:] 

http://www.nasfaa.org/EntrancePDF.aspx?id=9992 

[Questions submitted for the record and their responses follow:] 

U.S. CONGRESS, 

Washington, DC, April 3, 2013. 

Mr. JUSTIN DRAEGER, President and CEO, 

National Association of Student Financial Aid Administrators, 1101 Connecticut Avenue NW, Suite 1100, Washington, DC 20036-4303. 

DEAR MR. DRAEGER: Thank you for testifying at the March 13, 2013 hearing on 

‘‘Keeping College Within Reach: Examining Opportunities to Strengthen Federal 

Student Loan Programs.’’ I appreciate your participation. 

Enclosed are additional questions submitted by members of the committee after 

the hearing. Please provide written responses no later than April 16, 2013 for inclusion in the final hearing record. Responses should be sent to Amy Jones or Emily 

Slack of the committee staff who can be contacted at (202) 225-6558. 

Thank you again for your important contribution to the work of the committee. 

Sincerely, 

JOHN KLINE, Chairman, 

Committee on Education and the Workforce. 

REPRESENTATIVE RICHARD HUDSON (R-NC)

1. There has been a lot of talk about a ‘‘student loan bubble.’’ Do you think we 

are about to see the collapse of student loan programs because too many people are 

borrowing to pay for college? What would the collapse of this bubble mean for the 

economy and for the students who are preparing for college now? 

REPRESENTATIVE MARTHA ROBY (R-AL)

1. I know financial aid administrators are concerned about the impact of sequestration on student financial aid programs, particularly right now as campuses are 

starting to put together financial aid packages for incoming students. How forthcoming has the Department of Education been with the campus community about 

the impact of the cuts? 

REPRESENTATIVE RAUL GRIJALVA (D-AZ)

1. NASFASS’S Debt Task Force recently recommended allowing colleges to limit 

students’ eligibility for loans based on things like their program length or program 

type and allowing professional judgment to approve increased borrowing on a caseby-case basis (flipped from current policy that allows for limiting borrowing on a 

case by case basis). However, NASFAA’s recent RADD white paper said ‘‘Restrictions on federal loan borrowing could drive students to borrow under less advantageous private loan programs, discourage some students from enrolling, or cause 

more enrolled students to drop out due to lack of funds.’’ What evidence can you 

point to that would outweigh the risk of forcing students to drop out, not enroll, or 

turn to riskier forms of borrowing? 

Mr. Draeger’s Response to Questions Submitted for the Record 

REPRESENTATIVE RICHARD HUDSON (R-NC)

1. There has been a lot of talk about a ‘‘student loan bubble.’’ Do you think we 

are about to see the collapse of student loan programs because too many people are 

borrowing to pay for college? What would the collapse of this bubble mean for the 

economy and for the students who are preparing for college now? 

Draeger: The size of the mortgage market at the height of the housing bubble in 

2006 dwarfs the current student loan market. Using rough estimates, the current 
80 

student loan market is valued at roughly $1 trillion. At the height of the housing 

boom in 2006, the residential housing market was worth $22 trillion—more than 22 

times larger. When the mortgage bubble burst, it lost nearly $8 trillion in value 

(Baker, 2012). Even if every borrower defaulted on his or her student loan at the 

exact same time (an impossibly unlikely scenario), it wouldn’t have the same impact 

on the economy as the housing collapse. 

However, it stands to reason that as students and parents take on more debt to 

pay for college, they could be delaying other financial decisions such as purchasing 

a home, buying a car, or otherwise participating in the economy through consumer 

purchases. Still, federal student loans bet on the likelihood that the borrower’s financial circumstances will improve through the education or training being financed, and that as a result the borrower will repay the loan over time. For most 

students and for society in general, this is a good risk to finance. 

