U.S. Representative Danny K. Davis Leads Letter To Treasury And Federal Reserve Calling For Protections For Students In Treasury-Fed Plan

Press Release

Congressman Danny K. Davis last week led a request by 18 Members of Congress to Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke to ensure protections for students in any plan to use federal dollars to support for-profit lenders of non-federal student loans. As a Member of the Committee on Education and Labor, Davis is active in education policy. Congressman Davis and his colleagues from the House of Representatives made clear that they strongly support helping low-income students access higer education during this economic crisis. The policymakers want to make certain that new Term Asset-Backed Securities Loan Facility program administered jointly by the Treasury and the Federal Reserve does not simply line the pockets of for-profit lenders.

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

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

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

Text of the letters appears below:

December 4, 2008

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

Dear Chairman Bernanke:

As Members of Congress who are active in education policy, we write to respectfully request clarification of the recent Term Asset-Backed Securities Loan Facility program that would allow the Department of Treasury and the Federal Reserve to fund non-federal student loans. We strongly support ensuring that students have the money they need to attend institutions of higher education. However, we must make certain that any such plan aids students and does not simply line the pockets of for-profit lenders.

Most students and families use 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 require private student loans to attend school, such as students who need to borrow more than is available federally, students who attend schools that do not participate in the federal loan program, and international students. The Project on Student Debt estimates that only about 8% of undergraduates used private loans last year. Unlike federal student loans, private student loans typically lack any form of consumer protection (e.g., fixed interest rates, income-contingent and income-based repayment options, or debt discharge in the case of disability or death). For these reasons, lenders and financial aid experts generally agree that students should exhaust federal financial aid prior to using private loans.

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

The Honorable Ben S. Bernanke
December 4, 2008

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