Thursday, August 02, 2007

EduCap: RIP?

By Bryan O'Keefe

A couple of weeks ago, the Washington Post ran a front-page story on EduCap, a major private-student loan lender. The piece cast suspicion on EduCap, questioning its technical non-profit status, expounding upon luxury items that the company owned like private jets, and claiming that the whole thing was ripping off students.

At the time we wrote a blog about it, with Rich pointing out that he knows EduCap’s President, Catherine Reynolds, and that she even bought him a meal once upon a time (we restate that again here in the interest of full disclosure).

The Post has another story on the company today, this time reporting that about half of its employees have been laid off, more are soon to follow, and that the company might be “going dark.”

This is a minor earthquake in the private student loan lending industry. EduCap has always been a major player and in fact pioneered private student loan borrowing.

Of course, we have no idea if EduCap was behaving unethically. Some of the luxury items that the Post reported on certainly seemed to be out of line for a supposed charity. At the same time, Richard served with Catherine on the Spelling’s Commission, got along with her quite well, and never thought that she was doing anything inappropriate. It seems that the IRS and others who are now investigating this will sort it out in the days to come.

What is important to keep in mind is that even if the worst turns out to be true, this does not mean that the entire private student lending industry is corrupt or that private loans in theory are undesirable. In fact, we have said for a long time that for some students, private student loans should be the way to go. So many of the news stories about student loans seem to always paint private loans negatively and we are sure that EduCap’s troubles will only make this problem worse.

But the creative destruction of capitalism has led to many businesses entering and exiting industries while the industry itself stays in tact. We hope that whatever the fate of EduCap, it does not tarnish the concept of private loans for higher education.


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TC said...

There may well be some misconduct. And it would appear, (based on the information available) that EduCap purchased unneeded luxuries to inure to the benefit of Reynolds - which would have affected margins.

"The credit window is closed" at this time because of all the fallout from the subprime lending market debacle. I would imagine that EduCap is going to become just another victim of the subprime fallout if they can't meet their margin calls. It's no surprise. Which is not to be construed as marginalizing your blog. Quite the contrary.