Getting into Harvard may mean cheaper loans than going to Howard

(Bloomberg) –Borrowers expect their income or credit history to send their loan costs up or down. Few, however, expect lenders to judge them based on what college they went to.

But that’s exactly what some of the nation’s largest banks are doing, a group of former federal regulators said. Companies including Wells Fargo & Co. are charging consumers more to borrow money if they attended less prestigious colleges, a form of educational discrimination that may violate credit laws and deepen inequality, according to a new study.

That means Harvard University students, already flush with opportunity, stand to gain an additional edge over their peers at nearby Bunker Hill Community College when taking out loans.

The Student Borrower Protection Center, a Washington-based nonprofit, found that Wells Fargo, one of the largest U.S. lenders, offers significantly cheaper loans to borrowers attending four-year colleges than to those at community colleges.

And Upstart Network Inc., an online lending platform, charges a graduate from historically black Howard University almost $3,500 more to borrow $30,000 over five years compared with a similar New York University graduate.

“Despite assurances by these lenders that their practices lift up consumers from marginalized communities, our analysis shows that educational redlining can further drive disparities and inequality,” Seth Frotman, a former student-loan official at the Consumer Financial Protection Bureau who’s now executive director of the nonprofit, said in a statement.

Redlining refers to the now-illegal practice of refusing loans based on where borrowers live.

Case studies

The group chose Wells Fargo and Upstart as case studies to demonstrate broader issues across the industry. Both lenders disputed the Student Borrower Protection Center’s analysis.

“We follow responsible lending practices that take into account expected performance outcomes and are confident that our loan programs conform with fair lending expectations and principles,” Wells Fargo representative Vickee Adams said.

Upstart co-founder Paul Gu said his company works closely with the federal consumer bureau, and that Upstart’s statistics show that those who attended Howard University and borrow through his firm are more likely to get credit and at cheaper terms.

The findings come as lenders and their regulators in Washington embrace so-called alternative data as a way to cut borrowing costs and increase access to credit for historically under-served households. By using data such as a borrower’s alma mater, the argument goes, lenders can better price household loans than if they relied on traditional factors such as credit scores and personal income.

Data abuse

Consumer groups, meanwhile, warn that lenders could abuse the data to overcharge some households. Those fears have been heightened by lenders’ use of algorithms to wade through reams of data to make instant credit decisions, particularly after users of Goldman Sachs Group Inc.’s credit card for Apple Inc. complained late last year that women were given smaller credit lines than their husbands. The New York State Department of Financial Services subsequently opened an investigation.

Disparities in credit scores and incomes across races have led to a “really awful system” in which minority borrowers often pay more than they should, Gu said. His firm regularly reports loan application data to the federal consumer bureau under an agreement that allows Upstart to use borrowers’ educational backgrounds in underwriting decisions without fear of a regulatory crackdown, as long as the company continues to meet fair-lending standards.

“If you want to make it better, you need more data, and you need different kinds of data to help different kinds of people,” Gu said.

Lending disparities

Using educational data could help level the playing field, he said. Howard students, for example, are 46% more likely to get a loan under Upstart’s underwriting model than they would from a traditional lender, and they enjoy interest rates that are 18% lower, Gu said.

But disparities remain. White Americans are more likely to have college degrees than blacks and Hispanics, Census Bureau data show, while college dropouts are more likely to fall behind on their student loans than borrowers with degrees, according to U.S. Department of Education figures.

Wells Fargo, for instance, quotes loan interest rates for a hypothetical freshman studying engineering at the Borough of Manhattan Community College that are nearly double those offered to a similar student studying the same subject at the City College of New York nearby, a tool on the lender’s website shows. Both are part of the City University of New York system. Community-college students often complete their four-year degrees at other institutions.

In 2007, Andrew Cuomo, then New York’s attorney general, warned lenders against using borrowers’ educational backgrounds when making loan decisions. And in 2014, the Federal Deposit Insurance Corp. told Sallie Mae that it couldn’t price loans to students using their college’s loan-default rates without violating the Equal Credit Opportunity Act.

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