Lenders base rates on school records

By Ashley Cook
September 13, 2007

Large lenders are setting interest rates based on the colleges the students attend, rather than the borrower’s credit worthiness. The Senate Banking Committee and The House Committee of Education and Labor is further studying the student loan business.

According to The Associated Press, Andrew M. Cuomo, attorney general of New York, said his office’s investigation of the $85 billion industry found that a “significant number” of lenders rank colleges and universities on the loan default rates of their students and set interest rates on private loans higher for schools with poor records.

“This is also similar to the way health insurance companies set rates,” Eric Malm, asst. professor, business administration, said. “Companies with employees that have lots of claims end up paying more for health insurance.”

Large lenders practice dividing colleges into groups based on how their alumni repaid federally subsidized loans. According to the NY Times, a letter written by Cuomo said students at colleges with default rates of 3 percent or less, were eligible for private loan interest rates of 8 percent to 9.25 percent. In his letter, he stated that schools with default rates of 3 percent to 5 percent, could obtain loans at interest rates of 9 percent to 12 percent. Colleges with default rates of 5 percent to 10 percent, students paid interest rates of 11 percent to 14 percent.

“The question is whether or not the use of colleges as a class of individual is fair or discriminatory,” John Heiberger, associate professor, business said. “For example, it is now illegal to charge males more for auto insurance than women.”

?According to the NY Times, rates on private loans varied within those ranges depending on the student’s credit record.

“It seems reasonable that the lender would look at graduation rates in a certain discipline, and more importantly the percentage of those graduates that find employment in their field,” Mary Harris, Dept. Chair, of Business Admin. said. “This factor will help assess the default risk for the loan.”

According to the Associated Press, noting that not all lenders use the ranking system, Cuomo said consumers should be given more information so they can shop for providers who don’t consider a school’s default rates.

“It sounds to me like the student loan companies are trying to make similar generalization by correlating risk of default to the college a person attends, without taking into account each individual student’s credit worthiness,” John Brown, Assoc. Professor of Mathematics, said. “Assessing individual risk of default might be hard to do with students who likely do not have a credit history.”

Ashley Cook

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