Summary:

Consolidation is a key tool to help student loan borrowers manage the growing burden of student loan debt. Most students don’t have student loan payments in college. The real affordability crisis hits after college, when the payments begin.

Consolidation is not a program that benefits the affluent. Nearly 20% of consolidators are nurses and teachers.

Big financial institutions don’t like consolidation loans because they are less profitable.

The consolidation program has generated a surplus to the federal treasury of $1.3 billion between FY ’95-’02. CBO estimates an additional $1 billion surplus for FY ’03-’04.

Estimates of future subsidy costs of consolidation are highly interest-rate sensitive, and thus, are probably exaggerated. They are based on materially higher future interest rates, contrary to the low rate outlook of the Federal Reserve.

Extended repayment of Stafford loans would be very costly because it would deprive the federal government of billions in lender-paid fee revenue.

Student borrowers prefer the simplicity and certainty of a fixed interest rate.

Congress should require enhanced consumer disclosure language and unbiased borrower counseling for consolidation loans.

The single lender rule keeps student borrowers from comparison shopping for the best rates and terms when consolidating. It should be repealed.

Mr. Chairman and Members of the Committee:

Thank you for the opportunity to talk about a program that is critically important to helping America’s college students manage the growing burden of student loan debt. The average student today graduates with $19,000 in student loan debt at a time when the job market is weak and cash flow pressures are often severe. Consolidation allows these students to refinance their multiple loans into one new loan with a low fixed rate and a monthly payment that often saves hundreds of dollars a month in cash outflow.

College affordability is a key issue in this Reauthorization. Some allege that consolidation diverts federal resources that would otherwise make college more affordable. But stop and think a moment. Although the perception of affordability is a barrier to access for those students concerned about incurring loan debt, for the most part students don’t have loan repayment burdens in college. The reality of affordability doesn’t hit until the student leaves college and has to start making loan payments. That’s when the bill for college really comes due----and consolidation makes that bill more affordable. Unfortunately, according to a recent Harris survey, 53% of graduating college seniors are unaware of the consolidation program.

Some argue that the consolidation program has strayed from its original purpose, but what in the student loan industry hasn’t? Sallie Mae, once prohibited by statute from originating student loans, now competes vigorously with the lenders it was originally created to serve. Wall Street securitizations of student loans have largely replaced the need for taxpayer-supported non-profit state secondary markets, although the latter continue to persist. Guaranty agencies have diversified into loan origination and servicing. And the Department of Education’s Direct Loan program vigorously competes in the marketplace. Yes, the consolidation program has changed--- like many of the other changes, it has become better for consumers.

The original purpose of consolidation was to assist student borrowers having multiple lenders. However, that was in an era of much smaller debt levels. For example, median undergraduate debt has skyrocketed about 80% since just 1997, and is now about $19,000. As college costs and student loan debt have climbed dramatically in the past few years, consolidation has become a vital tool to make those high debt levels more affordable-----and post-graduation affordability has become a major problem. A Roper survey last year found that a significant percentage of graduates had to pursue a career choice other than the one they preferred in order to make their loan payments. Recent articles in the Washington Post and the New York Times have reported on a finding in a survey by the Partnership for Public Service that two thirds of law school graduates would not consider public-interest or government jobs because their income would be too low to make their student loan payments.

It should also be noted that consolidation provides a potent default prevention tool, as described in a study entitled "Factors Affecting the Probability of Default", published in the Journal of Student Financial Aid, Vol. 32, No.2 (2002.)

The Congress realized the need to make loans more affordable during the 1998 Reauthorization of the Higher Education Act. It did so by making consolidation loans more readily available and opening up the marketplace to far greater competition. This has provided significant benefit to the more than one million student loan borrowers just last year.

Opponents of the consolidation loan program claim that the program benefits primarily doctors, lawyers, and other high-income professionals. However, data we are providing to the Committee shows quite the opposite. According to a large study done by Experian (the credit reporting agency), less than 4% of consolidators are doctors and lawyers-----and nearly 20% are nurses and teachers. Their average age is only 27. This is not a program that favors the affluent.

