GAO Report Faults Industry Oversight
By Amit R. Paley and Valerie Strauss
Washington Post Staff Writers
Thursday, August 2, 2007
EduCap, a nonprofit company that pioneered the $17 billion-a-year private student loan industry, laid off scores of workers yesterday and is considering shutting its loan business as federal officials investigate whether it has abused its tax-exempt status, according to current and former employees.
The layoffs came less than two weeks after lawmakers opened investigations into the nonprofit firm, which has been a financial boon for its chairman and her family. The company says it has helped students pay for college, but critics say its nonprofit status has not resulted in better loans for students.
Dozens of employees at EduCap's Sterling offices were laid off about noon yesterday. Some wept. Others headed out for drinks and chocolate waffles. EduCap executives said more employees would be laid off soon as the business winds down, according to employees who were let go yesterday.
The layoffs were part of a flurry of developments yesterday in the unfolding investigation of the $85 billion-a-year student loan industry. The Senate Banking Committee approved legislation aimed at regulating the fast-growing private loan business, an alternative to federally backed loans.
Congressional investigators also issued a report that the U.S. Education Department had failed to adequately oversee student loan programs. And in New York, the state attorney general announced an investigation into possible kickbacks from a loan company to university athletic departments, including Georgetown's and Howard's.
George C. Pappas, EduCap's senior vice president for strategic partnerships, said in an e-mail yesterday that the company "is restructuring its operations due to uncertainties in the student loan industry and financial markets." He declined to discuss the layoffs and said the company would continue to service loans.
The layoffs come two weeks after The Washington Post detailed how EduCap's spending practices have benefited its chairman, Catherine B. Reynolds, whose annual compensation has totaled about $1 million. The nonprofit company, which is exempt from paying federal income tax, bought a Gulfstream jet worth about $30 million for her use and donated millions to a nonprofit organization run by her husband.
According to accounts from more than a dozen current and former EduCap employees, the company laid off at least half of its workers yesterday and said most of the remaining staff would soon lose their jobs. Some executives announced to workers yesterday that the company was "going dark" and might get out of the loan business soon, the employees said. Others familiar with EduCap's operation confirmed that Reynolds has been trying to get out of the loan business.
The company has been laying off employees for almost a year, though yesterday's cut appeared to be the most severe. When EduCap established Loan to Learn, it built itself up from almost no staff to more than 300 employees in summer 2006, former executives said. But dozens of workers were laid off that fall and this spring, and the number had dwindled to about 100 to 200 before yesterday, the executives said. Pappas has repeatedly declined to say how many people work for EduCap.
Reynolds has been trying for months to sell the company's loan assets or bring in an investor, according to people with direct knowledge of the business, who declined to be identified because of the confidential nature of the dealings. She recently tried to sell the loan assets to Michael Milken, the Wall Street financier, but the deal fell through over the past two weeks, the sources said. A Milken spokesman said he was not aware of the discussions.
If the loan assets are sold, EduCap, which also does business as the Catherine B. Reynolds Foundation, could continue as a charity.
"The fact is, Loan to Learn as it currently exists won't continue," said one of the associates.
The Senate Finance Committee opened an investigation into the company last week, saying that the Post article "raises serious questions" about the lender's nonprofit status. The Internal Revenue Service and the New York attorney general's office are also investigating EduCap, and the chairman of the House education committee has asked the Government Accountability Office, an investigative arm of Congress, to look into the nonprofit lending industry.
The chairman and ranking Republican on the Senate Finance Committee said they continue "to expect a full, complete response to our questions" despite the layoffs. "We hope that all records needed to respond to our inquiry remain accessible and intact, and that any loss of personnel won't hinder the response," Max Baucus (D-Mont.) and Charles E. Grassley (R-Iowa) said in a statement.
On Capitol Hill, the Senate Banking Committee approved a bill, sponsored by Sen. Christopher J. Dodd (D-Conn.), that would require private lenders to give approved student borrowers an extra 30 days to shop for a lower rate, inform applicants of their eligibility for lower-cost federal loans and take other steps to increase market transparency and curb what critics call deceptive business practices.
Also yesterday, the Government Accountability Office concluded in a report that the Education Department should beef up oversight of lenders that participate in federal student loan programs. It found that the department has taken few steps to enforce rules that prohibit lenders from offering certain financial favors, or "inducements," to help them obtain more customers on campus.
In the past 20 years, the report found, the department has sought sanctions twice against lenders for violations of the inducement rules. In 1988, the department disqualified one lender from the Federal Family Education Loan Program, and in 1995 it sought to limit participation of a second lender. "More frequently, Education has written letters to offending parties . . . instead of imposing sanctions," the report found, "but it has not routinely assessed the effectiveness of these letters."
The department agreed with some GAO recommendations for stronger oversight and said it has moved toward issuing new industry regulations. But Lawrence A. Warder, acting chief operating officer for the department's Federal Student Aid office, wrote that "under existing law, the department's authority to take action regarding some of these practices is limited."
Congressional Democrats, who requested the report, said it provides evidence of lax enforcement by the Bush administration. "Lenders continue to take advantage of students entering college and the Department of Education is not doing enough to prevent it," Senate Majority Whip Richard J. Durbin (D-Ill.) said in a statement. "Parents and students have placed their trust in a department that is not living up to its responsibility."
Staff writer Michael Alison Chandler contributed to this report.
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