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Students Claim Bias In Loan Rates

Connecticut lawsuit says minorities pay higher interest

By CHRISTIAN NOLAN

A lawsuit has been filed in U.S. District Court in Connecticut alleging that one of the nation's largest student loan lenders is charging minority applicants higher interest rates than other students.

The suit was filed on behalf of Sasha Rodriguez, Cathelyn Gregoire and "all persons similarly situated" against the Sallie Mae Corp. Attorneys for the plaintiffs, who are seeking class action status, say they believe the suit could end up affecting "many thousands of students, if not more."

Rodriguez is a Hispanic woman who lived in Branford before moving to New Hampshire to attend McIntosh College. Gregoire is an African-American student from Tampa, Fla., who attends that city's International Academy of Design and Technology.

According to the complaint, Rodriguez was "coerced" into taking $19,500 in private student loans from Sallie Mae between 2003 and 2005.

Because of the 18.125 percent interest rate on her loan, her debt has increased to more than $33,000. Her monthly bill exceeds $500. The suit claims Rodriguez's rates are double what she was led to believe they would be.

Rodriguez, who could not be reached for comment, currently makes $10.40 an hour working at a Rite Aid pharmacy. She said in court documents that she cannot afford the loan payments and claims Sallie Mae calls as many as 17 times per day and also sends e-mails.

'Level Playing Field'

The suit alleges that Gregoire was told she would receive an interest rate of 7 percent when she agreed to a loan but was later informed of "a six percent supplemental fee at disbursement and an index of 5.5 percent over prime, which now equates to a 13.25 percent interest rate." She is now around $20,000 in debt.

"This suit seeks to level the playing field for minority students seeking higher education,"said Christa Collins, the managing partner at James, Hoyer, Newcomer & Smiljanich, a consumer action law firm based in Tampa. Collins is leading the team of attorneys handling the class action suit.

"Racially discriminatory lending practices like those alleged in the complaint create roadblocks to higher education for minorities and then put them at an economic disadvantage that can haunt them and severely damage their credit for years to come," added Collins. "Every student deserves a level playing field to pursue the dream of higher education, and this suit is aimed to achieve that goal."

Local counsel for the plaintiffs is M. Hatcher "Reese" Norris of Hartford's Butler, Norris & Gold. Norris said Sallie Mae was "targeting minorities" and that the case "was appropriate subject matter for a class action suit because of the individuals affected."

The suit alleges that Sallie Mae considers the loan default rate of each applicant's school. The higher the default rate, the higher the interest rate charged to students attending that school. According to the lawsuit, institutions that serve large numbers of minority students often have higher default rates than other colleges do.

Compared To Redlining

This method of setting loan rates has already drawn the attention of New York Attorney General Andrew Cuomo, who last summer wrote a letter to lawmakers comparing these types of practices in the student loan industry to the kind of racial discrimination associated with "redlining in the home mortgage industry."

Cuomo's discoveries, outlined in his letter, explained that a large, unnamed lender placed schools into one of three groups based on default rates. Students attending the schools with the best rates, typically between zero and 3 percent, would get the best interest rates on their loans, from 8 to 9.25 percent.

The next group, with 3 to 5 percent default rates, would see their students offered interest rates from 9 to 12 percent. The final group, with default rates between 5 and 10 percent, would see students offered interest rates between 11 and 14 percent.

The suit argues that, for purposes of receiving loans, incoming minority students should be judged on their own personal credit history rather than the college's overall loan default rate.

Collins declined to say how much money plaintiffs would seek in damages from the suit if a judge determines the complaint to be a proper class action. But Collins did say she will definitely seek punitive damages and injunctive relief.

Sallie Mae is no longer sponsored by the government but rather is a private publicly traded lending company since 2005.

Sallie Mae officials did not return phone messages last week seeking comment for this article. Last summer, the lender acknowledged at a congressional hearing that it does consider the institution's overall default rate when setting interest rates.

As for the racial bias claim, a Sallie Mae spokeswoman told the St. Petersburg Times earlier this month that the company would vigorously defend itself against the "unfounded allegations in this baseless complaint."

Sallie Mae has until Feb. 15 to respond to the lawsuit. •