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Domino: A Blog About Student Debt New Evidence Underscores the Fair Lending Risks Inherent to Income Share Agreements

New Evidence Underscores the Fair Lending Risks Inherent to Income Share Agreements

By Kat Welbeck and Ben Kaufman | March 25, 2021

Today, we released a report revealing extensive evidence that the financial technology student lender Stride Funding, Inc (Stride Funding) may be violating federal fair lending law by penalizing borrowers of color for attending minority-serving institutions (MSIs). Our findings underscore the deep fair lending risks that can arise when creditors consider students’ educational background as part of the underwriting process and the extensive work left to do to ensure that so-called “novel” products are not just a new wrapping for age-old discrimination.

Our report on Stride Funding is available here: Inequitable Student Aid: A Case Study of Disparate Lending Practices and Educational Redlining Tactics in the Market for Income Share Agreements

Stride Funding offers Income Share Agreements (ISAs), a risky emerging form of student financing that ties students’ loan payments to their future wages. Typically, ISA lenders use information from borrowers’ educational background as they design and price their product offerings. Stride’s use of educational criteria to inform its product terms is not unique—ISA providers commonly charge students more based on the school they attend or the major they select. But given that income, college selection, and students’ choice of major are all closely associated with race, there is a substantial risk that ISAs could promote educational redlining—the practice of using information from borrowers’ educational history to perpetuate barriers to fair credit access for people of color. Fair lending experts are increasingly worried that this risk may be a reality.

Our investigation of Stride Funding’s lending practices illustrates how the ISA business model can put students of color at risk. We conducted extensive mystery shopping on Stride Funding’s website, examining the quoted price for products that the company offered to students attending a variety of postsecondary institutions. Like many companies that offer ISAs, Stride Funding, which finances attendance at a range of colleges (including Title IV schools), coding bootcamps, and other educational and vocational training institutions, determines how much it charges borrowers in part based on the school students attend and their choice of major. 

We generated price quotes for Stride Funding ISAs while holding all factors constant except for the school the credit applicant attends. As a result, we found that Stride Funding’s ISA products are priced in ways that generate significant cost disparities for students of color. Our investigation revealed the following:

Stride Funding regularly quotes students a price that is thousands of dollars higher for the same product if they attend an HBCU.

  • Stride Funding’s own data reveal that a student at an HBCU can expect to pay more for a Stride Funding ISA than an otherwise-identical peer who does not attend an HBCU. Stride Funding regularly quotes students a price that is thousands of dollars higher for the same product if they attend an HBCU. For example, Tuskegee University and Auburn University may be only roughly 20 miles apart, but the cost of a $10,000 Stride Funding ISA for a computer science major attending these two schools is separated by over $2,800 in additional charges for Tuskegee students. This price differential amounts to a 39 percent higher cost of credit. We uncovered similar disparities in dozens of price comparisons.
  • After graduation, HBCU alumni can expect to pay substantially more than identical non-HBCU alumni working in the same job if both took on equal-sized loans through Stride Funding. Analysis of Stride Funding’s pricing patterns reveals that the company’s advertised ISA terms could lead an HBCU graduate to pay substantially more for the same amount of funding than someone with the same income but who did not attend an HBCU. In one example, given two financially identical adults working in the same job and making the same income but where one adult attended Morehouse College (an HBCU) and the other attended Emory University (a non-HBCU), Stride Funding would charge the Morehouse graduate $1,619 more for the same ISA product. This differential is equivalent to a 20 percent higher cost of credit. Cost disparities such as these were replicated across several comparisons of HBCUs and comparable non-HBCUs.
  • Stride Funding’s own data reveal that disparate quoted pricing extends across other MSIs. Students at Hispanic Serving Institutions (HSIs) who take on Stride’s ISAs can expect to pay more than similarly situated students at comparable schools that are not HSIs. In one example, Stride Funding quoted a student studying computer science at the University of Houston (an HSI) $913 more than a student pursuing the same course of study at Rice University (a non-HSI), the equivalent of a 14 percent higher cost of credit. As in the case of HBCUs, evidence that Stride Funding penalizes students at HSIs extended across numerous examples uncovered in our mystery shopping.
  • Disparities in quoted pricing for MSIs hold even when the MSI is the “higher ranked” school. Financial companies using educational criteria in underwriting often argue that cost differences in their products for students and alumni of certain schools reflect differences in those schools’ quality. However, independent of the merits of that argument, we discovered several examples where Stride Funding quoted students at MSIs less favorable rates for ISAs than it did for students at non-MSIs with a “lower” college ranking. In one case, Stride Funding represented that it would charge a student at Spelman, an HBCU, over $300 more than it would charge a student pursuing the same course of study at a school that Spelman is ranked 59 places above (Westmont College) but which is almost two-thirds white.

A set of exhibits documenting our findings is available here.

In light of our findings, we wrote a letter to Stride Funding alongside the NAACP Legal Defense and Educational Fund to demand answers and immediate changes to the company’s lending practices. As LDF noted in its letter, the Equal Credit Opportunity Act (ECOA) prohibits anyone offering a credit product from discriminating against any applicant on the basis of race or other protected characteristics, including through the use of racial proxies (that is, facially neutral criteria that may correlate strongly with race). Because ISAs are a covered type of credit product, providers must comply with ECOA’s nondiscrimination mandate.

The ISA market is growing fast—over $250 million in ISAs were originated in 2019 and market participants expected $500 million in ISAs to be originated in 2020 before the COVID pandemic began. Though industry-wide data are unavailable, the association between ISAs and the types of for-profit career training programs known to take advantage of economic downturns implies that the volume of ISAs originated in 2020 may have ultimately been much larger, and that the market will continue to grow rapidly in 2021.

Given the fair lending risks uncovered in our investigation of Stride Funding, it is clear that policymakers and law enforcement agencies at every level of government must aggressively scrutinize the risks that pervade this emerging market. We have already highlighted how ISA companies may be engaging in deception and unfairly depriving borrowers of their rights by unlawfully toying with the fine print in their ISA contracts. 

Read more about the SBPC’s work related to income share agreements here.

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Kat Welbeck is Civil Rights Counsel & Deputy Director of Advocacy at the Student Borrower Protection Center. She joined the SBPC from the Consumer Financial Protection Bureau where she worked in the Office of Public Engagement & Community Liaison.

Ben Kaufman is the Head of Investigations and a Senior Policy Advisor at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked as a Director’s Financial Analyst on issues related to student lending.

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