Student Loan Nonprofit a Boon for CEO

By Amit R. Paley and Valerie Strauss
Washington Post Staff Writers
Monday, July 16, 2007

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.

With federal aid failing to keep up with the skyrocketing cost of college tuition, the volume of private student loans is now expected to surpass federal loans by 2015. At the same time, many of the protections afforded to students who use federal loans are not extended to those who take out private loans.

"Private loans are the Wild West of the student loan industry," said New York Attorney General Andrew M. Cuomo, who has uncovered many of the abuses in the lending market, although none involving EduCap.

In an interview, Catherine Reynolds and her husband, Wayne R. Reynolds, rejected the criticism of private loans and EduCap, saying the company has helped more than 350,000 students pay for college. They said any financial benefit to their family was legal and in accordance with normal business procedures. And the Reynoldses said their higher interest rates were for the highest-risk students, who wouldn't be able to borrow anywhere else. EduCap officials also say that its operations must comply with rules established by the Treasury Department.

And Catherine Reynolds, 49, of McLean, said she has helped students nationwide because the business model EduCap pioneered has been replicated by companies across the country, creating competition in the lending industry that has benefited families by reducing the overall cost of private loans.

"We're here to make a difference and do good," she said. "And I think we've done that."

One Entity, Three Names

When Catherine Reynolds joined EduCap in 1988, it was a small tax-exempt company headed by a local Catholic priest at a time when most loans came from decades-old federal programs. But Reynolds, the child of working-class parents, saw that soaring tuition costs had created a huge demand for aid beyond the government's programs.

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