Another Student Loan Scandal? Or Not?

In a fresh blow to the beleaguered student loan industry, New York Attorney General Andrew Cuomo has charged some companies in the fast-growing private student loan market of charging students higher interest rates because they attend colleges where students are more likely to default on their loans. In uncovering yet another scandalous lender practice, Cuomo...

Hey, wait a minute.

Isn't that what lenders are supposed to do, price their loans based on risk? InsiderHigherEd reports,

Taking a specific college, or type of college, into account as a factor in determining a credit score could theoretically mean that loans to students at, say, Harvard could be seen by lenders as less risky and therefore more desirable than those made to students at community colleges, for-profit institutions and historically black colleges.

It's not a matter of lenders "seeing" anything, Harvard students are less risky and more desirable than other students, obviously so. Yet Senator Dodd has responded by introducing legislation to "Prohibit lenders from using any data in their underwriting that may have disparate impact on the loan products, terms, or conditions available to student borrowers based on race, age, and other personal factors, or the institution they attend."

So if you're a poor student with an IQ of 180 who gets into Harvard and you need a private loan to make ends meet, you have to pay above-market interest rates in order to subsidize the rates other, riskier students? Is that fair? Are we going to make that student pay higher rates on her Visa bill too, to avoid "disparate impact" in that credit market?

Clearly, it's important to give people a way to borrow money for college without having to pay usurious interest rates that will limit their choices later in life. But that's why we already have a massive, federally subsidized student loan program, where everyone pays the same interest rate regardless of race, age, personal factors, or the institution they attend. Cuomo is going after the private loan market, the whole point of which is to offer credit as credit is due. As the article notes, tying loans to institutional default rates will disadvantage the credit-worthiest students at high-default institutions, but in the long run a private market should be expected to sort that out, because it's in the lender's financial interest to do so.

The student loan industry has been subject to plenty of harsh, deserved criticism of late. But this seems like crossing the line into political opportunism.