Two decades ago, a young accountant pioneered the now-$17 billion-a-year private student loan industry through a tiny nonprofit company with a noble goal: helping students pay for college.
The nonprofit company also has become a financial boon for the accountant, Catherine B. Reynolds, and her family. The McLean-based company bought a Gulfstream jet worth about $30 million that she sometimes uses to fly friends and relatives around the world. It has given more than $9 million to a separate nonprofit company run by her husband and paid her $1 million in annual compensation. And the nonprofit donates millions to her favorite charities, including $400,000 to her daughter's private school.
Loan industry watchdogs question whether the company, EduCap, operates in the best interests of students and should retain its nonprofit status. As a nonprofit, EduCap is exempt from paying federal income tax as long as it claims to be serving a public good. But the company allows some students to borrow up to $50,000 a year, sometimes at 18 percent effective interest rates -- terms that most financial experts urge borrowers to avoid. The Internal Revenue Service has been reviewing the business.
The loan company's business practices -- detailed in interviews with former employees and internal company documents obtained by The Washington Post -- illustrate how the booming and some say largely unregulated private loan industry is creating tremendous wealth for some lenders. Experts say private loans also can pose financial risk for students in certain cases.
A nationwide investigation of the student loan industry this year has revealed a series of conflict-of-interest scandals between lenders and university financial aid offices. Congress is poised to pass legislation this month that would overhaul the federal student loan system and limit those financial ties.
Yet the bills would do little to regulate private loans, which have become the fastest-growing segment of the $85 billion-a-year student loan market. . . .
And Inside Higher Ed reports on the necessity to inform students of the choices and risks involved in borrowing for school. It works!
As the scandals and debates over private lending have grown in recent months, conventional wisdom has held that private loans are a necessary evil. Sure, students and their families are taking on debt that is typically more expensive and more risky than federally backed loans. But as long as families feel that college costs are otherwise beyond their reach, private loans will continue to become more popular.
By most measures, they have become much more popular. College Board data released last year show that the volume of private loans taken by students has been increasing by 27 percent annually since 2000-1, to a total of $17.3 billion. A decade ago, private loans made up only about 4 percent of student loan volume; now that total is 20 percent.
But while even critics of private loans talk about their growth as inevitable, Barnard College tried to roll them back during the last academic year — with success that stunned even the college: a 73 percent reduction (more than $1 million) in private loan volume. That suggests many of those taking out the loans do not need to, and might not do so if only someone explained the issues.
And that’s what Barnard did this year. The only real change in policy the college made was to require a conversation. Before Barnard would certify to a lender that a student was enrolled, the college required students or their parents to talk to an aid counselor. If, after that conversation, the family wanted to proceed, Barnard did not stand in the way. But for many families, the talk revealed risks and options they didn’t know about. . . .