Floor Speech by Senator Chuck Grassley on
The Know Before You Owe Federal Student Loan Act of 2014
Delivered Wednesday, June 11, 2014

Mr. President, in fiscal year 2014, the U.S. Department of Education will make about $112 billion in Federal Direct Loans to students.  The federal government already holds more than $1 Trillion in student loan debt.  That makes the U.S. Department of Education one of the country’s largest lenders.  Total student loan debt in the U.S. is now second only to mortgage debt and about 90% of all student loans are issued by the federal government.  So, when elected officials say that we have a student loan crisis because too many students owe more than they can afford to repay, we have to keep in mind who it was that made those loans to students in the first place.  It was Uncle Sam.  

What is one of the first things that federal regulators look out for when a private bank issues a loan?  They look at whether the bank has confirmed the ability of the borrower to repay.  Federal student loans are given out without a credit check or any analysis of the student’s ability to repay the loan in the future.  The fastest growing category of student loans is federal unsubsidized student loans, which are given out regardless of need.  That means that students across this country get an award letter from their college saying they are eligible for thousands of dollars in federal loans, even though in many cases they may not need all of those loans to cover their tuition and other costs.  Colleges are required to offer the full amount of federal student loans for which the student is eligible even if a financial aid counselor knows a student is borrowing more than the student needs and will likely have trouble repaying.  If a private bank gave out loans on these terms, it would be accused of predatory lending.  These easy money policies may even be helping fuel tuition increases, which just make the problem worse.  Between federal student loan policies that effectively encourage over borrowing and the lack of good jobs for college graduates in this current economy, it’s no wonder so many college graduates find themselves in over their heads with student loan debt.

Unfortunately, for all the concerns we’ve heard expressed on the Senate floor about excessive student loan debt, my colleagues on the other side of the aisle decided to play election year politics with this issue rather than tackle any of the root causes of the problem.  In fact, when it comes to economic growth and job creation, the first rule is “Do no harm.”  By including yet another massive tax increase, the bill the Senate declined to take up would have only added to the list of tax and regulatory burdens currently choking our economy.  We should be intensely focused on removing burdens to economic growth and job creation.  Instead, the policies we see from the other side of the aisle seem to be based on the old European model of accepting anemic economic growth, and trying to make up for it with debt-financed government hand outs for as long as possible.  I call it the old European model because many countries in Europe have rejected this failed approach and instead have sought to reform entitlements, cut spending, and reduce taxes.  Our goal should be to expand opportunities for young people and the middle class, not to add them to the welfare state.  

Incidentally, the President’s recent so called “executive action” on student loans shows he shares that same outlook assuming a stagnant economy for the foreseeable future.  He’s talking about making people who graduated years ago retroactively eligible for a program enacted in 2010 that allows students to lower their monthly payments if they have a low income.  First of all, that’s an admission that many students who graduated near the beginning of President Obama’s first term in office still don’t have a good paying job half way through his second term.  What he doesn’t tell you is that when you lower your student loan payments, you will pay off your loan more slowly and accumulate more interest.  In other words, you will eventually end up paying a lot more to Uncle Sam than you otherwise would have.  When banks were offering adjustable rate or interest only mortgages, they were criticized for taking advantage of borrowers who would be faced with bigger payments down the road.  The Pay-As-You Earn program may be a useful short term tool for those in real distress, but it will cost you in the long term.  That is, assuming you ever do get a job that pays well.  

However, the second part of this program says that if you still haven’t found a job that pays well enough to pay off your loan after 10 years, your loans will be forgiven if you work for the government or a nonprofit, or after 20 years if you work in the private sector, which is apparently considered less worthwhile.  And who foots the bill when these people get their loans forgiven?  The American taxpayers will pay for those people’s college loans.  Creighton University Professor Ernie Goss has analyzed the President’s plan and thinks it is a poor use of taxpayer funds.  As he said, “A lot of these men and women that are out there working don’t have kids in college, won’t have kids in college, and it’s a big transfer of income to those of us who have university educations, or particularly those of us who are in university education.”  Increasing federal subsidies for college at the expense of Americans who work hard to pay their own bills just encourages colleges to keep increasing tuition.  Furthermore, expanding a program designed to help student loan borrowers who still can’t afford their student loan payments 10 or 20 years after graduation looks a lot like planning for further economic stagnation rather than a focus on improving economic growth and job creation.

