The Legal Examiner Mark The Legal Examiner Mark The Legal Examiner Mark search twitter facebook feed linkedin instagram google-plus avvo phone envelope checkmark mail-reply spinner error close
Skip to main content

As college-bound minorities take a step toward self-improvement, lenders could be sending them two steps back.

Lenders rely on complex, and at times secret, methods of determining what rate to charge a borrower for student loans. Some lenders, including the credit giant Sallie Mae, look at the borrower’s school to find out how many of its students have defaulted on their loans—and then factor that into the equation determining a specific borrower’s interest rate. The result may be a significant increase in the interest rate and fees on a student loan based partly on what school the student chooses to attend.

One problem with the use of so-called “cohort default rates,” as the U.S. Department of Education calls the statistics it requires schools to keep, is that some racial minorities default on their loans at disproportionately high rates. One analysis of federal data found that black students “had an overall default rate that was over five times higher than white students and over nine times higher than Asian students.” Hispanic students defaulted at twice the rate of white students and at quadruple the rate of Asian students.

The result could be a vicious cycle. Schools with high cohort default rates tend to serve disproportionately large minority and low-income populations. Students who attend those schools, in turn, may be charged higher interest rates. The practice, highlighted in 2007 by New York Attorney General Andrew Cuomo, prompted Sens. Patty Murray, D-Wash., and Christopher Dodd, D-Conn., to introduce legislation last summer that would have barred such a practice. It didn’t pass, and there is no sign that the credit industry has renounced the method. Congress did, however, order a study of the effect that such practices have on the cost of private student loans.

Practices that have a disparate impact on minorities may violate the Equal Credit Opportunity Act, a federal law designed to protect minorities from lending practices that treat minority groups unequally in credit markets.

The problem may be especially acute at schools such as community colleges that have elected not to participate in federal loan programs. Lower income and minority students are more likely to be among the more than 1 million students attending such schools. Student loans are accordingly much less accessible by racial minorities than by whites. Minorities must rely more heavily on expensive private loans and are at the mercy of a lender’s fuzzy math.

The stakes for minorities trying to navigate the already tumultuous waters of today’s recession are only going up. Defaults among low-income and minority students may rise as a growing number of new college students will be from their ranks because of demographic shifts and their efforts to boost their competitiveness in tight job markets.

The question is how long minorities will be charged more for their education simply because the schools they choose to attend serve more people who look like they do.

*This blog was written by our summer law clerk Cory Reiss, a rising 3L at Wake Forest University School of Law*


  1. Gravatar for Cedrick Andrews
    Cedrick Andrews

    It is important for students and families to know that federal loans are available to students at most colleges and have the same interest rates and terms for ALL borrowers.

    Private loans, which are typically riskier and more expensive than federal loans, should only be used as a last source of funds after considering federal, state, and institutional aid.

  2. Gravatar for Jean Martin

    Thank you for your comment. You bring up a great point that students need to inquire as to all sources of funds available to them. If the financial aid office only presents the option of private student loans to you, ask questions about the availability of federal loans. Don't believe that you have only one option or one source available to you. Before you enroll, do your homework on this subject.

  3. Gravatar for Anonymous

    Anybody, including non-minorities, are subject to the same rules if they go to the same low scored schools. You mentioned the root of the problem being that a larger percentage of minorities fail to repay their loans as promised. Isn't this an area that might need to be worked on by the minorities themselves instead of assuming there is some type of discrimination going on - you know, personal responsibility? Somehow the feeling gets across in your article that asians and whites are getting some type of advantage because they have less of a default rate and pay their loans more often than others. Actually, isn't that a good thing? Shouldn't we be using them as an good example instead of somehow insinuating that they're getting special consideration, which is not the case at all? You also failed to mention the disproportionate amount of scholarships that are available to minorities if you want to talk about disparate impact. If you are a bright, non-athletic, non-minority, the chances of you getting any type of scholarship is next to zero. If you are a minority, regardless of your grades, or anything else, you have many scholarships available to you. I spent 2 solid years looking for every scholarship that existed and this is just a fact - many of the scholarships available are for minorities. If minorities are relying more heavily on private student loans, it is their fault. There are plenty of scholarships available to minorities. So, if one looks closer, you can see that perhaps the only type of discrimination going on is as it relates to non-minorities. The rest is just a matter of personal responsibility, both on the student's part and the school's part. Don't get me wrong, I know the private student lenders are.......horrible. I went to a low scored school and had to take out large private loans that I struggle to pay just get tired of the same old story as it relates to minorities. Everything is somehow being done to them. I just don't buy it and I think less and less people are.

  4. Gravatar for Facebook User

    I hope the Federal Government decides that if primary-schools are to be judged on their effectiveness to provide an education through test scores, then secondary schools, colleges and universities will be held to similar standards. If a school is providing a quality-needed-skill/training education then the students should be able to find employment. Employment itself isnt enough, the employment would have to be something better than they would have been able to get before hand. The employment should be able to pay for the loans taken to pay the school. If the school is training for jobs that no longer exist or are considered redundant, then perhaps they shouldn't be eligible for federal funding.

    Default rates should be made public to prospective students. This is a pretty good indicator of whether or not a school is a performer or not. I recognize that it is not the only metrics that an institution should be judged by. Employment information post-education data should be published as well. There needs be a connection made between how many people get viable work and are able to make their loan with the schools they attended.

    Schools who are changing their name and corporate structure should be required to go through the rigors of becoming newly qualified for federal funding, schools should not be allowed to dissolve their corporate structure just to absolve themselves of prior actions while just rolling over their eligibility to receive federal funds.

    I agree with a great deal of anonymous comment, why he chooses to be anonymous is his business.

    Restore consumer debt protection to student debtors. Remove the shackles of bondage from millions of hard-working Americans. Stimulate the economy pay off and eliminate student debt. Extend income based repayment to all forms of student debt. Require schools to post their post-graduate employment numbers and default rates on any potential-student marketing materials. Require schools disclose any relationships with lenders in writing on the promissory notes. Require originating lending agreements to be part of the promissory note.

    Forgive and forget student.


Comments are closed.

Of Interest