Student Loan Furor: Do Poor Kids Pay More?

Some College Loan Providers May Be 'Redlining' Student Borrowers

June 17, 2007 —

There's a new front in the war on shady practices in the college loan industry.

State and congressional investigators are looking into claims that top lenders may be charging some students higher interest rates after inappropriately considering factors such as the credit rate of other students at the borrower's school.

That practice may hurt the poorest students the most and leave them with decades of debt.

Nicole Gibson is one recent college graduate who faces a nearly unmanageable burden.

"I feel like I'm in a trap door and I can't get out," she says.

Two years after getting her diploma from the Rochester Institute of Technology in upstate New York, Gibson earns $1,400 dollars a month as a graphic designer. Her student loan payment is $1,200 dollars a month. That has forced her to make tough choices.

"I've got to sacrifice food on my table," she says. "And I don't see that as a fair option."

The student loan process can be tricky and intimidating for college students. Critics say it can also be unfair.

One of those critics is New York State Attorney General Andrew Cuomo, whose investigations prompted a national examination of college lending practices. He's concerned about the impact of unfair debt on students.

"They're being victimized when they go to those private lenders," Cuomo says. "And that's wrong."

In the past few months Cuomo's investigations have turned up deceptive and possibly illegal business practices in the student loan industry, including undisclosed relationships between universities and lenders. And now, there's a new concern.

"What we're finding," Cuomo says, "is that many lenders actually use the schools that you are attending as one of the factors in the equation. And this is startling to me, frankly."

Cuomo says the only factor lenders should consider when deciding who gets a loan and what interest they'll pay is the student's credit rating. He says it's not acceptable for lenders to also factor in the credit history of other students at the school.

Cuomo compares it to an old practice called "redlining," where mortgage lenders would mark a red line on a map around areas where they would not invest — most frequently, minority, inner city neighborhoods.

"We determined a long time ago in the mortgage industry that redlining was improper," Cuomo explains. "You can't judge against the person just because of the community that they choose to live in. Why should you judge a person because of the community in the school that they choose to attend?"

That practice could have the same outcome. Students who attend the lowest performing schools — often the poorest students — can wind up paying the highest rates.

But the lenders say it's not fair to compare mortgage loans, where the house is collateral, to private student loans.

"Remember, these loans are not guaranteed by the government," says Harrison Wadsworth, special counsel to the Consumer Banker's Association. "The lender is completely on the hook for them, so they have to try to judge what the risk is on the loan."

While Gibson has no idea what criteria were used to determine her interest rate, she does know 9 percent is nearly impossible for her to pay. "It keeps me up a lot at night. It's just taken a lot of my life away from me."

One thing Gibson has calculated: at this rate, she will be paying up for the next thirty years.

ABC News' Gigi Stone contributed to this report.