‘Time for a Major Redo of Our Entire Student-Loan System’

KELLY FIELD: We’re here with Rohit Chopra, the longtime student loan ombudsman for CFPB. He recently left for the Center for American Progress, and we’re going to talk to him about his tenure at the Bureau, and what he’d like to accomplish going forward. So Rohit, you were at the Bureau for about four and 1/2 years. Why did you decide it was time to leave, and what do you hope to do at CAP?

ROHIT CHOPRA: The time at the Bureau was one that will always be so exciting. Starting up a new agency, we were just a small team with 30 or so, and now over 1,400 people. And I really feel like we accomplished quite a bit in those few short years. And I felt it was time for the next chapter. And to continue the work, though, about fixing what I think is a very broken student loan system.

One of my major reflections of my time at the Bureau, was that problems in the student loan market are so remarkably similar to what we saw in the mortgage market around the time of the financial crisis-- the misaligned incentives, the problems with servicers, issues where consumers feel they didn’t really even know where to turn for help. And I think there’s a lot more work to be done. I think, obviously, the Congress is going to be thinking a lot about the Higher Education Act. And I think it’s really time for a major redo of our entire student loan system, one that works better for students, and one that works better for the economy more broadly.

KELLY FIELD: And what were you proudest of accomplishing at the Bureau? You also mentioned that there’s more to be done. What do you see as the unfinished business?

ROHIT CHOPRA: I think one of the things that we really focused hard on was addressing the consumer experience. I think colleges and universities, and lenders, and other market participants, have been pretty well represented in the policy debate. But the lens of the consumer really was missing. For example, we knew that customer service was a big problem when it came to repaying student loans. And it wasn’t just bad customer service, but we now have 8 million people in default on a student loan. And most of that could have been avoided. And it just, again, reminds us so much about the improper foreclosures, the robo-signing.

And I think we really did hit at the need to really change the way servicing works. And I think we’re on a good path towards that. I think you’re increasingly seeing more proposals about how to beef up borrower protections, to make sure that they’re more in line with those of homeowners and credit card holders. We’re seeing a lot of thinking about changing servicing altogether. Should we move toward a payroll withholding system? Should we move to a completely different way of engaging borrowers to repay their student loans? So I’m looking forward to figuring out new innovative models to do this, that don’t harm consumers in the process.

KELLY FIELD: What do you see as the biggest problems in servicing and private student lending right now? And what one thing would you do to fix each of those sectors?

ROHIT CHOPRA: So I would say in loan servicing, we learned a lot in the mortgage market. Where-- when many of these loans were originated, packaged into Wall Street securities, and flipped-- there was a lot of incentive problems between the servicer, and the investor, and the borrower. And in some cases, the investor or the bank, would be better off if the servicer was able to work with the borrower to create a repayment plan that actually works. And we’re not seeing that enough. We’re seeing servicers, unfortunately, steer people into forbearance plans or other quick fixes, rather than working with them to find a payment plan that works.

And, of course, that means changing some of the core economics of how servicing works, changing those incentives. But, also, really thinking about, should we have a robust student loan borrower bill of rights, where they are entitled to get information on ways to avoid default, on all their options, when they’re in trouble. And I think we’ve done that in the mortgage space, and we have to see whether it will work in the student loan space as well.

I think as it relates to private lenders, in the housing market right now, there is a lot of questions about the future of Fannie Mae and Freddie Mac. What is going to happen with private capital in the mortgage market? And I think we can pretty much say that private capital in the student loan market has not really worked well. It has not really created competition. It has not created an environment of good customer service.

So we really need to rethink how private capital is going to make the market more competitive, create better prices, even at the tuition level. I think there’s been some interesting discussion, across the political spectrum, about skin in the game. Should colleges have skin in the game when they enroll borrowers and sign them up for loans? And should lenders, also? In Dodd-Frank, this was really changed. More people now have skin in the game, and you can’t just sign someone up for a loan and jump.

KELLY FIELD: When you were at the Bureau, the Bureau filed suit against ITT and Corinthian. What do you think is wrong with the for-profit sector, and how should we fix it?

