U.S. Representative Danny K. Davis Leads Letter to Treasury and Federal Reserve Calling for Protections for Students in Treasury-Fed Plan

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December 8, 2008
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Washington,D.C.- Congressman Danny K. Davis(D-IL) last week led a request by 18 Members of Congress to Secretary of theTreasury Henry Paulson and Federal Reserve Chairman Ben Bernanke to ensure protectionsfor students in any plan to use federal dollars to support for-profit lendersof non-federal student loans.  As aMember of the Committee on Education and Labor, Davis is active in education policy.  CongressmanDavis and his colleagues from the House of Representatives made clear that theystrongly support helping low-income students access higer education during thiseconomic crisis.  The policymakers wantto make certain that new Term Asset-Backed Securities Loan Facility program administeredjointly by the Treasury and the Federal Reserve does not simply line thepockets of for-profit lenders.  

Washington,D.C.- Congressman Danny K. Davis(D-IL) last week led a request by 18 Members of Congress to Secretary of theTreasury Henry Paulson and Federal Reserve Chairman Ben Bernanke to ensure protectionsfor students in any plan to use federal dollars to support for-profit lendersof non-federal student loans.  As aMember of the Committee on Education and Labor, Davis is active in education policy.  CongressmanDavis and his colleagues from the House of Representatives made clear that theystrongly support helping low-income students access higer education during thiseconomic crisis.  The policymakers wantto make certain that new Term Asset-Backed Securities Loan Facility program administeredjointly by the Treasury and the Federal Reserve does not simply line thepockets of for-profit lenders.  

Davis and his colleaguessaid, "We have serious concerns about using taxpayer money to subsidizefor-profit lenders of non-federal student loans.  A number of higher education groupsrepresenting students, consumers, and colleges share our concerns.  The Treasury-Fed plan seems to equate creditcard, auto, and student loans.  However,these debts are not equal.  Privatestudent loan lenders enjoy federal protections from bankruptcy that otherconsumer creditors do not.  Specifically,unlike other types of consumer debt, private student loans are protected fromdischarge during bankruptcy except under extreme circumstances.  Thus, an individual who accumulates thousandsof dollars in debt for purchases of cars or luxury goods can obtain relief viabankruptcy; however, a teacher with private student loans cannot."


The letter asked Treasury and Federal Reserve officials to construct itsstudent loan plan to mitigate against adverse consequences for private studentloan borrowers.  Specifically, shouldtaxpayer money be used to support private student lenders of non-federal loans,the policymakers asked that the plan require consumer protections similar tothose afforded to federal student loans. These protections include fixed interest rates, income-contingent andincome-based repayment options, and debt discharge in the case of disability ordeath.  Davis said, "Federal student loans haveconsumer protections; private student loans subsidized by the Treasury-Fed planshould have such protections as well." In addition, the letter recommended that the new program institute stepsto assess the underwriting standards of lenders who seek federal relief todetermine if the lenders extended credit to particularly vulnerable consumersand whether credit was extended with onerous terms or conditions. 

Davis and his colleagues alsowrote to Barney Frank, Chairman of the House of Representatives Committee onFinancial Services to request a hearing on the potential Treasury-Fed intervention.  That letter stated, "A hearing promises tobring to light important facets of the student loan industry that Treasury andFederal Reserve officials should consider prior to taking action."  Davis and his colleagues are hopeful that membersof the Committee on Financial Services will seek clarification about theprogram during the oversight hearing scheduled for Wednesday, December 10,2008.

Text of the letters appearsbelow:

December 4, 2008

The Honorable Ben S. Bernanke
Chairman
Federal Reserve System
20th Streetand Constitution Avenue, NW
Washington,DC  20551

Dear Chairman Bernanke:

As Members of Congress whoare active in education policy, we write to respectfully request clarificationof the recent Term Asset-Backed Securities Loan Facility program that wouldallow the Department of Treasury and the Federal Reserve to fund non-federalstudent loans.  We strongly supportensuring that students have the money they need to attend institutions ofhigher education.  However, we must makecertain that any such plan aids students and does not simply line the pocketsof for-profit lenders.  

Most students and familiesuse federal loans to pay for college. Thanks to recent actions by Congress and the Department of Education,federal student loans are currently readily available.  However, certain groups of students requireprivate student loans to attend school, such as students who need to borrowmore than is available federally, students who attend schools that do notparticipate in the federal loan program, and international students.  The Project on Student Debt estimates thatonly about 8% of undergraduates used private loans last year.  Unlike federal student loans, private studentloans typically lack any form of consumer protection (e.g., fixed interestrates, income-contingent and income-based repayment options, or debt dischargein the case of disability or death).  Forthese reasons, lenders and financial aid experts generally agree that studentsshould exhaust federal financial aid prior to using private loans.

