WASHINGTON — Lawmakers appear increasingly concerned about issues related to student lending, including the possibility that the record level of student loan debt could end up damaging the economy.

The Senate held two separate hearings on the issue on Wednesday, covering everything from bank ties to universities to trouble with student loan servicers.

Following are three key takeaways from Capitol Hill's interest in the subject — and what it means for lenders:

Policymakers are worried about bank partnerships with universities

Lawmakers on the Senate Budget Committee spent much of their hearing pressing for ways to cut the costs of a college education and urging greater access to financing options.

But Rohit Chopra, the student loan ombudsman for the Consumer Financial Protection Bureau, said one of the biggest obstacles to cheaper financing is the incentives offered to colleges by partnering financial service providers for getting students to sign up for a loan.

"As we saw in the run-up to the financial crisis, the incentive misalignment between those who broker loans or offered loans — their alignment with investors or others — can lead to very disastrous consequences," Chopra said. "Aligning incentives between schools, between financial services providers and others is critical to ensure that market outcomes are efficient."

Chopra noted a discussion he had with a former student loan servicer who told him that part of their evaluation was how quickly they could get a customer off the phone.

"That can lead to very quick interactions" and "you might get the shortcut answer rather than the answer that is better for the owner of the loan, for the borrower and maybe for the economy more broadly," Chopra said.

The CFPB has already begun looking into college partnerships with financial institutions. It has also issued a rule to supervise the largest student loan service providers.

Lawmakers fear the economic impact of student loan debt

During a hearing of the Senate Banking financial institutions and consumer protection subcommittee, several Democrats expressed concern about student loan servicing, raising questions about a lack of transparency and illegal behavior in the market. Some warned it could even cause broader economic harm.

"Excessive student debt can defer or destroy the dreams of prospective first-time homebuyers, small business formation and entrepreneurship, and limit the options of young graduates who might work as teachers or doctors in rural areas. Defaults will have long term impacts on our economic recovery," said Sen. Sherrod Brown, D-Ohio, chairman of the subcommittee. "It is critical that we ensure that student loan servicers are doing their jobs properly to protect individual borrowers, but also our economy as a whole."

Brown, along with Sens. Elizabeth Warren, D-Mass., and Jack Reed, D-R.I., pressed witnesses about the ease of navigating the student loans system.

Robert Geremia, a social studies teacher in Washington, D.C., testified on his experiences, noting that he received little formal support in understanding his loans when he attended graduate school.

"I did receive counseling, but I do not believe, especially with my graduate loans, that it was particularly effective. It involved an exercise, going through the motions, clicking on boxes — there really isn't that, 'hey, did you have a question?' kind of one-on-one interaction," he said. "I read through it, it wasn't clear, it wasn't effective, especially for someone like myself who is trying to pay rent, trying to teach 100 students, grade their essays, finish a masters' thesis."

Witnesses added that the servicing industry remains opaque, particularly when loans are transferred across companies.

"I still believe there needs to be one place of contact for all borrowers and that the contractors be invisible to the students," said Nancy Hoover, director of financial aid at Denison University. "I think if the servicers were mandated to be contracted with identical processes and policies, a lot of this confusion would be eliminated."

Warren raised concerns about the lack of knowledge students may have if they suspect servicers aren't following the rules.

"When a borrower thinks that something is wrong, basically if they think they haven't been told the truth or someone has broken the law, where do they turn?" she asked.

Hoover responded that students don't usually know where to turn, but often return to the university's student aid office.

"Most of the time the students now are going back to the financial aid office, because they are so confused about where else to go. But the tragedy is that sometimes students don't do anything," she said, adding that many students are not aware of the CFPB, another avenue for borrowers.

Some lawmakers want to compel the government to release more data

Lawmakers have also focused on ways to help students refinance existing debt or provide more financial information to students upfront under the premise that it would ultimately reduce costs. For example, Democratic senators Mark Warner and Ron Wyden along with Republican Marco Rubio have introduced a bill that is designed to streamline information on higher education such as loans and employment prospects.

"This is taking an enormous toll in effect putting students, young people, in shackles," Wyden said. But "to get the kind of data you need to really do this right, it's going to take a piece of legislation, whether it's [our bill] or something else."

The three witnesses at the Budget panel, including an economist and a recent college graduate, said there was very little information available either to inform students on financial options or lawmakers on future bills.

"It's ironic that the universities that are in the knowledge business are sometimes very resistant about providing knowledge about their own students, what they're learning, what they're earning after they graduated college," said Dr. Richard Vedder, distinguished professor emeritus of economics and faculty associate of the Contemporary History Institute at Ohio University.

Vedder suggested to lawmakers that the IRS and Social Security Administration could "provide enormously useful information" on the earnings of graduates and other statistical breakdowns without breaking privacy laws.

"Why don't we do that? … If part of problem is student financial burden shouldn't the students know what is the probability that they are going to earn a certain amount of money when they graduate?" he said. "Information bills are important. I think they are low cost and they're consumer friendly. And markets work better when there's more information by all parties."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.