The Thin Red Line

article | June 12, 2007

"Redlining" is a term coined by community activists in 1960s Chicago. It refers to mortgage brokers excluding predominantly black inner-city neighborhoods from getting loans for housing, and by extension, to any discrimination achieved by drawing arbitrary lines.

Last week, New York State Attorney General Andrew Cuomo sparked a mini-furor when he accused the student-loan industry -- while testifying at a hearing before the Senate Banking Committee on private loans -- of engaging in redlining. If students historically underrepresented in higher education are being offered more expensive loans, this clearly strikes directly at the heart of college access. Ironically, statements made by Sallie Mae's own lobbyists just a few weeks ago may add fuel to the fire.

Cuomo said that his national investigation, which has already turned up evidence of improper relationships between lenders and financial aid officers, is extending further into underwriting criteriathe way student lenders decide on what terms and fees to offer loans.

"What criteria are they using in the underwriting of these loans?" Mr. Cuomo asked. "Parental income? Student income? Student creditworthiness? How about the school you attend? How is that weighted?" He added, "There are also civil rights and legal ramifications to what criteria they use, and that's what we're looking at."

Civil rights issues would be a concern -- as Rep. George Miller (D-CA), chairman of the House Committee on Eduation and Labor, said in a statement last week -- if "lenders offer less favorable terms to students at predominately minority colleges, such as Historically Black Colleges and Universities, than they offer to students at other four-year public and private colleges."

On Thursday, Representative Miller, Attorney General Cuomo, and Sen. Chris Dodd (D-CT), chairman of the Senate Banking Committee, each sent letters to a host of major lenders asking for details on their underwriting criteria, including Bank of America, Citibank, JPMorgan Chase, Nelnet, the Pennsylvania Higher Education Assistance Agency (Pheaa), and Sallie Mae.

Unfortunately, perhaps, for lenders seeking to evade this line of inquiry, the impression that student lenders treat HBCUs differently is reinforced by Sallie Mae's own lobbying efforts. An article by Bethany McLean in Fortune magazine in late May entitled "Using Racial Politics to Save Sallie Mae," referred to a document circulating around Washington, purportedly by Sallie Mae lobbyist Mark Schuermann, that argued that proposed subsidy cuts made as part of the budget reconciliation process "will have an especially negative impact on predominantly black colleges and universities".

The document continues that any cuts to default insurance -- from the current whopping 98 percent to 85 percent, as Sen. Edward M. Kennedy (D-MA) has reportedly considered proposing -- are a "particularly alarming threat" to HBCUs with their higher default rates. [The editor of Higher Ed Watch worked for Senator Kennedy, who is chairman of the Senate Committee Health, Education, Labor, and Pensions.]

Sure enough, Sen. Mary Landrieu (D-LA) and Marvalene Hughes, president of the historically black Dillard University in New Orleans, wrote letters opposing proposed cuts to lender subsidies using many of Sallie Mae's arguments. (Their support might have been reinforced by John Breaux, the former Louisiana senator who counts Sallie Mae as a client at his lobbying firm Patton Boggs.)

Tom Joyce, a spokesman for Sallie Mae, told NPR that the risk for lenders is greater at schools with higher default rates. And if federal payments to lenders are cut, he said, "Fewer lenders will be willing to make loans at campuses that have a disproportionate number of low- or middle-class families."

This jibes with what Sallie Mae senior vice president Barry Goulding told the Senate Banking Committee on Wednesday: they do consider an institution's default rate when setting rates for individual students.

Whether this practice violates existing law, or rises to the level of a civil rights violation, remains to be seen. It should be mentioned that there is a legitimate underwriting issue here. Reports in the 1990s found HBCUs to have consistently higher student loan default rates -- sometimes more than double the average for all colleges.

However, while there might be public support for increasing the accountability for defaults on the college level, it's hard to stomach the thought of a system where the students who most need help getting to and getting through college are offered the most expensive loans and the least forgiving terms. Why does the federal government subsidize the student loan program, if not to compensate lenders for the risk they take in giving unproven young people a chance to succeed?


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