Systemic economic risk is further reduced by the fact that federal loans make up 

the large bulk of the student loan market and collection rates are much higher than 

private sector collections. As long as the program contains reasonable and effective 

repayment terms like income based repayment—which act as safety valves—the 

loan program should remain healthy. The loss of the student loan program would 

be disastrous: without student loans, higher education in this country would be impossible for many low- and middle-income students. The loss of a broadly educated 

work force is untenable in today’s world economy. 

But more can be done to strengthen the programs and protect borrowers. Underwriting standards might need to be examined for parent borrowers to see if they 

provide adequate protections to both the borrower and the government as lender. 

For undergraduate borrowers, there are loan limits in place to ensure borrowers 

stay within permissible amounts, but aid administrators need broader authority to 

limit indebtedness for students whose borrowing is not-on-pace with their program. 

Such a proposal is included in my written testimony. 

REPRESENTATIVE MARTHA ROBY (R-AL)

1. I know financial aid administrators are concerned about the impact of sequestration on student financial aid programs, particularly right now as campuses are 

starting to put together financial aid packages for incoming students. How forthcoming has the Department of Education been with the campus community about the 

impact of the cuts? 

Draeger: Financial aid administrators are always concerned when cuts are made 

to the federal student aid programs, including the cuts imposed by sequestration. 

The impact of sequestration has been especially difficult given the timing—some of 

the scheduled cuts were occurring at the same time aid administrators were delivering award letters to new and continuing students based on non-sequester estimates previously delivered by ED. 

It is unclear to us why OMB did not release more specific estimates that would 

have allowed ED to provide schools allocations at a post-sequester amount given 

that the sequester was in the law and everyone knew its effective date. In fact, institutions across the U.S. relied on rough estimates created by us to construct their 

awarding packages. If NASFAA could create fairly reliable estimated campus-based 

cuts assuming sequestration, certainly the government could have done the same. 

Since the sequester went into effect March 1, ED has provided regular communication and guidance about how to implement sequester cuts and/or how to temporarily proceed until final implementation instructions could be made. ED has also 

been responsive to NASFAA’s requests and questions since March 1. 

REPRESENTATIVE RAUL GRIJALVA (D-AZ)

1. NASFASS’S Debt Task Force recently recommended allowing colleges to limit 

students’ eligibility for loans based on things like their program length or program 

type and allowing professional judgment to approve increased borrowing on a caseby-case basis (flipped from current policy that allows for limiting borrowing on a 

case by case basis). However, NASFAA’s recent RADD white paper said ‘‘Restrictions 

on federal loan borrowing could drive students to borrow under less advantageous 

private loan programs, discourage some students from enrolling, or cause more enrolled students to drop out due to lack of funds.’’ What evidence can you point to that 

would outweigh the risk of forcing students to drop out, not enroll, or turn to riskier 

forms of borrowing? 

Draeger: The passage being referenced from our Bill and Melinda Gates Foundation-funded Reimagining Aid Delivery and Design paper was offered as a ‘‘possible 

unintended consequence’’ of giving aid administrators the authority to limit loans 

for specific categories of students. We offered this thought as part of making an in-
81 

tellectually honest policy argument that examines all sides of an issue. The simplest 

and most effective way to deal with such an unintended consequence is to require 

that all private education loans be certified through the financial aid office just like 

federal loans. That would ensure students are having conversations with financial 

aid administrators before dipping into the private market and would further ensure 

that students borrow within the federal loan programs before turning to riskier private loans. 

REFERENCES

Baker, D. (2012, March 11). Student Loan Bubble. Retrieved From http:// 

www.cepr.net/index.php/blogs/beat-the-press/student-loan-bubble-nonsensepeter-peterson-and-the-washington-post-mess-up-on-the-economy-yet-again 

U.S. CONGRESS, 

Washington, DC, April 3, 2013. 

Mr. JASON DELISLE, Director, 

Federal Education Budget Project, the New America Foundation, 1899 L Street, NW, 

Suite 400, Washington, DC 20036. 

