The High Price of Loan to Learn
"The nonprofit, tax-exempt company EduCap offers private loans that are as expensive, and in many cases even more expensive, than its for-profit competitors."
Stephen Burd
The New America Foundation
Stephen Burd
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"The nonprofit, tax-exempt company EduCap offers private loans that are as expensive, and in many cases even more expensive, than its for-profit competitors."
Stephen Burd
The New America Foundation
Higher Ed Watch
By almost all accounts, Catherine B. Reynolds’ nonprofit company EduCap, which lends private student loans under the brand name Loan to Learn – occupies a fairly unique space in the student loan industry. There are other nonprofit private student loan providers. But those tend to be state-affiliated organizations that offer private loans at cheaper rates than banks and other for-profit lenders. In contrast, EduCap is an independent company that offers private loans that are as expensive, and in many cases even more expensive, than its for-profit competitors.
According to company documents obtained by Higher Ed Watch, the average weighted interest rate EduCap charges on its loans is slightly above 11 percent, and about one third of its portfolio has interest rates of 11.25 percent of higher. More than 12 percent of its loan pool carries interest rates higher than 14.25 percent, and about 4 percent have interest rates of 17.25 or greater. In addition, the company requires borrowers to pay upfront fees to take out the loans of as much as 10 percent of principal borrowed. According to Mark Kantrowitz, the publisher of FinAid, a Web site about student aid, 4 percent in upfront fees on a 10-year loan is the equivalent of a 1 percent increase in the interest rate charged.
Nonprofit, tax-exempt organizations are allowed to keep only a tiny portion of the revenue that they make. The rest must either be returned or spent in ways that benefit the public. They therefore don’t have as much of an incentive to turn a profit off of the loans, and so are able to reduce the cost of these high-interest private loans to borrowers.
For example, Maine Education Loan Authority (MELA) provides private loans to undergraduates who are Maine residents or are from elsewhere but attend colleges in the state an interest rate of 6.35 percent, regardless of their credit histories. The rate on these loans is variable but is adjusted only once yearly, based on the auction rate of MELA tax-exempt bonds (which are currently valued at about 3.85 percent) plus a spread of an additional 2.5 percentage points. Other nonprofits also try to keep their rates down. The top rate that the nonprofit Missouri Higher Education Loan Authority (MOHELA) charges its mostly risky borrowers, for instance, is between 10 and 11 percent.
Not only does EduCap's Loan to Learn charge higher rates to less creditworthy students than these nonprofits, in many cases, its private loans have higher top rates than those charged by for-profit firms. For example, according to rate information compiled by FinAid, the highest rate charged on Astrive Student Loans, a private loan product from Citizens Financial Group, for undergraduates is about 13 percent. The worst rate that CitiBank charges is about 12.5 percent, and it doesn’t add on any origination fees. [Sallie Mae, on the other hand, trumps EduCap, charging the riskiest students up to 19 percent on their private loans, with origination fees up to 8 percent.]
EduCap officials will say that such comparisons are unfair, because we are not comparing the deals that individual students are getting. And they have a point – in the private loan arena, the terms that individual students are charged are largely based on their specific circumstances. Therefore, it’s hard for us to know whether a particular student would fare better getting a loan from EduCap or CitiBank– although it seems fair to assume that they would better off getting their loans from the Maine Higher Education Loan Authority.
But the difficulty in making these comparisons points to the incredible lack of transparency in the non-federally guaranteed, private loan marketplace. Most students can’t even find out the terms of their private loans until they're just about to sign their promissory notes. Congress is expected to soon consider legislation, introduced recently by Sen. Chris Dodd (D-CT), that would require private loan providers to provide more detailed information about the terms and conditions of their loan products.
Are borrowers happy with their Loan to Learn loans? Officials with EduCap think so. They shared with us an e-mail from Alan Collinge, the founder of Student Loan Justice, saying that he hasn't heard any complaints from students who have borrowed loans with this company. But at Higher Ed Watch, we have received numerous complaints, some of which can be read here.
