Didn't Finish College? Then You May Be Denied New Loans

It is estimated that perhaps 45% of Americans attended college but failed to complete it.  This could put them in danger of not getting any new loans they may desire, this according to a recent WSJ piece ('New Credit Criteria Raise Fairness Issue',  Aug. 9, p. B10).  This as we learn lenders are now searching for "new types of data and computer-driven models" on which to base borrowers' qualification for loans.

As a point of reference, "several bills have been introduced in the House of Representatives" this year, in an effort to improve the credit scoring system which factors into loan qualification.  The effort is also bipartisan, i.e. not just Reepo tightwads and grinches pushing the bills.  Another motivation? "Alternative data" were cited by credit reporting agency Transunion as enhancing access to credit.  Thus one bill put forward by Rep. French Hill (R, AR) to address the matter.

Sen. Kamala Harris, meanwhile "proposed including on -time rent  and cell phone payments" in credit scores.

Then there is online lender Upstart Network Inc. which requires loan applicants to "provide the highest education degree obtained, the names of universities and colleges attended, and the areas of study" as well as employment history.

According to Dave Girouard, Upstart's CEO, quoted in the piece:

"The use of occupational history and educational background generates a significantly more accurate credit model."

Adding that the company's model approves 27 percent more loan applicants for its personal loans than the traditional credit -scoring model.  It also "results in 16 percent lower interest rates.for approved loans."

Despite these seeming advantages of the alternative data models, consumer advocates insist this trend will hurt lower income and minority applicants.  According to Chi Chi Wu - an attorney for the National Consumer Law Center quoted in the article:

"It entrenches and perpetuates inequality in an obvious and stark way"   adding that "the existing system already makes it harder for people with lower income and fewer assets for cheaper loans."

Educational credentials factor into all this, especially for minority citizens given:

"The percentage of those with at least bachelor's degrees is 33% among whites, 54% among Asians,  23 % for African Americans, and 16% for Hispanics."

So all other factors being equal, the last two groups will generally have a tougher time getting approved for loans.

Not finishing college can also present a bugbear re: loans. For example, a 2015 Federal Reserve report "showed the average student loan delinquency rate among those who didn't finish college was 44 % compared to 11 % for bachelor's degree holders,"

Hence, degree holders would definitely appear to be better bets for loans.

But as the WSJ authors also note, "whether the use of data related to occupation and education is appropriate is debatable".  This is given that "determining what types of data should be permitted in credit scoring is a complex and contentious task."

We shouldn't let that last aspect escape notice, especially as student loan debt is steadily increasing, along with consumer credit card debt.