We have serious concernsabout using taxpayer money to subsidize for-profit lenders of non-federalstudent loans.  A number of highereducation groups representing students, consumers, and colleges share ourconcerns.  The Treasury-Fed plan seems toequate credit card, auto, and student loans. However, these debts are not equal. Private student loan lenders enjoy federal protections from bankruptcythat other consumer creditors do not. Specifically, unlike other types of consumer debt, private student loansare protected from discharge during bankruptcy except under extremecircumstances.  Thus, an individual whoaccumulates thousands of dollars in debt for purchases of cars or luxury goodscan obtain relief via bankruptcy; however, a teacher with private student loanscannot. 

 

The Honorable Ben S. Bernanke
December 4, 2008

Page 2

 

Given these circumstances, wehope the Treasury and Federal Reserve will construct its student loan plancarefully to mitigate against adverse consequences for private student loanborrowers, especially in light of current economic conditions.  Should taxpayer money be used to supportprivate student lenders of non-federal loans, we strongly urge that theTreasury and Federal Reserve require consumer protections similar to thoseafforded to federal student loans as a condition of receipt of federal rescuefunds.  Federal student loans haveconsumer protections; private student loanssubsidized by the Treasury-Fed plan should have such protections as well.  Further, we recommend instituting steps toassess the underwriting standards of lenders who seek federal relief todetermine if the lenders extended credit to particularly vulnerable consumersand whether credit was extended with onerous terms or conditions.  Similar to the executive compensationrestrictions of the Treasury-Fed plan, these restrictions would help focusfederal dollars on stimulating lending while protecting taxpayers andborrowers. 

We commend the effort to ensure that students with financial needs canaccess higher education during this economic crisis.  We urge the Treasury and Federal Reserve toproceed cautiously when using taxpayer funds for the student loan industry,ensuring that both financial and consumer protections are considered.   Thankyou for your consideration of this request.

 

Sincerely,

 

Danny K.Davis                                                          Yvette D. Clarke

Rubén Hinojosa                                                          Mazie K. Hirono

William Jefferson                                                        Raúl M. Grijalva

Edolphus "Ed" Towns                                                            Fortney"Pete" Stark

Robert Wexler                                                             David Wu

Lynn Woolsey                                                             Phil Hare

Dennis Kucinich                                                         Linda T.Sánchez

Joe Courtney                                                               SheilaJackson Lee

Chaka Fattah                                                               RobertC. "Bobby" Scott

 

 

December 4, 2008


The Honorable Henry M. Paulson, Jr.
Secretary
U.S.Department of the Treasury
1500Pennsylvania Avenue, NW
Washington,DC  20220

 

Dear Secretary Paulson:

As Members of Congress whoare active in education policy, we write to respectfully request clarificationof the recent Term Asset-Backed Securities Loan Facility program that wouldallow the Department of Treasury and the Federal Reserve to fund non-federalstudent loans.  We strongly supportensuring that students have the money they need to attend institutions ofhigher education.  However, we must makecertain that any such plan aids students and does not simply line the pocketsof for-profit lenders.  

Most students and familiesuse federal loans to pay for college. Thanks to recent actions by Congress and the Department of Education,federal student loans are currently readily available.  However, certain groups of students requireprivate student loans to attend school, such as students who need to borrowmore than is available federally, students who attend schools that do not participatein the federal loan program, and international students.  The Project on Student Debt estimates thatonly about 8% of undergraduates used private loans last year.  Unlike federal student loans, private studentloans typically lack any form of consumer protection (e.g., fixed interest rates,income-contingent and income-based repayment options, or debt discharge in thecase of disability or death).  For thesereasons, lenders and financial aid experts generally agree that students shouldexhaust federal financial aid prior to using private loans.

We have serious concernsabout using taxpayer money to subsidize for-profit lenders of non-federalstudent loans.  A number of highereducation groups representing students, consumers, and colleges share ourconcerns.  The Treasury-Fed plan seems toequate credit card, auto, and student loans. However, these debts are not equal. Private student loan lenders enjoy federal protections from bankruptcythat other consumer creditors do not. Specifically, unlike other types of consumer debt, private student loansare protected from discharge during bankruptcy except under extremecircumstances.  Thus, an individual whoaccumulates thousands of dollars in debt for purchases of cars or luxury goodscan obtain relief via bankruptcy; however, a teacher with private student loanscannot. 

 

The Honorable Henry M. Paulson, Jr.

December 4, 2008

Page 2

Given these circumstances, wehope the Treasury and Federal Reserve will construct its student loan plancarefully to mitigate against adverse consequences for private student loanborrowers, especially in light of current economic conditions.  Should taxpayer money be used to supportprivate student lenders of non-federal loans, we strongly urge that theTreasury and Federal Reserve require consumer protections similar to thoseafforded to federal student loans as a condition of receipt of federal rescuefunds.  Federal student loans haveconsumer protections; private student loans subsidized by the Treasury-Fed planshould have such protections as well. Further, we recommend instituting steps to assess the underwritingstandards of lenders who seek federal relief to determine if the lendersextended credit to particularly vulnerable consumers and whether credit wasextended with onerous terms or conditions.  Similar to the executive compensationrestrictions of the Treasury-Fed plan, these restrictions would help focusfederal dollars on stimulating lending while protecting taxpayers andborrowers. 

