Danger Lurks When Shopping for Student Loans
Saturday, July 26, 2008When college financial aid officers got into trouble last year for accepting gifts from lenders, the moral of the story was clear: You could easily overpay for your student loan by simply borrowing from a college’s recommended lender without first shopping around.
There is just one problem with comparison shopping for a private student loan. Doing so may damage your credit score. Since lenders quote higher interest rates to applicants with lower scores, some students could end up paying thousands of dollars more in interest over the life of their loans.
In few other areas of consumer life are you at risk of being penalized for seeking out the best deal. Indeed, mortgage and auto loan seekers who comparison shop within a relatively short period of time do not see their credit scores suffer. But Fair Isaac, the company that helps credit bureaus calculate credit scores, does not extend the same break to private student loan applicants or their parents, who often co-sign for loans.
The basic inequity here — the fact that people borrowing money for higher education are not given the same benefit of the doubt as people shopping for mansions and BMWs — is unfortunate enough. But the real head-scratcher is how little anyone in the industry seems to know about how often students and their parents suffer damage. Fair Isaac thinks it’s rare, if it happens at all. Lenders and student loan brokers think it’s common.
The disagreement wouldn’t matter if Fair Isaac bowed to the will of the New York State attorney general’s office. The office has been investigating the student loan industry for more than a year and has asked Fair Isaac to treat student loan borrowers like car and home shoppers. So far, Fair Isaac has refused to change its policy.
This issue matters because even a small credit score decline can lead to a more costly interest rate. Every point counts at a time of tightening credit standards, when many lenders have been requiring higher minimum credit scores. In addition, banks have been getting stingier with another source that parents tap for tuition money, home equity loans.
How did it come to pass that 18-year-olds were vulnerable to paying more because they shopped around? To answer that question, and develop strategies for credit score damage control, you need to know a bit more about the worlds of student debt and credit score algorithms.
Borrowers took out $17.1 billion in private sector loans in the 2006-7 school year, according to preliminary College Board figures. Part of what makes private loans different from other student loans is that rates can range wildly, by several percentage points, even with one lender.
To quote a rate, lenders check an applicant’s credit history. And every time a shopper asks a lender for a rate quote, it can show up as another inquiry on a credit report.
Lots of inquiries send the wrong signals to the formulas that create the popular FICO credit score that Fair Isaac administers, namely that borrowers may be applying for multiple loans because they’re financially troubled and potentially going bankrupt.
While Fair Isaac has mined years of data to determine that people making a bunch of mortgage and auto loan applications over a short period are almost always innocently shopping for a loan, it hasn’t declared student loan shoppers similarly safe...
Source: http://www.nytimes.com
