Statement of
Doreen R. Eberley, Director,
Division of Risk Management Supervision,
Federal Deposit Insurance Corporation
On
Private Student Loans: Regulatory Perspectives
before the
Committee on Banking, Housing,
And
Urban Affairs; United States Senate;
538 Dirksen Senate
Office Building
June 25, 2013
Chairman Johnson, Ranking Member Crapo and members of the Committee, thank you
for the opportunity to testify on behalf of the Federal Deposit Insurance Corporation
(FDIC) regarding private student loans (PSLs). Higher education has long provided a
pathway to prosperity, as individuals with college degrees historically have had higher
incomes and lower rates of unemployment than those without. Students and their
families have financed higher education through loans, both Federal and private, for
many years. While this model works well when graduates are able to obtain
employment and use their degrees to move into higher paying jobs, the severity of the
recent financial crisis and a relatively slow recovery have resulted in persistently high
rates of unemployment and underemployment, which have negatively impacted the
newly graduated who are trying to enter or advance through the workforce. Today,
many consumers are struggling with student debt loads in a still fragile economic
environment.
In my testimony, I will discuss data on the student loan market, including data on its size
and performance. I also will discuss our approach to the supervision of private student
loan lenders, including the regulations and guidance that apply to private student loans.
In addition, I will describe the ability of insured depository institutions (IDIs) to work with
consumers to manage their student loan obligations within the current supervisory
environment.
In particular, I will describe the FDIC’s efforts to communicate to the banks we
supervise that, for borrowers experiencing difficulties, prudent workout arrangements
are in the best long-term interest of both the bank and the borrower.
Data Regarding Student Loans
Data regarding the overall market for PSLs are difficult to discern because there is no
standard source for collecting the data. These data are not broken out separately in the
Consolidated Reports of Condition and Income, otherwise known as Call Reports, which
banks file quarterly, as student lending is a fairly small portion of aggregate consumer
Doreen R. Eberley, Director,
Division of Risk Management Supervision,
Federal Deposit Insurance Corporation
On
Private Student Loans: Regulatory Perspectives
before the
Committee on Banking, Housing,
And
Urban Affairs; United States Senate;
538 Dirksen Senate
Office Building
June 25, 2013
Chairman Johnson, Ranking Member Crapo and members of the Committee, thank you
for the opportunity to testify on behalf of the Federal Deposit Insurance Corporation
(FDIC) regarding private student loans (PSLs). Higher education has long provided a
pathway to prosperity, as individuals with college degrees historically have had higher
incomes and lower rates of unemployment than those without. Students and their
families have financed higher education through loans, both Federal and private, for
many years. While this model works well when graduates are able to obtain
employment and use their degrees to move into higher paying jobs, the severity of the
recent financial crisis and a relatively slow recovery have resulted in persistently high
rates of unemployment and underemployment, which have negatively impacted the
newly graduated who are trying to enter or advance through the workforce. Today,
many consumers are struggling with student debt loads in a still fragile economic
environment.
In my testimony, I will discuss data on the student loan market, including data on its size
and performance. I also will discuss our approach to the supervision of private student
loan lenders, including the regulations and guidance that apply to private student loans.
In addition, I will describe the ability of insured depository institutions (IDIs) to work with
consumers to manage their student loan obligations within the current supervisory
environment.
In particular, I will describe the FDIC’s efforts to communicate to the banks we
supervise that, for borrowers experiencing difficulties, prudent workout arrangements
are in the best long-term interest of both the bank and the borrower.
Data Regarding Student Loans
Data regarding the overall market for PSLs are difficult to discern because there is no
standard source for collecting the data. These data are not broken out separately in the
Consolidated Reports of Condition and Income, otherwise known as Call Reports, which
banks file quarterly, as student lending is a fairly small portion of aggregate consumer
lending and relatively few IDIs make these loans. Rather, data on PSLs, like unsecured
installment loans, are contained within a broader category called "other loans to
individuals."
