Student Loan Nonprofit a Boon for CEO
Watchdogs Question Spending; Company Touts Benefit to Consumers

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.

The company was very successful, and in 2000, Wells Fargo, the financial services giant, purchased for more than $150 million a for-profit affiliate of EduCap that serviced its loans.

After the expiration of a non-compete agreement that accompanied the sale, Reynolds has returned to the business, and EduCap is once again one of the few nonprofit lending companies in the country.

Several associates said Reynolds has recently been considering new business opportunities, and company executives declined to say whether Reynolds will remain in the loan industry.

The IRS has been reviewing the company's financial arrangements, according to people with direct knowledge of the matter. Under those arrangements, one legal entity, EduCap, operates under three different names: EduCap, the Catherine B. Reynolds Foundation and Loan to Learn, the brand under which EduCap loans money to students.

The exact nature of the IRS inquiry is unknown. Reynolds declined to comment but said EduCap complies with the law. IRS spokesman Michael Devine also declined to comment.

Richard Lee Colvin, a loan industry expert at Columbia University's Teachers College, said Reynolds "has acted in the nonprofit space very much as a for-profit company."

Reynolds said U.S. law allows her to run EduCap as a nonprofit, adding that critics should "take it up with Congress."

Much of the critics' scrutiny of EduCap centers on its spending. The company paid for Reynolds, her husband, their now-teenage daughter and several friends to go to luxury resorts in the Bahamas last year and in Barbados in 2004, according to internal company records.

The accommodations during the Bahamas trip were at the Four Seasons Resort in Great Exuma, where EduCap paid for a 37-person lobster bake one evening that cost $92 a head, plus the $450-an-hour Sweet Love Band, according to billing records.

George C. Pappas, the company's senior vice president for strategic partnerships, described the trips as official retreats for EduCap's six-member board at which company business was discussed.

One of the company's most expensive properties is the Gulfstream IV jet, which was purchased about five years ago, according to company and federal aviation records.

Reynolds sometimes has used the jet to fly her family and friends on personal vacations, according to former employees and company records. On a two-week trip to China and Turkey in 2004, for example, Reynolds took her daughter, sister and niece aboard the jet.

Pappas said Reynolds always reimburses EduCap for the cost of friends and family who fly aboard the company plane. But some question whether a nonprofit company should own such an expensive jet.

"The airplane actually belongs to the struggling college students of America," said Bob Shireman, executive director of the Project on Student Debt. "Catherine Reynolds is misusing this nonprofit to benefit herself instead of student borrowers."

Nonprofit Benefits Family

Although Reynolds is a high-profile figure in the student loan industry, she also has become a prominent fixture in Washington's social and political circles because of her recent philanthropy. The Catherine B. Reynolds Foundation, established in 2001, has donated more than $100 million to major cultural institutions across the country. Among the beneficiaries is the D.C. College Access Program, a charity closely affiliated with Donald E. Graham, chairman of The Washington Post Co.

The foundation appears in some ways to present itself as an independent charity giving away the personal wealth of Catherine Reynolds. It maintains a separate Web site and Reynolds identifies herself as the chairman and chief executive of the foundation, in addition to her role as chairman and chief executive of EduCap, according to a company biography.

The foundation doesn't exist as a separate legal entity, though; it is another name by which EduCap does business, according to documents and company officials. So when the Catherine B. Reynolds Foundation donates money, it is from the tax-exempt lending company, according to company officials and tax filings. Steven Glover, a member of the EduCap board, said Catherine Reynolds usually proposes the donations, which the board then approves.

In some instances, the money given away in the foundation's name has benefited organizations and entities with ties to Reynolds's family. It donated $400,000 to a private school after Catherine Reynolds's daughter was accepted there in 2001.

One of the largest beneficiaries of the foundation has been the Academy of Achievement, a separate nonprofit company run by Wayne Reynolds that sometimes directs payments to a for-profit company he runs. EduCap has donated at least $9 million to the academy, which then paid at least $1.7 million to ASC Management Co., a company whose sole shareholder is Wayne Reynolds, tax filings show.

Wayne Reynolds said the payments are fair compensation for his work on the four-decade-old academy, whose main mission is hosting an annual International Achievement Summit, a well-known four-day gathering where several hundred graduate students meet with and learn from luminaries that have included Nobel laureates, Hollywood moguls, politicians such as Bill Clinton, and journalists, including several from The Washington Post. "We change people's lives," Reynolds said.

The operations of EduCap and the Academy of Achievement are intertwined. The companies share the same office space, hold corporate retreats at the same Caribbean resort and lend each other accounting and administrative staff, according to former employees and company records. Wayne Reynolds sits on the EduCap board of directors, and Catherine Reynolds is the vice chairman of the Academy of Achievement's board.

Catherine Reynolds stressed the professional standards of EduCap and said the spending practices were no more extravagant than those of major for-profit lenders.

When asked whether the standards should be different for tax-exempt groups, her husband said their philanthropy was a sharp contrast to other lending executives', such as Albert L. Lord, chairman of for-profit lending behemoth Sallie Mae. Referring to the scrutiny Lord has received for building a private 18-hole golf course in Anne Arundel County, Wayne Reynolds said: "Better we should be like Al Lord and make $200 million and build a golf course? And he's proud of himself? To me, it's just disgusting."

One Percent Default Rate

Some student advocates question whether EduCap's business practices benefit students.

Unlike federal loans, for which interest rates are now capped at 6.8 percent, EduCap offers private loans with variable effective rates as high as 18 percent. Pappas said most students, though, pay interest of 10 to 11 percent, with the highest rates going to students who are at the greatest risk of defaulting on their loans and can't borrow elsewhere.

The company declined to reveal its recent annual default rates but said the rate has generally been about 1 percent over the company's 20-year history. "The results speak for themselves," Catherine Reynolds said. "When 99 percent of your portfolio pays you back, one has to deduce that its not usurious or irresponsible lending."

Last year, the United States Student Association, the country's largest student organization, complained to the Federal Trade Commission, urging the agency to "take action to stop false and deceptive advertising practices" by EduCap. The commission wrote last month that nonprofit groups do not fall under its jurisdiction and that it does not plan to take action, according to a letter obtained by The Post under the Freedom of Information Act.

EduCap said the complaint had no merit. The company later removed or modified certain statements from its Web sites to increase clarity for borrowers, not because it agrees with the complaint, Pappas said.

EduCap, which now lends under the name Loan to Learn, has also hosted an all-expenses-paid conference for university officials and their spouses in Pebble Beach in 2005, and it planned another this year on the Caribbean island of Nevis, which was canceled after media scrutiny.

A financial aid official from the 2005 conference, Tony Sutphin of Virginia Tech, added EduCap to the school's list of recommended private lenders after the company paid for him to attend. (Sutphin declined to comment, and Pappas said EduCap has no formal business relationship with the school.)

Although the company had previously said the purpose of the conference was to discuss education, Reynolds said in the interview that her goal was to promote the company and connect the relatively new Loan to Learn program with EduCap's well-known brand name.

"I thought it was important to make the financial aid community aware that this is our program," she said, "so that if someone walked in and said, 'Have you heard of this?' they could say, 'These people have been around.' "

Reynolds explained that she listens to criticism but doesn't obsess about it: "I worry about what I think of me."

"At the end of the day, you have to believe in what you're doing," she concluded. "And I think EduCap has done a good job."

Staff researcher Meg Smith contributed to this report.

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