Student Loan News: Lenders Accused of ‘Educational Redlining’

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Welcome to Student Loan News, a weekly summary of developments and events affecting college debt in the U.S. Join us each Friday for a look at goings-on that could impact your own student loan situation.

Student Borrower Protection Center warns of discriminatory practices

Student loan borrowers could be quoted interest rates and costs based partly on their school choice, according to a report published this week by the Student Borrower Protection Center (SBPC).

The study said that some lenders are charging more for their financial products to students who attend certain schools, such as HBCUs (Historically Black Colleges or Universities) or community colleges.

The SBPC, a nonprofit led by the former student loan ombudsman for Consumer Financial Protection Bureau, cited two case studies in its findings:

  1. Borrowing a $10,000 student loan for college: One lender would charge $1,134 more for a student attending a two-year school, compared to a peer attending a four-year program.
  2. Refinancing a student loan after graduating: One lender would charge a graduate of Howard University (an HBCU) $3,499 more than a peer from New York University, and $1,724 more for a graduate of New Mexico State University (named in the study as a Hispanic-Serving Institution) than it would for an New York University grad.

“The use of education data in underwriting raises significant fair lending concerns, and its widespread adoption could reinforce systemic barriers to financial inclusion for Black and Latinx Consumers,” the report said. “Where the effects of these practices have negative economic consequences for borrowers from historically marginalized communities, these practices are known as ‘Educational Redlining.’”

The SBPC said in the report that private loan companies should be transparent about their use of education data, while also calling for greater government regulation. For their part, lenders named in the report challenged its validity when speaking with Yahoo Finance and The Washington Post.

How it affects YOU: When borrowers apply for student loans, they’re made aware that factors like their credit score and debt-to-income ratio will determine their interest rates. We’ve also reported on how where you live could affect your rate on certain financial products.

As you shop around for student loans or refinancing options, consider vetting lenders. Ask each one about its underwriting criteria. If a bank or online company penalizes you because of where you are going or went to school, you might consider signing on with a competitor.

Also in the news…

  • Colleges are beginning to question whether they should weigh a student’s standardized test scores when awarding merit-based financial aid. The concern, as The Wall Street Journal reported on Tuesday, is that exams like the SAT and ACT are biased toward certain students, with “income inequality influencing test results.”
  • Presidential candidate and Sen. Elizabeth Warren (D-Mass.) wrote a letter to Betsy DeVos last week, urging the Education Secretary to collect Navient’s $22.3 million debt. Warren said the servicer overcharged the government by that amount in 2009.
  • DeVos also faced the threat of a Congressional subpoena, according to Politico’s reporting on Tuesday. House Oversight Chairwoman Carolyn Maloney (D-N.Y.) said that DeVos failed to testify before her committee in January as requested.
  • Wisconsin Gov. Tony Evers signed an executive order last week to create a student debt task force, Wisconsin Public Radio reported. About 64% of the state’s college graduates leave school with an average $31,705 in education loans, according to The Institute for College Access & Success.
  • LendKey reported in a new survey late last week that just 16% of borrowers shop around — and therefore compare rates — before choosing a private student loan.
  • Also of concern: About 55% of federal loan borrowers don’t know the interest rates of their debt, according to the Bipartisan Policy Center. The think tank’s finding, published in its “A New Course for Higher Education” report, squared with Student Loan Hero’s recent student loan misconceptions survey.
  • Fortunately, financial education is on the rise. Twenty-one states require high school students to take a personal finance class (up from 17 in 2008), and 25 states require an economics course (up from 22), according to the Council for Economic Education’s newly-posted Survey of the States.
  • The benefits of more accessible financial education could already be here: Millennials purportedly burdened by student loan debt are saving for retirement at a faster rate than Generation X did at the same ages, according to Federal Reserve data quoted in The New York Times.

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