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Anti-Discrimination Rules for Education Lenders

This page discusses the extent to which education lenders can discriminate against certain types of eligible borrowers in the origination of federal education loans. When an education lender seeks to improve the quality of its loan portfolio, it may want to discriminate on the basis of the borrower's credit score or attendance at a particular educational institution or type of educational institution (e.g., based on the institution's cohort default rate or the institution's graduation rate).

Summary Chart

This chart summarizes which types of discrimination are banned for each lender and type of loan. As is evident from the chart, the current statutory and regulatory anti-discrimination rules represent a patchwork of rules with many holes and gaps.

Senators Patty Murray (D-WA) and Christopher J. Dodd (D-CT) introduced the Preventing Student Loan Discrimination Act (S. 3141) on June 17, 2008. This legislation would ban FFELP lenders from discriminating against eligible borrowers based on the borrower's choice of an eligible educational institution, length of the borrower's program, academic year in school or the borrower's income. The changes are highlighted in the summary charge with the letter P.

	Stafford	PLUS	Consolidation	9.5% Floor Lenders	Guarantee Agencies	Sallie Mae
Race	X	X	X	X	X	X
Color	P	P	P	X	X	X
National Origin	X	X	X	X	X	X
Religion	X	X	X	X	X	X
Sex	X	X	X	X	X	X
Marital Status	X	X	X	X	X	X
Age	X	X	X	X	X	X
Disability Status	X	X	X	X	X	X
Number or Type of Eligible Loans			X
Type or Category of Institution of Higher Education			X
Interest Rate			X
Choice of Repayment Schedule			X
Fees except when based on need	X	X	X	X	X	X
Income	P	P	P	X	X	X
Attendance at a Particular Eligible Institution	P	P	P	X	X	X
Length of Educational Program	P	P	P	X	X	X
Academic Year	P	P	P	X	X	X
Adverse Credit History or More Restrictive Credit Standards		Y

All Lenders and Loans

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Section 421(a)(2) of the Higher Education Act bans discrimination on the basis of race, national origin, religion, sex, marital status, age, or handicapped status. Compared with the other anti-discrimination rules, this language adds marital status but does not include color, income, attendance at an eligible educational institution, length of the borrower's education program, or the borrower's academic year in school.

Section 438(c) of the Higher Education Act requires lenders to charge the same fees to all student borrowers, except that lenders can charge lower fees to borrowers with greater financial need. This effectively prevents lenders from discriminating in the provision of fee waivers according to borrower attendance at particular institutions of higher education. (The use of the word 'student', however, allows lenders to discriminate in the waiver of fees on parent PLUS loans.) There is no similar requirement with regard to interest rate discounts in section 428(m).

Nothing prevents a lender from halting the origination of all Stafford loans.

Nothing appears to prevent a lender from being selective in the marketing of their federal student loans. For example, a lender can refuse to be included in a school's preferred lender list.

Stafford Loans

Aside from the general rules mentioned in All Lenders and Loans above, there are no specific restrictions on discrimination by lenders in the origination of Stafford loans. In particular, lenders can discriminate on the basis of income and attendance at an eligible educational institution, among the other omissions in section 421(a)(2) of the Higher Education Act.

PLUS Loans

Section 428B(a)(1)(A) requires that a PLUS loan borrower not have an adverse credit history. Adverse credit history is defined in 34 CFR 682.201(c)(2)(ii) as not being 90 or more days late on repayment of a debt or having had a write-off of a Title IV debt, default, bankruptcy discharge, foreclosure, repossession, tax lien or wage garnishment in the past five years. The regulatory language allows a lender to approve a PLUS loan despite an adverse credit history when "extenuating circumstances exist" but does not require the lender to do so. In addition, the regulations at 34 CFR 682.201(c)(2)(iii) allow lenders to establish "more restrictive credit standards". This could potentially allow lenders to use FICO scores in determining eligibility for the PLUS loan, or use 30 or 60 day delinquencies or a longer horizon, such as 7-10 years, for defaults, discharges, foreclosures and other write-offs.

Nothing precludes a lender from halting the origination of all PLUS loans.

Aside from the general rules mentioned in "All Lenders and Loans" above, there are no other specific restrictions on discrimination by lenders in the origination of PLUS loans. In particular, lenders can discriminate on the basis of income and attendance at an eligible educational institution, among the other omissions in section 421(a)(2) of the Higher Education Act.

Consolidation Loans

Section 428C(b) of the Higher Education Act bans discrimination on the number or type of loans being consolidated, the type or category of institution of higher education attended by the borrower, the interest rate to be charged to the borrower, or the repayment schedules offered to the borrower. Nothing precludes a lender from establishing minimum balances for consolidation loans.

Nothing precludes a lender from halting the origination of all consolidation loans.

9.5% Floor Income Lenders

The regulations at 34 CFR 682.800(a) ban lenders who are receiving the 9.5% floor income special allowance payments from discriminating according to the borrower's race, sex, color, religion, national origin, age, disability status, income, attendance at a particular institution within the area served by the authority, length of the borrower's education program, or the borrower's academic year in school. In particular, it is worth noting that this regulation bans discrimination based on income or attendance as a particular educational institution. The ban on discrimination based on income likely precludes the use of credit scores to the extent that credit scores correlate with income. The ban on discrimination on the basis of attendance at a particular institution probably precludes using stricter cohort default rate standards than the Higher Education Act.

Guarantee Agencies

34 CFR 682.404(h) bans guarantee agencies from discriminating on the basis of the same set of criteria as the 9.5% floor income lenders. A guarantee agency therefore may not refuse to guarantee loans at any eligible school within the states served by the guarantee agency.