I’ve spent most of my career in this industry. Before joining Collegiate Funding Services, I was a senior manager in the Office of Student Financial Assistance at the U.S. Department of Education. Prior to that, I was a senior officer at Sallie Mae for nearly 20 years with responsibility for its then 4000 employees handling loan origination and customer service operations. In fact, when Sallie Mae temporarily withdrew from the consolidation program a few years ago in protest over the federal imposition of new lender-paid fees on consolidation, I was involved in the shutdown. As a result, I’ve viewed the debate over consolidation loans from a variety of perspectives. It is my belief that the debate over consolidation loans comes down to whether or not Congress is going to put the best interests of students and their families ahead of the desire by big financial institutions to protect their profits.

Most big financial institutions don’t like consolidation loans because they’re less profitable. Lenders have to pay the federal government a half-percent origination fee on each loan made, as well as an annual loan rebate fee of 1.05% each year on each consolidation loan in the lender’s portfolio. The result of all those fees is that, since FY 1995 (as far back as we could obtain data), the federal government has received a $1.3 billion surplus of fee income in excess of subsidies. The CBO estimates that for fiscal years ’03-’04, consolidation loan revenues will provide a further surplus of $1 billion. By the time of the completion of this reauthorization, more than $2 billion in fees will have inured to the Federal taxpayer that would not have been paid had the loans not been consolidated.

Now, it’s true that the unusually low interest rates that have been available for the last year or so will likely lead to future net subsidy costs. However, it is for this particular group of loans only (loans disbursed between July 1, 2002 and June 30, 2004). Opponents of consolidation like to use examples such as a $75,000 loan that lives for 30 years in order to show how much interest subsidy risk exists for the government. However, the reality is that the average consolidation loan is about $25,000 and usually is paid off before its maturity, typically in about 12 years. It should also be noted that many of the speculative estimates of the future cost of the consolidation program assume materially higher interest rates in the future. This runs counter to the Federal Reserve’s statements that interest rates are expected to remain relatively low for a considerable period of time.

The economic policy group from Ernst & Young, LLP, is completing a study on the incremental cost of consolidation that we will be providing to the Committee. According to Ernst & Young, if you recognize the current group of unusually low rate loans as "water over the dam" in the sense that the pending Reauthorization comes too late to impact them, and if you look ahead to the FY 2005-2010 time frame between this Reauthorization and the next, then, based on current CBO interest rate assumptions, fixed-rate consolidation loans originated during that time frame are estimated to create a further incremental revenue surplus to the federal government of approximately $700 million.

Those who oppose consolidation offer two alleged solutions to their exaggerated claims of cost to the federal government. One is an extended repayment term for the underlying loans that otherwise are subject to consolidation. Big financial institutions like this concept because it would mean fewer consolidation loans, which translates into bigger profits. The problem with this is that extended-term Stafford loans would deprive the federal government of billions of dollars of fee revenue generated by consolidation. It’s a bad deal for the taxpayer.

Extended repayment also does not allow consumers who are dissatisfied with the service their current holders are providing to consolidate and obtain better service with another lender. Recently, a major holder of student loans admitted it had improperly billed 800,000 of its customers, requiring increases in payment amounts often exceeding $100 per month. Student loan borrowers should have a way to escape service problems of this kind; consolidation provides it – unless the problematic service provider holds all of a borrower’s loans.

The other alleged solution offered by consolidation’s opponents is to make all new consolidation loans variable rate instead of fixed rate. However, many of you will recall that during the so-called "2002 interest rate fix" legislation which came out of this Committee, it was decided that as of 2006 all new student loans will move to a fixed rate. Students clearly prefer the certainty and simplicity of a fixed rate.

Another contentious topic is the so-called "single lender rule." It provides that if a student wishing to consolidate has all their student loans with the same lender, then the student must utilize that lender to consolidate------even if better rates, terms, and service are available elsewhere. On the other hand, if a student’s underlying Stafford loans are owned by multiple lenders, then the student is free to comparison-shop for the best deal.

