Some Lenders Are Setting Rates College by College

Andrew M. Cuomo, attorney general of New York, said yesterday in a letter to Congress that his investigation of the student loan business had found "a significant number of lenders" that determine eligibility for private loans and set interest rates based in large part on the colleges the students attend rather than the borrowers' credit-worthiness.

"Just as lenders in the mortgage industry once made judgments about credit lending in entire neighborhoods as a whole," Mr. Cuomo wrote, referring to a practice known as redlining, "so too are lenders making generalized judgments about student and parent risk based on a student's school neighborhood." He did not name any lenders that engaged in these practices.

He sent the letter to Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate banking committee, and Representative George Miller, Democrat of California and chairman of the House Committee on Education and Labor. Both committees have been studying the student loan business.

The letter provided an illustration of the practice of a large lender that divided colleges into groups based on how their alumni repaid federally subsidized loans, the standard measurement of default.

Students at colleges with default rates of 3 percent or less, the letter said, were eligible for private loan interest rates of 8 percent to 9.25 percent. At schools with default rates of 3 percent to 5 percent, students could obtain loans at interest rates of 9 percent to 12 percent. And at colleges with default rates of 5 percent to 10 percent, students paid interest rates of 11 percent to 14 percent.

Rates on private loans, which are usually more costly than those on federally subsidized loans, varied within those ranges depending on the student's credit record.

The result, Mr. Cuomo said, was that a student with a good financial record at Duke University paid 8 percent for a private loan, for example, while a student with the same credit record who attended the University of Phoenix paid 11 percent.

"Simply because of the school the student has chosen to attend, he is paying a 3 percent higher interest rate on what are often massive student loans," Mr. Cuomo wrote.

Several bankers said that it was not unreasonable to consider whether students would be able to repay loans based on factors like graduation rates at the colleges they attended and what they studied.

Taige P. Thornton, president of NorthStar Education Finance Inc., a nonprofit lender in St. Paul, said: "It's really an issue of being prudent and being able to secure debt. Words like good and bad, right and wrong, really don't come into this." In assessing credit risk, NorthStar considered several factors, "including school, discipline and historical data," he said.

Representative Miller and Senator Dodd said that they were concerned about the possible unfairness of a college-by-college approach.

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