The political messaging bill the Senate declined to take up would also do nothing to address the problem of students borrowing more than they will be able to afford to repay in the first place.  However, I have a bill that does.

The Higher Education Act already contains a requirement for colleges to provide counseling to new borrowers of federal student loans.  However, the current disclosures in the law do not do enough to ensure that students understand what kind of debt they will face after graduation.  My “Know Before You Owe Federal Student Loan Act” strengthens the current student loan counseling requirements by making the counseling an annual requirement before new loans are disbursed rather than just for first time borrowers.  My bill then adds several key components to the information institutions of higher education are required to share with students as part of loan counseling.  Perhaps most significantly, colleges would have to provide an estimate of the student’s projected loan debt-to-income ratio upon graduation.  This would be based on the starting wages for that student’s program of study and the estimated total student loan debt the student will likely take out to complete the program.  That way, students will have a real picture of the student loan payments they will face and whether they will be able to afford those payments with their likely future income.  Students will also be provided with information about the higher risk of default if they have a projected loan debt-to-income ratio greater than 12 percent.  They will be told that they should borrow only the minimum amount necessary to cover expenses and that they do not have to accept the full amount of loans offered.  Students will also be given options for reducing borrowing through scholarships, reduced expenses, work-study, or other work opportunities.  Also, because adding an extra year of study can significantly increase student loan debt, an explanation will be provided about the importance of graduating on time to avoid additional borrowing and the impact of adding an additional year of study to total indebtedness.

Finally, the bill requires that a student manually enter, either in writing or through electronic means, the exact dollar amount of federal direct loan funding that the student desires to borrow.  The current process almost makes borrowing the maximum the default option.  If you want to borrow less than is offered, you have to ask for less.  Students may wrongly assume that the federal government has determined this is the appropriate amount for them to borrow.  Surely the federal government would not lend them more than they can afford to repay, right?  Wrong.  This provision will ensure that students make a conscious decision about how much they borrow rather than simply accepting the total amount of federal student loans for which they are eligible.

I should add that good college financial aid counselors can and do advise students not to borrow more than they need, but the process itself needs to be reformed to give them the proper tools.  In fact, the reforms I have outlined were inspired by efforts already underway in my home state of Iowa.  Grand View University has a Financial Empowerment Plan where students and families construct a comprehensive four-year financing plan.  Under this plan, borrowing is based on the student’s future earning potential in the student’s field of study.  The four-year plan also helps ensure students graduate on time and tuition is capped at 2% a year over those four years.  Iowa Student Loan, our state-based nonprofit lender, also has a program called the Student Loan Game Plan, which is an online, interactive resource that calculates a student’s likely debt-to-income ratio.  It walks students through how their borrowing will affect their lifestyle in the future and what actions they can take now to reduce their borrowing.  As a result, in the past year, over 15 percent of students who participated decreased the amount they had planned to borrow by an average of $2,536 saving Iowa students over $1 million in additional loan debt.  Finally, my alma mater, the University of Northern Iowa, has a “Live Like a Student” program.  This involves a number of resources to help students learn to manage their finances better, including three-week courses, one-on-one counseling, and workshops.

We often tell prospective college students that they will earn, on average, $1 million more over their lifetime.  It’s true that college is generally a good investment.  However, when students’ academic dreams become a nightmare upon graduation because they borrowed more from the federal government than they can afford to repay on their starting salary, they understandably feel they’ve been had.  The federal government, as the lender making these loans, has a responsibility to at least ensure that students know what they are getting themselves into before they get in over their heads.  My legislation will do that.  I urge my colleagues to support this bill to help prevent more students drowning in federal student loan debt.