ALBANY, N.Y.—Some student loan providers have been setting rates based on the schools borrowers attend, a practice New York Attorney General Andrew Cuomo likens to “redlining” in the home mortgage market.
Cuomo 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, according to a letter he sent to the chairmen of two congressional committees.
“In other words, 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 credit risk based on a student’s ‘school neighborhood,’ “ Cuomo told Sen. Christopher Dodd, D-Conn., and Rep. George Miller, D-Calif.
One “large lender” off ers students at schools that have default rates up to 3 percent the best interest rates, from 8 percent to 9.25 percent, while institutions with default rates between 5 percent and 10 percent are hit with interest rates from 11 percent to 14 percent, Cuomo said.
So students with “excellent” personal credit histories are quoted an 8 percent rate if they’re going to Duke University and 11 percent if they attend the University of Phoenix, according to one of Cuomo’s examples. If their credit is less than “stellar,” Duke students get a rate no worse than 9.25 percent, while Phoenix students would see rates as high as 14 percent. Cuomo said the “disparities remain even if parents co-sign the loan.”
While annual tuition and expenses at Duke top $46,000, Phoenix, which heavily promotes its online courses, gener-
ally costs “much less than” $20,000.
Cuomo did not identify the lender in his example, but a spokesman for his offi ce said later it is Nelnet, based in Lincoln, Neb.