Nonetheless, based on recent studies, there appear to be about 39 million borrowers
with a student loan, with an average balance of about $25,000.1 As of year-end 2012,
total student loans outstanding were about $966 billion.2 Of this total student loan debt,
the Consumer Financial Protection Bureau (CFPB) has estimated the size of the PSL
market to be about $150 billion as of year-end 2011, which represents about 15 percent
of student loans outstanding, compared to 85 percent for the Federal student loan (FSL)
market.3
Debt from FSLs and PSLs has risen significantly since 2007, and student loans (FSLs
and PSLs combined) are now the largest category of consumer loans, not including first
mortgages.4 With regard to originations, growth has been centered in FSL originations,
which have climbed from about $70 billion in the 2006-2007 school year to over $100
billion per year in the past three academic years.5 In contrast, the PSL market has
shrunk considerably over the same time period, with originations peaking at about $23
billion in the 2007-2008 academic year before falling to about $8 billion per year in the
past three academic years. In terms of new volumes, PSLs are currently only about 7
percent of overall originations. While the market for PSLs is relatively small, PSLs
provide a secondary source of funds for students and families seeking to fill the gap
between FSLs and other financial resources and the total cost of students’ higher
education.
IDIs supervised by the FDIC hold about $14 billion in outstanding PSLs and originated
about $4 billion in the 2011-2012 academic year. Reported past due rates (30 days or
more delinquent) are just under 3 percent of total student loan balances, and the upper
end of the charge-off range is at just over 1.5 percent per year. In addition, IDIs that we
supervise are currently requiring cosigners, usually parents, on about 90 percent of the
loans they underwrite. The majority of loans are underwritten at a variable rate of
interest, with average interest rates currently in the 6 to 7 percent range. Loan terms
vary, usually between five and fifteen years.
Supervision of PSL Lenders
Of the approximately 4,400 institutions supervised by the FDIC, only a small number of
FDIC-supervised institutions originate PSLs, but these include two of the largest PSL
originators. Unlike most lending, student lending is complicated by the fact that students
often have no established credit history to indicate their creditworthiness, and that
repayment will initially be partial, or delayed, often for several years, while the student
completes his or her education. Also, PSLs generally are not dischargeable in
bankruptcy. While this provides borrowers with a strong incentive to repay, IDIs and
other lenders in the PSL market absorb all losses on these loans for borrowers who do
not repay, which is why many originators require cosigners.
installment loans, are contained within a broader category called "other loans to
individuals."
Nonetheless, based on recent studies, there appear to be about 39 million borrowers
with a student loan, with an average balance of about $25,000.1 As of year-end 2012,
total student loans outstanding were about $966 billion.2 Of this total student loan debt,
the Consumer Financial Protection Bureau (CFPB) has estimated the size of the PSL
market to be about $150 billion as of year-end 2011, which represents about 15 percent
of student loans outstanding, compared to 85 percent for the Federal student loan (FSL)
market.3
Debt from FSLs and PSLs has risen significantly since 2007, and student loans (FSLs
and PSLs combined) are now the largest category of consumer loans, not including first
mortgages.4 With regard to originations, growth has been centered in FSL originations,
which have climbed from about $70 billion in the 2006-2007 school year to over $100
billion per year in the past three academic years.5 In contrast, the PSL market has
shrunk considerably over the same time period, with originations peaking at about $23
billion in the 2007-2008 academic year before falling to about $8 billion per year in the
past three academic years. In terms of new volumes, PSLs are currently only about 7
percent of overall originations. While the market for PSLs is relatively small, PSLs
provide a secondary source of funds for students and families seeking to fill the gap
between FSLs and other financial resources and the total cost of students’ higher
education.
IDIs supervised by the FDIC hold about $14 billion in outstanding PSLs and originated
about $4 billion in the 2011-2012 academic year. Reported past due rates (30 days or
more delinquent) are just under 3 percent of total student loan balances, and the upper
end of the charge-off range is at just over 1.5 percent per year. In addition, IDIs that we
supervise are currently requiring cosigners, usually parents, on about 90 percent of the
loans they underwrite. The majority of loans are underwritten at a variable rate of
interest, with average interest rates currently in the 6 to 7 percent range. Loan terms
vary, usually between five and fifteen years.
Supervision of PSL Lenders
Of the approximately 4,400 institutions supervised by the FDIC, only a small number of
FDIC-supervised institutions originate PSLs, but these include two of the largest PSL
originators. Unlike most lending, student lending is complicated by the fact that students
often have no established credit history to indicate their creditworthiness, and that
repayment will initially be partial, or delayed, often for several years, while the student
completes his or her education. Also, PSLs generally are not dischargeable in
bankruptcy. While this provides borrowers with a strong incentive to repay, IDIs and
other lenders in the PSL market absorb all losses on these loans for borrowers who do
not repay, which is why many originators require cosigners.