A study determined graduates of historically Black colleges and universities pay more for personal loans compared to their counterparts from largely white educational institutions.
Student Borrower Protection Center, a nonprofit watchdog group, published its findings on Wednesday. The organization posed as a 24-year-old man making $50,000 per year as a financial analyst in New York. The hypothetical applicant attempted to refinance a $30,000 loan from online lender Upstart. When he told the company he graduated from Howard University, he was quoted a rate of $3,500 more in interest than he would have been as an NYU alum. The hypothetical Howard graduate also saw quotes of $729 more in loan origination fees and his annual percentage rate (APR) was five percentage points higher than the NYU alum’s rate.
“The only difference was where he went to school,” Kat Welbeck, civil rights counsel to the Student Borrower Protection Center, told NPR.
“There’s no other explanation that we can really come to terms with other than the fact that where this borrower went to school mattered in terms of how Upstart measured their creditworthiness.”
Wells Fargo was also found to have discriminatory practices. The bank charged an ostensible community college student $1,134 more for a private student loan than a hypothetical student attending a four-year school. The community college student got a shorter loan term, but the interest rate is almost three percent higher. Research conducted by The College Board shows a plurality of Black undergraduates attended two-year institutions in 2014.
“Similar to banks’ history of redlining in the housing sector, the use of education criteria in credit underwriting could result in borrowers of color receiving more expensive loans simply because of lenders’ assumptions and prejudices regarding those who sit next to them in the classroom,” Welbeck said to The Washington Post. “What we found raises serious alarms and warrants immediate attention by lawmakers.”
Upstart chief executive and co-founder Dave Girouard said the data was “misguided.”
“We’ve tested for bias over millions of applicants, not two or three, which can be very anecdotal,” Girouard said of the Student Borrower Protection Center report. “A system like ours uses 1,500 data points to assess creditworthiness. Education represents a few of them. [The report] was contrived and not statistically valid.”
Wells Fargo also disputed the report’s findings.
“Wells Fargo has a long-standing commitment to providing access to financing for students attending community colleges,” said spokeswoman Vickee Adams. “We follow responsible lending practices that take into account expected performance outcomes and are confident that our loan programs conform with fair lending expectations and principles.”