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CRL Highlights Toll of Heavy Student Loan Debt Crisis in House Financial Services Committee

Tuesday, September 10, 2019
Ashley Harrington

WASHINGTON, D.C. – Today, Center for Responsible Lending (CRL) Senior Policy Counsel Ashely Harrington testified before the full House Financial Services Committee for hearing entitled A $1.5 Trillion Crisis: Protecting Student Borrowers and Holding Student Loan Servicers Accountable. In her remarks, Harrington discussed the need to rein in the abusive practices of the student loan servicing industry and urged members of the committee to pass reforms that allow student borrowers easy access to affordable repayment plans.

View Harrington’s full written testimony for the record.

“Student loan servicers have consistently failed to fulfill their obligations and have engaged in a variety of abusive practices that have long-term negative consequences for borrowers,” said Harrington in her opening remarks. “While servicing reform is not the sole answer to the student debt crisis, servicing failures contribute substantially to the growing student debt burden and the creation of undue harm to millions of borrowers. Student loan servicers have been notorious for putting borrowers into deferment or forbearance. These practices have led to billions of dollars in extra interest and fees being added to the principal balances of already indebted student loan borrowers. They have also prevented borrowers from accessing affordable repayment plans that would allow them to take part in other wealth-building activities.”

Student debt is a significant drag on the entire economy as it depresses the purchasing power of millions, preventing people from starting families, investing in their own businesses, going back to school, and buying homes. And because students of color carry larger debt burdens, these consequences also exacerbate the racial wealth divide by impacting families of color the most acutely.

Higher education has long been considered a pathway for advancement into the middle class. However, the playing field has not been level for low- and moderate-income families and people of color in their pursuit of a postsecondary education. Sadly, the resulting disparities in educational outcomes contribute to the persistent and growing racial wealth and income gaps. Nationwide, trends in the higher education landscape such as state disinvestment, rising college costs, the increasing necessity of college degrees in the labor market, and the loss of savings and other forms of wealth from the Great Recession have led us to a crossroads. Now, student debt threatens the well-being of an entire generation of students and their families.

Below are Harrington’s remarks as prepared for delivery:

Good morning, Chairwoman Waters, Ranking Member McHenry, and members of the committee.

Thank you for the opportunity to testify today about the nation’s student debt crisis. With more than 44 million borrowers carrying almost $1.6 trillion in outstanding student loan debt, Congress has the responsibility to do its part to solve this crisis.

Just a decade ago we all watched the devastating ripple effect of the 2008 financial crisis--people lost their homes, pensions and savings accounts were wiped out, a generation of family wealth was gone almost overnight, and college graduates—many with a mountain of student loan debt—were entering a bleak job market.

A key lesson from the Great Recession is that skillful loan servicing could have dramatically mitigated the impact of foreclosures and their spiraling spillover effects on neighborhoods and the economy.

Despite this relatively recent lesson, the principles we learned seem to have already been forgotten as we face the current student debt crisis.

Student loan servicers have consistently failed to fulfill their obligations and have engaged in a variety of abusive practices that have long-term negative consequences for borrowers.

While servicing reform is not the sole answer to the student debt crisis, servicing failures contribute substantially to the growing student debt burden and the creation of undue harm to millions of borrowers.

Today, two in five borrowers are in default or delinquent, and many borrowers are not reducing their principal even after almost a decade of repayment. Twenty-seven percent of borrowers who entered undergraduate higher education in 2003–2004 had defaulted on their student loans by 2016. Up to 40% of this cohort are projected to default by 2024.

When we spend $700 million on collection activities and more than $800 million on servicing activities annually, Congress should require more from these contractors.

We should also have concern that the student debt crisis, already a by-product of the racial wealth gap, is also further entrenching these inequities and perpetuating the cycle of poverty and economic instability that results from systemic lack of access to resources, capital, and affordable credit. Rather than creating a pathway to opportunity, student borrowers of color are more likely to default and take longer to pay back their loans.

For instance, for Black students who entered undergraduate higher education in 2003–2004, almost 49% had defaulted by 2016. Up to 70% of this cohort is projected to default by 2024. Nearly half of Black graduates with a bachelor’s degree owe more on their undergraduate student loan after four years than they did at graduation compared to 17% of white graduates.

Student loan servicers have been notorious for putting borrowers into deferment or forbearance. These practices have led to billions of dollars in extra interest and fees being added to the principal balances of already indebted student loan borrowers.

They have also prevented borrowers from accessing affordable repayment plans that would allow them to take part in other wealth-building activities. Servicers should enroll struggling students in Income Driven Repayment Plans, not forbearance.

While reforms are definitely needed, IDR plans are an essential tool for preventing delinquency and default.

Despite these documented failures, the current Department of Education has revoked existing policies meant to protect student loan borrowers. It has acted to the benefit of private companies over students and taxpayers. And it has attempted to prevent federal and state enforcement of consumer protections.

States that have passed reforms hold nearly 30% of the 1.5 trillion in outstanding student loan debt. States have historically played a critical role in protecting consumers from abusive and predatory practices from mortgage servicers to payday lenders. Student loan servicing is no different. Since 2015, 11 states and DC have passed laws to oversee student loan servicers. This is combined with multiple state enforcement actions against servicers like Navient and PHEAA. Their approach to addressing this crisis will shape the lives of millions of borrowers and the health of our economy for decades to come. Federal efforts must complement these state level actions, not preempt them.

Many of us in this room can attest that good servicing makes a real difference in borrower outcomes. This is especially true for student loan servicing, where there are already many options to help students avoid default and be successful in repayment. By failing to hold servicers accountable to basic consumer protection laws and responsibilities, we increase the likelihood of more defaults and that this crisis will worsen.

Rather than repeat mistakes from the mortgage crisis, we should learn from that experience and work to achieve a sounder, more effective student loan system. Congress must ensure that federal money is truly an investment, not just a payout.

Our nation’s future depends on it.

For more information, or to arrange an interview with a CRL spokesperson on this issue, please contact Vincenza Previte at vincenza.previte@responsiblelending.org.