Getting to the bottom of private loan rates

In our testimony to the Iowa legislature’s Government Oversight Committee yesterday, we recommended that the state seek details on the rates charged to students by the Iowa Student Loan Liquidity Corporation, the nonprofit lender created by the state. Mark Kantrowitz, publisher of FinAid.org, agrees with us and suggests additional information that should be disclosed by lenders. He also dismisses nonprofits’ claims that rate information should be kept secret:

“Ideally, I’d like to see lenders disclose the mappings from credit scores to their rate tiers and not just the tiers themselves. Add a FICO Score Range column to your table. The lenders insist that they cannot or will not do this voluntarily because it reveals competitive information.

But it’s really all about obscuring the mapping from borrower characteristics to rates. Yes, if lenders had to publish their tiering, there’d be more competition. But isn’t that the point? If lender X knows that lender Y’s cutoff for LIBOR + 2.0% is FICO 750, lender X can potentially undercut with LIBOR + 1.8% at FICO 760. By making the mapping opaque, they minimize the opportunity for competition. But, frankly, it also probably has a lot to do with making it harder for borrowers to shop around by forcing them to apply to obtain rate information. Lenders don’t want clear information because student loans are a commodity, and if they let it behave like one, supply and demand will drive down prices.”

“It’s especially egregious when a state agency protests against releasing detailed pricing models for competitive reasons. What they’re saying is that if they release the data, their competitors will be able to undercut them on price. Why is that a problem? Either it will force ISLLC to cut prices, or their borrowers will go elsewhere to get lower prices. Either way ISLLC’s mission to enable students to pay for college is met. Of course, more likely ISLLC is not adequately aligning pricing with cost, profiting from some students to subsidize others, and so will be prone to price competition on them. But the real problem is you have agencies thinking about profits first and public benefit second.”