The Senate Budget Committee will hold hearings Wednesday to decide whether the student loan industry is "set up to make borrowers fail."
"I'm concerned that student loan servicers see that they can maximize their profits by cutting corners, rather than giving proper customer service," Chairman Sherrod Brown (D-Ohio) will say, according to an advanced copy of his opening remarks. "Among the questions to consider: Have servicers created an intentionally opaque repayment process, set up to make borrowers fail?"
Brown and others on the Banking Committee, including Sen. Elizabeth Warren (D-Mass.), have criticized Sallie Mae and other financial institutions for overcharging borrowers with high interest rates.
In an interview Tuesday, Brown doubled down: "The system is so slanted toward the servicers against the borrowers on student loans."
While Brown's hearing will look at the borrower's experience, the Senate Budget Committee will have a full committee hearing Thursday on how the nation's $1.2 trillion student loan debt impacts the economy.
Warren's first standalone legislation proposal has seen little traction in the Senate, which would allow students who are eligible for Stafford loans to borrow at the same interest rate that banks receive when obtaining low-interest, short-term discounted loans from the Federal Reserve.
The measure would allow students who are eligible for federally subsidized Stafford loans to borrow at the same rate that banks get from the Federal Reserve when they need a short-term infusion of cash from the central bank’s discount window.
Richard Vedder, director of the Center for College Affordability and Productivity, is expected to criticize Warren's student loan proposal at Wednesday's Senate Budget hearing Wednesday.
In his submitted testimony for the Budget Committee, Vedder said Warren's bill is "fundamentally flawed" and "punishes those who have who have responsibly paid back their loans."
"The Warren proposal increases the likelihood or irresponsible lending to students not equipped for college who face a high probability of dropping out," Vedder submitted in his testimony. "If the Warren bill were to pass, students will likely be told by counselors 'if it gets too tough for you to pay off your loan, Congress will likely either forgive the loan or reduce your burden by lowering interest rates.'
What economists call a moral hazard problem will be worsened."
Student loans set up to fail? Panel to decide. »
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