Student Loans and Redlining
Loans Based on the School Attended Draw Attorney General's Ire
Jun 20, 2007
Recently a practice of setting college student loan rates based on the school they attend has come under scrutiny. A recently written article by Times Argus reviews a recent study by the office of New York Attorney General Andrew Cuomo, which found that many banks offering student loans give better terms to students attending more prestigious colleges.
Student Loans and Redlining?
The study goes on to suggest that this practice is tantamount to the old and now outlawed practice of redlining. Redlining essentially created a system where the neighborhood a borrower lived in had a lot of bearing on the interest rate he/she was able to obtain. This created a system where the poor and the middle class, who could least afford to pay higher rates, received the worst loan terms, while the wealthy received the best. Additionally, this practice was used to discriminate on a racial and ethnic basis because neighborhoods with heavy minority populations always fell into the worst loan categories.
While the practice of basing loan terms on the school a borrower attends seems unfair, it is clearly not as bad as redlining. From the bank’s perspective, students who attend better schools are more likely to graduate and more likely to get better jobs that will enable them to repay their loan. Rather than making a value judgment on the school or students, they say they are looking objectively at facts and ability to pay.
Furthermore, in the wake of legislation that will limit their ability to access a student's personal finance records, banks will need some way to assess a borrowers ability to pay. While this legislation will surely result in higher rates for all student loans, banks are looking for some way to protect themselves from students with poor credit and students who drop out.
Effects on Middle Class and Low Income Students
The attorney general must look at the social effects of this policy, however. This practice will inevitably lead to students of lower income and higher need getting more expensive loans. Additionally, students who are graduating with less ability to pay for their loans will have to end up paying more, while students better off will pay less. Interestingly enough, this situation reflects the current situation facing many of the middle class and poor population of the US (See Payday Loans article).
Students attending post-secondary institutions need to shop around for student loans. With these practices and other student loan scandals, it is more important than ever to be active in the student loan process. Shop around for the lowest rates and the best terms. Make sure these terms are available for the full length of your anticipated stay at an institution. Look for additional perks like loan deferment and alternative payment options. The best way to avoid falling into any of these traps is to be informed.
