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.

Anya Kamenetz, author of Generation Debt, has more on the college loan scandal:

So as part of Cuomo's still-ongoing probe into lenders' relationships with financial aid offices, 6 schools have agreed to reimburse students $3.27 million, Citibank is donating $2 million to a financial-industry education fund, while 29 New York State schools have simply signed codes of conduct without admitting wrongdoing.
To address some of the questions raised in the comments, I do see the quick payoff as an admission. If not overtly confessing guilt (and I agree that most lenders probably didn't break the law, as now written), it's an acknowledgment that both schools and lenders would rather that students and taxpayers hear as little about lender practices as possible. The money, frankly, is peanuts. This is an $85 billion industry which once sued the Secretary of Education. If the lenders wanted to, they could easily create a legal fund to defend themselves and every single one of the 100 schools involved.
Taking as a given the power of market forces to deliver the best prices to consumers in most circumstances, I think the incentives in the current system are messed up. Currently your financial aid officer is like a financial adviser who works on commission. He's going to try to sell you the financial products that give him the best commission, as well as making you happy.

And Fred's got more on New York AG Andrew Cuomo's investigation in the comments to my last post.

On a related note, I've been meaning to write about this, but seem to have lost it in the shuffle. New York Magazine is running a piece about a wonderful feature of our new economy:being young and lacking health insurance.

Young Democrats consistently list health care and education costs as two of their highest priorities when deciding how to vote, and health care is also listed (with Iraq) as an issue that Congress should act on in the next two years. Candidates need to be hitting these issues hard when addressing young audiences - with solid proposals, not just platitudes - and questions about both of these issues should be put to the candidates by reporters on the trail and in the debates. We need to know where they stand.

The New York Times is running an interesting editorial about potential illegal actions on behalf of colleges and loan companies. Def. worth a read. The costs of college should be a huge issue for candidates looking to connect with young voters.

By rights, a student who calls a college financial aid office should reach one of the college’s aid officers. But that is often not the case, as a front-page article by Jonathan Glater of The Times pointed out last week. Many colleges route student calls to representatives of loan companies who pretend to work for the college but who actually have a vested interest in selling the costliest possible loans.

Colleges portray this as a harmless, cost-saving convenience that allows them to serve students without hiring more staff members. But it is part of a troubling — and possibly illegal — process that finds colleges steering students to “preferred lenders” in exchange for kickbacks based on volume.