Pricing Student Loans by College

The New York Times reported today that New York Attorney General Andrew Cuomo sent a letter to Senator Christopher Dodd and Representative George Miller complaining that private student lenders are setting interest rates based on the colleges students attend. The NYT story explained the practice this way:

Students at colleges with default rates of 3 percent or less, the letter said, were eligible for private loan interest rates of 8 percent to 9.25 percent. At schools with default rates of 3 percent to 5 percent, students could obtain loans at interest rates of 9 percent to 12 percent. And at colleges with default rates of 5 percent to 10 percent, students paid interest rates of 11 percent to 14 percent.

What's wrong with that? Consumer lenders are entitled to earn a profit and part of earning a profit includes considering the possible default rates of borrowers.

Because I could not find Attorney General Cuomo's letter on his web site or on the web sites of Senator Dodd or Representative Miller, I have to rely on the NYT's summary of it. Cuomo is quoted as comparing the private student lenders activities to redlining: "Just as lenders in the mortgage industry once made judgments about credit lending in entire neighborhoods as a whole, so too are lenders making generalized judgments about student and parent risk based on a student's school neighborhood." It may be effective political rhetoric to compare the two situations, but they are inapposite. The practice of redlining had the taint of racial prejudice, and there is no evidence that is occurring. Cuomo's letter mischaracterizes the facts. Lenders are not making judgments based on the "neighborhood of the school"--and a good thing that is for some schools!--but on repayment histories.

Later, the story cites statistics from Cuomo that a student at Duke University might pay 8% interest, but a student at the University of Phoenix pays 11%. These examples were chosen carefully because they raise the specter of a privileged Duke student getting a break the blue-collar student at the University of Phoenix does not (to draw on the stereotypes of the students at the two universities).

What Cuomo complains about is the lack of an individualized determination of creditworthiness, but what does it  mean for something to be "individualized?" Is not the school you attend an "individualized" fact about you? The implication seems to be that creditworthiness should be determined based on one's past track record of repayment of debt, but that misses the point that student borrowers typically have little or no credit records. That is precisely why the private student lenders might find it profitable to use the borrower's school as a rough proxy for likelihood to repay. Moreover, the private student lenders could try to get more individualized information about a potential borrower, but information is not free. If a private student lender can figure out a profitable way to make more individualized pricing decisions, the market likely will beat a path to that lender's door.

There have been a lot of troubling disclosures recently about private student lenders, but this announcement did not strike me as one of them. I have a lot of concerns about aggressive practices in the private student loan industry and the consumer credit industry generally. Drawing attention to the trivial takes attention away from the practices that do need reform.

Comments

[David Yen]

Does the Equal Credit Opportunity Act apply to these loans? The ECOA has an effects test - i.e., proof of intent to discriminate is not required. If you can prove disparate impact on a protected class, you have a prima facie case. If there is a business necessity (necessity may not be the right word - maybe it is justification, or something like than), that is a defense.

If you are in a protected class, go to a school with the higher rates, and would qualify for a lower rate under a different system, you may have an ECOA case, assuming that there is not some exemption or special rule for these student loans

[John Pottow]

Bob, Do you have a problem with insurance companies using your credit rating in pricing your policy's premium?

[R]

What loan companies to you suggest a student use? My son has to go to a Community College & is having a hard time getting a student loan to continue his education

[Linda Setlech]

I propose a National Support Group for Student Loan Defaulters, NSGSLD. My first job after graduating Columbia University in 1977 was in the Mail Room of Caterpillar Tractor Co. I was promoted to secretary several months later. Opportunities for higher positions of serious employment never materialized. After 30 years of under-employment, student loan defaults, and tax arrears, I am isolated economically and socially at age 64. I rely on Social Security. What is wrong with this story??? (1) Redistribuion of wealth and power from Americans to foreigners for purposes of "globalization" a/k/a communism, (2) outsourcing employment, (3) increased domestic competition, and (4) failure to predict, calculate and estimate negative consequences from 100% vestiture in higher education. This poverty stricken story can and must be rewritten with a variation on its tragic theme. Join me in a national support group.

[Linda Setlech]

I, Linda Setlech, propose a National Support Group for Student Loan Defaulters, NSGSLD. My first job after graduating Columbia University in 1977 was in the Mail Room of Caterpillar Tractor Co. I was promoted to secretary several months later. Opportunities for higher positions of serious employment never materialized. After 30 years of under-employment, student loan defaults, and tax arrears, I am isolated economically and socially at age 64. I rely on Social Security. What is wrong with this story??? (1) Redistribuion of wealth and power from Americans to foreigners for purposes of "globalization" a/k/a communism, (2) outsourcing employment, (3) increased domestic competition, and (4) failure to predict, calculate and estimate negative consequences from 100% vestiture in higher education. This poverty stricken story can and must be rewritten with a variation on its tragic theme. Join me in a national support group.

[Linda Setlech]

Who is R?! He, she or it appears to have posted on June 20, 2007, at 02:53 p.m., my original comment of June 24, 2007 at 6:36 a.m., reminds me of my 1982 dispute with MGM, ABC-TV, Leonard Goldberg, Producer, who claimed PAPER DOLLS, my original stage play, was written and produced as a teleplay before I wrote and copyrighted it. Wealth and power are routinely redistributed to deny others equal access to information, ideas, recognition, wealth and power. NEWS FLASH TO "R": Take heed.