Congress recently spoke to this issue in the Conference Report accompanying the Omnibus Appropriations Act for FY 2003 (page 1141):

"The conferees continue to be concerned about issues within the consolidation loan program. The conferees are aware that some borrowers would like to see the current law changed to allow for consolidation with any lender or holder, regardless of how many lenders with whom the borrower has loans. The conferees are concerned that without change to the current law governing consolidation loans, some borrowers may not be permitted to consolidate their loans with any lender they choose. The leaders of the authorizing committees have expressed a desire to address this and other issues during the reauthorization of the Higher Education Act so as to address the Consolidation Loan Program as a whole. The conferees urge those committees to ensure borrowers have the best options available to them in order to manage their student loan obligations."

Additionally, Congressman Joe Wilson, a member of this Committee, said during the floor debate on the Teacher’s Bill:

Big financial institutions--- wanting to protect their loan portfolios from competition---argue that repeal of the single lender rule would cause lenders to exit the business and have a negative impact on access to loan capital. This is an empty threat. Competition for student loan business is more vigorous than it’s ever been…. just ask any college financial aid director.

In an article in the May, 2003 edition of the Greentree Gazette, Paul Sheldon, Managing Director at Salomon Smith Barney’s Education Finance Group, supported the view that student loan capital is unthreatened. He wrote: "There appears to be no practical limit to the appetite of lenders to make student loans. There is very aggressive competition for loans among huge financial institutions. There is growth in smaller size specialty companies. And a handful of new entrants are growing very rapidly. The supply of funds for growing loan volume is ample."

This Committee had, in the Chairman’s mark of the 1998 Reauthorization, a full repeal of the single lender rule (which is a budget-neutral initiative.) We are merely asking you to do what you did in the House during the last Reauthorization, which is to repeal this anti-consumer rule. Imagine a federal law that restricted the ability of homeowners to comparison-shop for the best deal when refinancing their mortgage. Make sense? Of course not, and neither does the single lender rule. It is time for Congress to repeal this special interest, anti-consumer piece of legislation.

In addition to repealing the single lender rule, we urge the Committee to require enhanced consumer disclosure language and borrower counseling for consolidation loans. Although most of the companies offering consolidation loans adhere to high standards, regrettably there are some fly-by-nights that tarnish the reputations of everyone. CFS is concerned about that and has joined with other leading consolidation lenders to form the Student Aid Integrity Coalition. Members of the Coalition are substantial companies, typically being among the Top 50 holders of FFEL loans in the program, with multi-billion dollar student loan portfolios, AAA-rated Wall Street securitizations, hundreds of employees, Advisory Boards of financial aid directors from top colleges, and a substantial investment in the long term success of the FFEL program. In consultation with financial aid administrators and student groups, the Coalition has developed a list of pro-consumer best operating practices covering such things as no deceptive marketing practices, required employee training, borrower counseling, strict adherence to do-not-call lists, etc. Members of the Coalition agree to adhere to these best practices as a condition of membership. Like other Members of our Coalition, CFS does periodic customer satisfaction surveys. Our last survey showed that over 95% of our customers would do business with us again and would refer us to a friend. We take our commitment to our customers very seriously.

In closing, I’ll comment on the topic of re-consolidation. The Higher Education Act currently provides that once a student consolidates, they cannot re-consolidate. If the law were changed to permit re-consolidation, it would be costly to our company---- and to all student loan lenders---- because we’d be turning higher interest rate loans into lower rate loans. But, student loan borrowers clearly want the ability to re-consolidate and if Congress can work out the budget-scoring challenges of re-consolidation, we support whatever is best for student loan borrowers----even if our revenues take a hit in the process.

To make the growing burden of student loan debt more affordable for America’s students, I hope you will continue to support a vibrant student loan consolidation program.

Thank you again for the opportunity to testify today.