The Student Borrower Protection Center, or SBPC, released a report Feb. 5 showing certain lenders may be charging higher interest rates on student loans for students at historically Black colleges and universities, or HBCUs, or Hispanic Serving Institutions.
The SBPC conducted the study to investigate whether equal economic and educational opportunities are accessible to marginalized communities, according to Moira Vahey, the director of communications and outreach at the SBPC. The report said students who attended HBCUs may pay more than other students when refinancing loans through companies like Upstart.
A loan applicant can expect to pay about $3,500 more for a $30,000 five-year loan because they attended Howard University, a historically Black university, according to the report. The study also showed that an applicant from New Mexico State University at Las Cruces, which has a large population of “Latinx/Hispanic” students, can expect to pay more in interest rates.
According to a letter written to Upstart by U.S. senators Kamala Harris, D-CA, Sherrod Brown, D-OH, Elizabeth Warren, D-MA, Bob Menendez, D-NJ and Cory Booker, D-NJ, the company’s use of educational data could result in discrimination against underrepresented students.
“The Bureau found that the use of (cohort default rate) to determine loan eligibility, underwriting, and pricing may have a disparate impact on minority students by reducing their access to credit and requiring those minority students . . . to pay higher rates than are otherwise available to similarly creditworthy non-Hispanic White students at schools with lower CDRs,” the senators said in the letter.
The letter also said the Consumer Financial Protection Bureau, or CFPB, the Federal Deposit Insurance Corporation and the New York attorney general found that Upstart’s focus on non-individualized factors raises fair lending concerns.
In response to the report, Upstart defended its loaning techniques, adding that the CFPB checks the company’s testing of loan applicants. The CFPB found Upstart recorded and informed the CFPB that it accepts 27% more applicants than the traditional model and cuts interest rates on loans by 16% for approved applicants.
“These large-scale tests consistently show that the addition of alternative data such as education, occupation, or employment reduces the bias in lending rather than increasing it,” Upstart co-founder Paul Gu said in a blog post.
Vahey and Rebecca Maurer, a student loan lawyer and the owner and founder of Maurer Law LLC, said they appreciate senators raising visibility for this issue and would like to see Upstart questioned. According to Vahey, their questions would ideally answer who gets access to credits and for how much in order to calculate possible disparities impacting marginalized communities.
Vahey added that the SBPC hopes that its report will inspire other lending companies to not follow the model set forth by Upstart in calculating creditworthiness on the basis of educational data.