We commend the effort to ensure that students with financial needs canaccess higher education during this economic crisis.  We urge the Treasury and Federal Reserve toproceed cautiously when using taxpayer funds for the student loan industry,ensuring that both financial and consumer protections are considered.   Thankyou for your consideration of this request.

Sincerely,

 

Danny K.Davis                                                          Yvette D. Clarke

Rubén Hinojosa                                                          Mazie K. Hirono

William Jefferson                                                        Raúl M. Grijalva

Edolphus "Ed" Towns                                                            Fortney"Pete" Stark

Robert Wexler                                                             David Wu

Lynn Woolsey                                                             Phil Hare

Dennis Kucinich                                                         Linda T.Sánchez

Joe Courtney                                                               SheilaJackson Lee

Chaka Fattah                                                               RobertC. "Bobby" Scott

 

 

December 4, 2008


The Honorable Barney Frank, Chairman
Committee on Financial Services
U.S.House of Representatives
2129 RayburnHouse OfficeBuilding
Washington,DC 20515

Dear Chairman Frank:

As Members of Congress who are active in educationpolicy, we write to respectfully request that the Committee on FinancialServices hold a hearing to clarify the recent Term Asset-Backed Securities LoanFacility program that would allow the Department of Treasury and the FederalReserve to fund non-federal student loans. We strongly support ensuring that students have the money they need toattend institutions of higher education. However, we must make certain that any such plan aids students and doesnot simply line the pockets of for-profit lenders.   A hearing specific to Treasury's potentialintervention into the student loan industry presents an effective way toexamine the necessity of and most appropriate strategies for such anapproach.  A hearing promises to bring tolight important facets of the student loan industry that Treasury and FederalReserve officials should consider prior to taking action.

In particular, we haveserious concerns about using taxpayer money to support for-profit lenders ofnon-federal student loans.  Statements byTreasury officials seem to equate companies that issue credit cards, autoloans, and student loans.  However, thesedebts are not equal.  Private studentlenders enjoy federal protections from bankruptcy that other consumer creditorsdo not.  Specifically, unlike other typesof consumer debt, private, non-federal student loans are protected fromdischarge during bankruptcy except under extreme circumstances.  Unlike federal student loans, private,non-federal student loans typically lack any form of consumer protection (e.g.,fixed interest rates, income-contingent and income-based repayments, or debtdischarge in the case of disability or death). Thus, an individual who accumulates thousands of dollars in debt forpurchases of cars or luxury goods can obtain relief via bankruptcy; however, ateacher with private student loans cannot.

A hearing to review theproblems and potential resolutions to thefinancial difficulties in the student loan market could encourage Treasury andthe Federal Reserve officials to proceed very carefully when intervening intothe student loan industry, and help guide their efforts.  For example, we would hope that a hearingcould identify ways that an intervention could mitigate against adverseconsequences for private student loan borrowers, especially in light of currenteconomic conditions.  Similarly, ahearing would provide an opportunity to discuss options for protectingconsumers, such as making consumer protections a condition of receipt offederal rescue funds, and for assessing criteria for lender eligibility foraid.  Such criteria might includeinstituting steps to assess the underwriting standards of lenders who seekfederal relief to determine if the lenders extended credit to particularlyvulnerable consumers and whether credit was extended with onerous terms orconditions.

The Honorable Barney Frank

December 4, 2008

Page 2

We arevery grateful to the Committee on Financial Services, and to you as itsChairman, for your tremendous leadership in identifying the central issuesunderlying and potential avenues for exiting the current economic crisis.  Thank you for your consideration of ourrequest to hold a hearing to clarify theintended use of the Term Asset-Backed SecuritiesLoan Facility program bythe Department of Treasury and the FederalReserve to increase the availability of student loans.  Please contact Jill Hunter-Williams in theoffice of Congressman Davis at (202) 225-5006 with any questions.

Sincerely,

 

Danny K.Davis                                                          Yvette D. Clarke

Rubén Hinojosa                                                          Mazie K. Hirono

William Jefferson                                                        Raúl M. Grijalva

Edolphus "Ed" Towns                                                            Fortney"Pete" Stark

Robert Wexler                                                             David Wu

Lynn Woolsey                                                             Phil Hare

Dennis Kucinich                                                         Linda T.Sánchez

Joe Courtney                                                               SheilaJackson Lee

Chaka Fattah                                                               RobertC. "Bobby" Scott