So if the nonprofit EduCap, which has lower costs because it's tax-exempt, is not reducing the costs of its private loans, what exactly is it spending its excess revenue on?
That’s a question that The Washington Post addressed in an extremely illuminating article last week. It’s also one that the Internal Revenue Service, the Government Accountability Office, and now the Senate Finance Committee are planning to investigate. And it's one we plan to address in a future blog post.
Stay tuned.
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Response
This article shows how Educap spent profits. Giving back to the public? Hardly!
http://www.washingtonpost.com/wp-dyn/content/article/2007/07/15/AR2007071501448_pf.html
Well Stephen, another
Well Stephen, another softball for you and the New America Foundation to hit out of the park! I (like you) won't be lighting a candle for Catherine Reynolds. Nor, will I venture to say, will many of her colleagues in private student lending I might add. But, before you and Congress inevitably tar and feather the rest of the industry for the sins of Ms. Reynolds, let's take a closer look at some of your allegations:
1.) I especially like how you compare other non-profits to L2L. Probably not an apples-to-apples comparison my friend (as you seem to acknowledge yourself). If you read about the "Catherine Reynolds' legacy", you'll see that she has been around private student loans for some time. Many years in fact. Over the course of that time, she has no doubt amassed some data on how well certain loans made to certain private student borrowers will perform. I'm not a 100% sure on this, but I'll bet you'll find that MOHELA and maybe even your other example MELA haven't been making private student loans for very long. That means they probably don't have a lot of performance data. Consumer credit (private loans) is based on properly pricing default risk. If you're used to making Federal Loans (defaults don't really matter since the government foots the bill) and don't have any private loan default data, you can find yourself blissfully unaware of how underpriced you are for the true credit risk. I'd bet if you surveyed some not-for-profits, you'd find many that had to raise their initial prices when some of the first private student loans they made started rolling into repayment finally giving them a real measure of the default risk.
2.) Maybe Catherine and her company target borrowers with lower credit scores (or have some adverse selection going-on via the way they market their loans). Folks with lower credits scores default more and require a relatively higher interest rate then folks with better credits in order for the lender to break-even. So, (again) you have to be careful when doing comparisons. If you compared Capital One several years ago to more mainstream credit card issuers you'd probably have noticed Capital One charged relatively higher rates. That could be explained by their marketing and lending to a relatively larger proportion of sub-prime borrowers (lower credit score borrowers). I'm not saying this is the case for L2L, but that can't be ruled-out as a possibility yet.
According to Bankrate.com, Catherine's loans are cheaper on average then the other variable rate unsecured consumer credit availabe to some student borrowers-credit cards. I'll also add here that if you think private student loan disclosures are opaque, try some credit card disclosures for comparison!
Catherine and her company have a lot to answer for.....overcharging borrowers may not be one of them.
Editor's Note
http://www.newamerica.net/blogs/education_policy/2007/07/more_scrutiny_loan_learn
Could "Patrick Bott" be another venture of "Catherine Reynolds?"
Matt
Funny you should say choice, since you no doubt are an advocate of removing it entirely from student funding decisions via the direct loan program. There isn't much choice (or service) with one provider-nay? Maybe you are your own worst enemies here at the New America Foundation since private loans came about through spiraling college costs. What nobody here seems to understand is the link between higher education costs and the basic economic concept of scarcity. The more free money you dump into college financing (the more stimulus for demand), the more strain it puts on scarce resources (e.g., qualified professors, space, equipment). The supply side of the equation is subject to the machinations of the free market. Increased demand for higher education through these subsidies translates into increased demand for the supply of these scarce resources. In the short-run, that translates into higher costs until the market can respond in the long-run with more supply. We don't live in a utopia where everyone's needs can be instantly satisfied by printing money. Printing money leads to inflation, and you've had a ton of that in higher education recently.
Guess that means more private loans and more burden on the student for the next few years? But you can't make an omelet without breaking a few eggs-right? Besides, this isn't about students, its about votes.
I don't work for Catherine Reynolds by the way. Nor do I condone how she runs her organization. And the interest rates on her loans are 11% according to Stephen's post.
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