Educational Redlining

Abstract

Alternative data, or information such as cell phone payments or utility bills, is increasingly used in underwriting by the financial services industry, especially financial technology or “fintech” companies. Some financial companies have begun to use information about borrowers’ education history, including the identity or sector of the college or university a borrower attended, when determining access to and the cost of credit. For years, policymakers have weighed the use of alternative data to help expand access to credit for marginalized or underserved communities. Although helping consumers trapped outside of the credit market is an important policy goal, regulators have made clear that certain data can also pose serious fair lending and discrimination risks by introducing unfair biases and perpetuating existing disparities.

The use of education data in credit decisions is particularly troublesome given the continuing pattern of disparate access to education in America and the historical inequality perpetuated by the use of this information. Widespread use of this data by lenders could reinforce systemic barriers to financial inclusion for black and Latinx consumers. For example, African American and Latinx students are especially underrepresented at the nation’s most selective colleges and universities, with nine percent and 12 percent, respectively, represented at the most prestigious public universities.

The SBPC examined a private loan product at a large bank and a private loan refinance product offered by a fintech lender. Using lenders’ publicly available online rate check tools, the SBPC tested loan applications from fictional borrowers from different schools while maintaining all other borrower characteristics constant (e.g., income, savings, occupation, loan amount). The sample credit estimates generated by the big bank indicated higher loan costs charged to borrowers for attending a community college. In the case of the fintech lender, higher costs were charged to a borrower who attended certain Minority-Serving Institutions (MSIs).

The companies used in the analysis are Wells Fargo and Upstart Network, Inc. Wells Fargo is one of the nation’s largest banks and the second-largest lender of new private student loans to college students. Upstart Network is a fintech company that uses machine learning and alternative data, including degree attainment, school attended, and area of study, in its underwriting processes.

Specific takeaways from the consumer case studies included in this report: 1) A private student loan borrower may pay a penalty for attending a community college. Wells Fargo charges a hypothetical community college borrower $1,134 more on a $10,000 loan, when compared to a similarly situated borrower enrolled at a four-year college. 2) A borrower who refinances student loans may pay a penalty for attending an HBCU. When refinancing with Upstart, a hypothetical graduate of Howard University, an HBCU, is charged $3,499 more over the life of a five-year loan when compared to a similarly situated NYU graduate. 3) A borrower who refinances student loans may pay a penalty for attending an Hispanic-Serving Institution (HSI). When refinancing with Upstart, a hypothetical graduate who received a bachelor’s degree from New Mexico State University-Las Cruces, an HSI, is charged at least $1,724 more over the life of a five-year loan when compared to a similarly situated NYU graduate.