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Pricing Without Discrimination: Alternative Student Loan Pricing, Income-Share Agreements, and the Equal Credit Opportunity Act

February 9, 2017
Dowse Bradwell “Brad” Rustin, IV , Neil E. Grayson , Kiersty M. DeGroote

Reprinted with permission from the American Enterprise Institute

New private financing options for higher education are becoming more popular every year. Products that take into account nontraditional lending factors, such as Alternative Finance (AltFinance), or that attempt to predict a student’s future income with income-share agreements (ISAs), provide an additional layer of transparency to students and their families with value for money calculations. However, with AltFinance, which prices loans based on a student’s perceived likelihood of repayment, and ISAs, in which an investor obtains repayment based on a student’s future income, the risk of Equal Credit Opportunity Act (ECOA) claims is significant. Based on prior research, some of the best graduation rates and future income predictors may disproportionately affect—or have a disparate impact on—protected classes of people. As AltFinance lenders and ISA investors consider these issues, maintaining accurate data to support the business necessity and manifest relationship defense to an ECOA claim is important.

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