Students of Color Face ‘Educational Redlining’ When Trying To Access Credit

Supermajority Education Fund

February 19, 2020

In an effort to expand access to credit for those who are historically financially underserved, financial service companies have started to expand what they look at when evaluating a potential creditor. One such data point is where the potential creditor went to college. In a report released earlier this month, a student borrower advocacy nonprofit organization, the Student Borrower Protection Center (SBPC), found that using this kind of data to evaluate consumers could perpetuate the same systemic problems that kept these borrowers underserved for so long.

The SBPC evaluated the lending practices based on education data at two different financial institutions — Wells Fargo and the fintech (or financial technology) company Upstart. Kat Welbeck, SBPC’s civil rights counsel, told Supermajority News that the Center was interested in this data because, “We really think it’s important to expand access to credit, but want to make sure it’s equitable.” 

The organization ran two case studies using hypothetical borrowers at Upstart and Wells Fargo. In the first case, the study found that Wells Fargo will charge a “hypothetical community college borrower an additional $1,134 on a $10,000 loan” with a 10.87% interest rate compared to a borrower who attended a four-year university or college with an 8.22% interest rate. 

In the second case study, the researchers examined the differences between a hypothetical potential student loan refinancer who had graduated from a four-year university or college. The borrower’s profile varied only in terms of their alma mater: New Mexico State University, New York University, or Howard University. Otherwise, the borrower was a 24-year-old living in New York City, requesting a $30,000 student loan refinancing product via Upstart. They expected to earn $50,000 annually, had been employed by their current employer for five months, had $5,000 in savings, no investment accounts, and no new loans in the past three months.

The study found that if the hypothetical borrower attended Howard University, they were charged “nearly $3,499 more” on a five-year loan with a 21.29% interest rate compared to a New York University graduate. For a hypothetical graduate of New Mexico State University, a Hispanic-Serving Institution, the borrower would be charged “at least $1,724 more” than the NYU graduate with a 19.23% interest rate.

“A borrower who’s paying more because of who they sat next to in school is similar to borrowers who pay higher mortgages because of where they lived,” Welbeck told Supermajority News.

Upstart CEO Dave Girouard told NPR that he disputes the use of “hypothetical” and “contrived applicants” of the service. “Our approach to ensuring that our platform isn’t biased against anybody is by doing testing regularly, at massive scale,” Girouard told NPR.

On February 13, Sens. Cory Booker, Sherrod Brown, Kamala Harris, Robert Menendez, and Elizabeth Warren issued a letter to Upstart and service providers demanding answers. 

Read the full report from the Student Borrower Protection Center here.