DEAR MR. DELISLE: Thank you for testifying at the March 13, 2013 hearing on 

‘‘Keeping College Within Reach: Examining Opportunities to Strengthen Federal 

Student Loan Programs.’’ I appreciate your participation. 

Enclosed are additional questions submitted by members of the committee after 

the hearing. Please provide written responses no later than April 16, 2013 for inclusion in the final hearing record. Responses should be sent to Amy Jones or Emily 

Slack of the committee staff who can be contacted at (202) 225-6558. 

Thank you again for your important contribution to the work of the committee. 

Sincerely, 

JOHN KLINE, Chairman, 

Committee on Education and the Workforce. 

REPRESENTATIVE RICHARD HUDSON (R-NC)

1. There has been a lot of talk about a ‘‘student loan bubble.’’ Do you think we 

are about to see the collapse of student loan programs because too many people are 

borrowing to pay for college? What would the collapse of this bubble mean for the 

economy and for the students who are preparing for college now? 

Mr. Delisle’s Response to Questions Submitted for the Record 

REPRESENTATIVE RICHARD HUDSON (R-NC)

Nearly all outstanding and newly-issued student loans are federal loans. It would 

be hard to imagine that program ‘‘collapsing’’ because the funding for it is provided 

directly by the federal government. That is, this source of financing for higher education would only become unavailable if lawmakers made it so. In that regard the 

student loan program cannot collapse unless Congress and the president enacted a 

law forcing it to collapse. I see that issue as a separate one from whether students 

are borrowing too much to pay for college. 

Nevertheless, rising levels of outstanding total federal student debt (somewhere 

around $1 trillion, nearly all federal) have raised concerns that students are borrowing too much and that will have economy-wide effects. I believe that matter is 

best discussed by focusing on undergraduate students and graduate students as two 

separate groups. 

For undergraduates, while are greater share of students are leaving school with 

some debt, the amount of debt that they leave with on average has not risen in real, 

inflation-adjusted terms by much in the past 10 years. The figure is somewhere 

around $25,000 today. Furthermore the federal government limits the amount undergraduates can borrow in federal loans to about $30,000 for dependent undergraduates. 

A borrower could make payments as low as $143 per month on a loan of $25,000 

with a 6.8 percent interest rate under the consolidation repayment plan. His payment could be lower, even $0, under the Income Based Repayment plan, and he can 

postpone payments for up to 3 years under the forbearance terms if he is having 

financial difficulties. In short, an undergraduate with the average amount of debt 

can make very affordable monthly payments on his loan under the federal student 

loan program. They are hardly figures that one would equate with a bubble. 
82 

Graduate student debt is a different story. Over 30 percent of outstanding and 

newly-issued loan volume is for graduate and professional education (although only 

10 percent of borrowers are/were graduate students). These borrowers can accumulate very large balances mainly because the federal government allows them to borrow to finance the entire costs of their educations as defined by institutions of higher education, including living expenses. There is no annual, aggregate, or lifetime 

limit. When we hear stories about graduates with $100,000 in student loan debt, 

but earnings prospects that cannot service such a debt level, the stories are almost 

always about graduate students, not undergraduates. This is where there is a bubble in the student loan market—but it is not a loan bubble, it is a cost bubble. Unlimited federal student loans let graduate schools charge sums that are not justified 

given the future incomes that their graduates may earn. 

I should stress, however, that this system will not necessarily collapse. Again, the 

federal government makes the graduate student loans available as an ongoing entitlement. Absent a change in law, students can continue to borrow at current rates. 

Worse yet, recent changes to the Income Based Repayment program (Pay As You 

Earn), which allows for low payments and unlimited loan forgiveness, gives students 

an incentive to borrow more, not less. That suggests that the graduate school cost 

bubble will not burst anytime soon. 

[Whereupon, at 12:11 p.m., the committee was adjourned.] 

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