Cuomo probes practices of student-loan providers

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Some lenders rank colleges on their students' loan default rates.

ALBANY, N.Y. (AP) — 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 Monday 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" offers 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.

An example

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, in 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 tops $46,000, Phoenix — which heavily promotes its online courses — generally costs "much less than" $20,000.

Cuomo did not identify the lender in his example, but a spokesman for his office said later it is Nelnet, based in Lincoln, Neb.

Nelnet spokesman Ben Kiser said the company offers private loan programs to institutions based on many factors, including the default rate.

"We believe it's an appropriate market-based approach to provide students with a competitive interest rate," Kiser said. "It is one of multiple factors that we use when determining a borrower's eligibility and their ability to pay back their loans."

Wednesday, June 20, 2007