Stakeholders Debate Public Policy Issues Surrounding Consumer Debt in America

A number of diverse stakeholders gathered at George Mason University (GMU) on Nov. 18, 2019, to participate in a program entitled "Consumer Debt in America: What Would Rate Caps and Student Loan Forgiveness Mean?" The debate, which was moderated by Thomas Vartanian, executive director of GMU's Program on Financial Regulation & Technology, focused on two important streams of consumer lending: small-dollar loans and student education loans. Both are hot topics in the news right now as policy debates circle around the federal preemption efforts to avoid state usury caps and growing calls for student loan forgiveness.

Context and Overview

The discussion on small-dollar loans took place the same week the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) proposed a rulemaking to reverse the Madden v. Midland decision. The regulators hope this rulemaking will serve to clarify that entities to which a bank transfers or assigns its consumer loans can enforce those loans according to their terms so long as the loans were legally permissible when made. This clarification roils consumer advocates who believe it will permit predatory lenders to continue to use "rent-a-bank" schemes to circumvent state usury caps. Financial technology (FinTech) firms that engage in marketplace lending welcome the clarification, believing it will make it easier for them to offer loan products nationally.

Regarding the student loan crisis, debt forgiveness is being debated among Democratic policymakers and presidential candidates. In addition, the U.S. Department of Education finds itself with a number of requests for loan forgiveness based on the fraudulent representations and activity of certain for-profit colleges. Recently, students who attended for-profit colleges operated by Dream Center – the now-defunct Art Institute of Colorado and Illinois Institute of Art – between Jan. 20, 2018, and Dec. 31, 2018, had their federal student loan debts canceled and Pell Grant eligibility restored.¹ At the same time, Congress and the Education Department are examining significant failures in the implementation of the public service loan forgiveness program, which has resulted in the rejection of 99 percent of all applications.² The impact on federal investors in the related securities is not clear, but certainly has negative implications for the holders of this debt.

It is in the context of these headlines that participants gathered to discuss these topics. Ashley Harrington from the Center for Responsible Lending (CRL) supported a 36 percent interest rate cap on small-dollar loans and appeared to prefer, among other options she identified, a $10,000 across-the-board student loan debt forgiveness program. Karen Thomas presented the views of the Independent Community Bankers of America (ICBA), which mostly represents smaller community banks – the most likely partners for FinTechs in the small-dollar lending market. She maintained that such a cap would make it virtually impossible for community banks to make small-dollar loans profitably, and that student loan forgiveness does nothing to curb ever-rising tuition costs, one of the prime causes of the student loan debt crisis. In addition, Todd Zywicki, a GMU Foundation Professor of Law and one-time finalist to run the Consumer Financial Protection Bureau (CFPB) for the current Administration, said that price controls on credit do not work and are dangerous. He added that because of low repayment rates, the student loan program has morphed into a social welfare program.

GMU Program on Consumer Debt

The Nov. 18, 2019, consumer debt debate at GMU included:

• Thomas Vartanian, Executive Director, GMU's Program on Financial Regulation & Technology, moderator
• Ashley Harrington, Senior Policy Counsel, CRL
• Karen Thomas, Senior Executive Vice President, Government Relations and Public Policy, ICBA
• Todd Zywicki, GMU Foundation Professor of Law

Below is a summary of the questions addressed and the panelists' comments:

Q. Is a nationwide 36 percent interest rate cap on small-dollar loans a good idea as a matter of public policy?

Panelists disagreed, with Harrington in favor and the others opposed.

Harrington pointed out that such a cap:

• would drastically impact existing payday lending models, which creates "cycle of debt"
• has proven to work for loans to active duty service members and their families (Military Lending Act)
• incentivizes lenders to offer longer-term loans with more affordable structure
• is supported by a large percentage of Americans (most recent example South Dakota, where 75 percent of voters approved)

Other panelists asserted that:

• a 36 percent cap would 1) decrease access to credit and increase costs for low- and moderate-income consumers, 2) make it virtually impossible for banks to make these types of loans profitably (offering as an example a $500 90-day loan at 12 percent simple interest and a modest $30 administrative fee, which translates to 37 percent APR); and 3) lead to fewer responsible lenders serving this market and more illegal, high-cost providers
• history shows that price controls on credit do not work and are dangerous (since interest rates change, sometimes quickly, whereas rate caps generally remain static)

Q. What can/should be done to solve the student loan debt crisis?

All panelists agreed that student loan debt is a huge concern but that solutions to the crisis are difficult and must take into consideration unintended and potentially harmful consequences.

Harrington offered:

• statistics to show severity of student loan debt crisis, including that outstanding student loan debt is now $1.5 trillion
• options to solve or mitigate the crisis, including 1) forgiving all federal student loan debt up to a set dollar amount of debt for all students (pointing to statistics to show that $10,000 forgiveness would have a substantial impact on the crisis, essentially because student loan defaults tend to be inversely proportional to the amount of the debt), or all debt held by former Pell recipients; 2) reforming income driven repayment (IDR) programs to tackle interest growth and provide quicker paths to forgiveness or including interim principle forgiveness as part of IDR programs; 3) making student loan debt dischargeable in bankruptcy; and 4) allowing refinancing

Thomas pointed out that:

• forgiveness would not address rising tuition costs
• what to do about high-income earners or children of high-income earners is a delicate issue
• taxpayers will have to foot the bill (because more than 90 percent of student loan debt is owned by the federal government)

Zywicki observed that:

• the biggest problem is rising tuition costs encouraged by availability of student loans (of every dollar the government loans to students, 65 cents goes to increases in tuition)
• students that don't graduate get debt but not the wage benefit of a college education
• bankruptcy relief is a bad idea (creates moral hazard)
• requiring universities to guarantee their students' loan debt would provide incentive to stop admitting those most likely to default
• the student loan program has become a social welfare program, with only 37 percent of all borrowers paying back; should taxpayers be paying for universities to build new amenities?

A PowerPoint presentation for this program is available.

Conclusion

While the panelists' views diverged, there was consensus that a policy that cuts off the availability of credit to small-loan borrowers would be counter-productive, and that the search for a solution to the student loan debt crisis will be extremely difficult and require careful deliberation to prevent unforeseen adverse consequences.

For more information or questions regarding the GMU program, small-dollar loans and student education loans, please contact the authors.    

Notes

¹ U.S. Department of Education press release (Nov. 8, 2019)

² As of June 30, 2019, 102,051 applications were processed, but only 1,216 were approved. Public Service Loan Forgiveness (PSLF) Program data

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.