Sallie Mae

Additional requirements are placed on Sallie Mae by sections 439(e) and 440A of the Higher Education Act. Section 439(e) bans Sallie Mae from purchasing loans from lenders that discriminate on the basis of race, sex, color, creed or national origin. Section 440A bans Sallie Mae from discriminating on the basis of race, sex, color, religion, national origin, age, disability status, income, attendance at a particular eligible institution, length of the borrower's educational program, or the borrower's academic year at an eligible institution. The language not only uses the "any pattern or practice" language that applies to guarantee agencies and 9.5% floor income lenders, but also uses "directly or indirectly" language. This would appear to prohibit Sallie Mae from paying different premiums based on a school's cohort default rate or refusing to make federal loans to students at particular eligible institutions.

Private Student Loans

The Equal Credit Opportunity Act (ECOA) applies to private student loans, and bans discrimination on the basis of race, sex, marital status, religion, national origin, age or receipt of public assistance.

Relevant Statutory and Regulatory Excerpts

Higher Education Act of 1965

421(a)(2) DISCRIMINATION BY CREDITORS PROHIBITED. -- No agency, organization, institution, bank, credit union, corporation, or other lender who regularly extends, renews, or continues credit or provides insurance under this part shall exclude from receipt or deny the benefits of, or discriminate against any borrower or applicant in obtaining, such credit or insurance on the basis of race, national origin, religion, sex, marital status, age, or handicapped status.

428C(b) NONDISCRIMINATION IN LOAN CONSOLIDATION. -- An eligible lender that makes consolidation loans under this section shall not discriminate against any borrower seeking such a loan --

based on the number or type of eligible student loans the borrower seeks to consolidate, except that a lender is not required to consolidate loans described in subparagraph (D) or (E) of subsection (a)(4) or subsection (d)(1)(C)(ii);
based on the type or category of institution of higher education that the borrower attended;
based on the interest rate to be charged to the borrower with respect to the consolidation loan; or
with respect to the types of repayment schedules offered to such borrower.

438(c)
(2) Except as provided in paragraph (8), a lender that charges an origination fee under this paragraph shall assess the same fee to all student borrowers.
...
(8) EXCEPTION. -- Notwithstanding paragraph (2), a lender may assess a lesser origination fee for a borrower demonstrating greater financial need as determined by such borrower's adjusted gross family income.

439(e) ADVANCES TO LENDERS THAT DO NOT DISCRIMINATE. -- The Association, pursuant to such criteria as the Board of Directors may prescribe, shall make advances on security or purchase student loans pursuant to subsection (d) only after the Association is assured that the lender (1) does not discriminate by pattern or practice against any particular class or category of students by requiring that, as a condition to the receipt of a loan, the student or his family maintain a business relationship with the lender, except that this clause shall not apply in the case of a loan made by a credit union, savings and loan association, mutual savings bank, institution of higher education, or any other lender with less than $75,000,000 in deposits, and (2) does not discriminate on the basis of race, sex, color, creed, or national origin.

440A. DISCRIMINATION IN SECONDARY MARKETS PROHIBITED. The Student Loan Marketing Association (and, if the Association is privatized under section 440, any successor entity functioning as a secondary market for loans under this part, including the Holding Company described in such section) shall not engage directly or indirectly in any pattern or practice that results in a denial of a borrower's access to loans under this part because of the borrower's race, sex, color, religion, national origin, age, disability status, income, attendance at a particular eligible institution, length of the borrower's educational program, or the borrower's academic year at an eligible institution.

Regulations

34 CFR 682.201(c)(2)

For purposes of this section, the lender must obtain a credit report on each applicant from at least one national credit bureau. The credit report must be secured within a timeframe that would ensure the most accurate, current representation of the borrower's credit history before the first day of the period of enrollment for which the loan is intended.
Unless the lender determines that extenuating circumstances existed, the lender must consider each applicant to have an adverse credit history based on the credit report if --
1. The applicant is considered 90 or more days delinquent on the repayment of a debt; or
2. The applicant has been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a Title IV debt, during the five years preceding the date of the credit report.
Nothing in this paragraph precludes the lender from establishing more restrictive credit standards to determine whether the applicant has an adverse credit history.
The absence of any credit history is not an indication that the applicant has an adverse credit history and is not to be used as a reason to deny a PLUS loan to that applicant.
The lender must retain a record of its basis for determining that extenuating circumstances existed. This record may include, but is not limited to, an updated credit report, a statement from the creditor that the borrower has made satisfactory arrangements to repay the debt, or a satisfactory statement from the borrower explaining any delinquencies with outstanding balances of less than $500.

34 CFR 682.404(h)
Nondiscrimination. (1) A guaranty agency may not engage in any pattern or practice that results in a denial of a borrower's access to FFEL loans because of the borrower's race, sex, color, religion, national origin, age, handicapped status, income, attendance at a particular participating school within any State served by the guaranty agency, length of the borrower's educational program, or the borrower's academic year in school.

34 CFR 682.800
Prohibition against discrimination as a condition for receiving special allowance payments.

For an Authority to receive special allowance payments on loans made or acquired with the proceeds of a tax-exempt obligation, the Authority or its agent may not engage in any pattern or practice that results in a denial of a borrower's access to loans under the FFEL programs because of the borrower's race, sex, color, religion, national origin, age, disability status, income, attendance at a particular institution within the area served by the Authority, length of the borrower's education program, or the borrower's academic year in school.