Redlining Universities: Sub-Prime College Loans

Today's New York Times looks at a disturbing practice within the student loan industry: setting loan rates for students based upon the default rate at the college they attend. Unbelievably, missing out on your first choice of University, or choosing to go to a "second-tier" school might make your education significantly more expensive.

Andrew M. Cuomo, the New York Attorney General, is leading the charge on this, and is exposing a shady College loan industry that really needs to be radically overhauled:

Andrew M. Cuomo, attorney general of New York, said yesterday in a letter to Congress that his investigation of the student loan business had found “a significant number of lenders” that determine eligibility for private loans and set interest rates based in large part on the colleges the students attend rather than the borrowers’ credit-worthiness.

“Just as lenders in the mortgage industry once made judgments about credit lending in entire neighborhoods as a whole,” Mr. Cuomo wrote, referring to a practice known as redlining, “so too are lenders making generalized judgments about student and parent risk based on a student’s school neighborhood.” He did not name any lenders that engaged in these practices.
...
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.

The article doesn't state which schools are being "red-lined", but I'd make a hefty wager that they are the institutions that have the students with the greatest financial needs. This is absolutely outrageous, and I really hope that our Democratic legislators do something about this asap. Given Chris Dodd's transparency in lending bill, he seems like the most likely person to push to make this practice illegal. I also am very encouraged by the fact that Cuomo seems to have picked up the "anti-corporate corruption" baton from Elliot Spitzer, the NY Attorney General's office has really become one of the most important watch guards around. Hopefully Cuomo and Dodd can bring a little sanity back to the student loan market.