ROHIT CHOPRA: So I will say that the for-profit sector doesn’t necessarily have to be one that is causing poor outcomes or problems. I think there are certain institutions that have become really myopic, and they are really driven by short-term gains in their share price, surfer investors. And that often can come at the long-term expense of their company. I think you’ve seen a lot of these college chains-- of course, Corinthian being the prime example-- that if you do not create a good product at a good price, over time people are going to find out that you might be selling them a lemon. And a lot of these companies are really struggling. I think many of them talk about the weight of regulation. I think really the weight that they’re experiencing is a poor track record of success.

And so the question then becomes, how can we make sure that borrowers and students have basic protections against predatory practices, while also shifting the marketplace to one that is really thinking about long-term success? Not just for the students, but also for their investors. I think if you look into the data, you will see that some of the smaller privately held for-profit schools, in some cases, do better. Because they might be thinking more about the long-term success.

KELLY FIELD: And one of the first things you did when you left the Bureau, was send a letter to investors in ITT warning that it needed to fix some of its management problems. I was wondering, do you see ITT as the next domino to fall, as Secretary Duncan might say?

ROHIT CHOPRA: Well, I don’t know. I think that there are a number of companies that-- across the student financial services sector, whether it’s for-profit schools, whether it’s lenders, or others-- that haven’t really figured out a sustainable business model. They’ve figured out ways that they can quickly recruit, or quickly get customers, but don’t really know how to serve them well. And I think that’s just not good for anybody, except for the executives who are able to get short-term bonuses.

So I think this is the key. It is, the way we’re going to get fixes is not just from here in Washington. It’s going to take investors and owners of companies to be able to discipline their management to do better. But it’s also going to take consumers and students to be able to think harder about the choices that they make. And a lot of what we did at the Bureau was try and simplify all of the barrage of data and information, and help consumers cut through it. But I think there’s still so much more to do there.

KELLY FIELD: While you were ombudsman, a number of banks, probably a handful of banks, started offering student loan refinancing. Do you think the market is robust enough now, or do we need a federal alternative?

ROHIT CHOPRA: So the refinancing sector has definitely grown a lot. It’s not many banks that are doing it, but other financial players. I still think the refinancing sector has a lot more to grow right now. It is really aimed at high income professionals, often from fancier schools. But there is probably still a significant addressable market of people who, particularly if they took out high-rate private loans, that now have stable careers, that might be able to benefit from a cheaper rate.

Now, as far as I see it, it is just the Federal Government who might be able to provide an alternative. Although, I don’t really know where that’s going to go when it comes to Congress passing anything. But you see a lot of interesting things happening at the state level. I think a lot of states are thinking to themselves, should we be using our economic development authorities to potentially offer lower rate products to their residents, in order to encourage them to start businesses, or start homes.

KELLY FIELD: The Ed Department recently announced that they were going to consider claims by Corinthian students on a case by case basis, with a special master reviewing all these claims. Do you think this was the right way to handle the borrowers’ request for relief?

ROHIT CHOPRA: I think it’s obviously a hard situation, because any time a federal agency has to interpret violations of state law, it gets really tricky. So I’m actually waiting for more details myself, on how that’s all going to work. But here’s where I think is the bigger lesson of the collapse of Corinthian, and the issue you raise. Is that, are we going to have a situation where students are pitted against taxpayers? If we recognize more of these claims in the favor of students, who, in the case of Corinthian likely deserve a lot of debt relief, given how they ran that place. Should taxpayers really be the one who are footing the large part of that bill, or should we be creating a system where the companies themselves are paying for it?

So there’s lots of ways to do it. We could be asking schools to post collateral, or letters of credit, to cover potential fraud, if they meet certain indicators. In the case of large banks, when banks were failing, the public said, why are taxpayers bailing them out? And a lot of policymakers thought, well, future bailouts should be funded by the banking industry. And maybe we should be thinking about some sort of tuition recovery fund, that risky institutions have to pay into, in order to pay for their misdeeds. So I want to see us go to a place where taxpayers aren’t giving a free ride to companies who might profit out of breaking the law. And those companies not only should be punished for that, but they should be paying for the debt relief that those students are entitled to.

KELLY FIELD: Great, thanks for being here, Rohit.

ROHIT CHOPRA: Thanks, Kelly.