Loan to Learn CEO: Living Large

Catherine B. Reynolds' nonprofit company EduCap -- which markets private student loans under the brand name Loan to Learn -- is coming under heavy and deserved scrutiny. The United States Senate's tax committee, as well as the Internal Revenue Service and the Government Accountability Office, are examining charges that Ms. Reynolds has abused the company's nonprofit form by using benefits derived from its tax exempt status not to serve the public good but to enrich herself and her family, and to raise her standing in the world of philanthropy. We applaud these investigations, because serious abuses may have occurred.

Over the last decade, Ms. Reynolds, who receives total pay and benefits of nearly $1 million a year for running the nonprofit company, not to mention a six figure expense account, has gained a reputation as a major philanthropist. She has donated, through the Catherine B. Reynolds Foundation, "more than $100 million to major cultural institutions across the country," according to a recent article in The Washington Post. Her donations have gone to institutions such as the Kennedy Center for the Performing Arts, the National Gallery of Art, and the National Symphony Orchestra, as well as other causes including Teach for America and the Special Olympics. Ms. Reynolds has never been shy about touting her generosity. She has urged the press "to use me as an example to inspire others."

Much of Reynolds' donations, however, haven't come out of her personal wealth, as most may assume. Instead, funds have come directly out of the revenues her tax-exempt company EduCap makes marketing high-cost private loans to students.

Recipients of Ms. Reynolds' largesse may be forgiven for their confusion, as the donations they have received have been made by the foundation that bears her name. But as a recent investigative article in The Washington Post made clear, the foundation is not "a separate legal entity" from EduCap (despite the fact that that it has its own website glorifying Ms. Reynolds and her giving spirit), it is one and the same as the loan company.

Tax-exempt organizations are allowed to keep only a small portion of the revenue they make. The rest must either be returned or spent in ways that benefit the public. Most nonprofit student loan providers are state-affiliated agencies that offer private loans at cheaper rates than banks and other for-profit providers. 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.

But Ms. Reynolds has not gone down that path. As Higher Ed Watch reported last week, EduCap's loans are as expensive, in many cases even more expensive than for-profit competitors. Moreover, despite its nonprofit status, Loan to Learn is not inordinately providing private loans to students who otherwise would not be able to obtain them because they are too poor or are not credit worthy. In fact, we reported last week that Loan to Learn relative to its peers tends to lend to better-risk students; that is those who tend to have higher credit scores than the population of students who are borrowing private loans from EduCap's largest for-profit rivals.

Instead of lowering the cost of the loans that EduCap lends or providing loans to riskier student borrowers, Ms. Reynolds has used much of the revenue that the tax-exempt company has made off of the backs of borrowers to raise her stature in the world of philanthropy and hobnob with the rich and famous.

Such a misuse of tax-exempt funds would be bad enough. But as Internal Revenue Service filings confirm, one of the top beneficiaries of Ms. Reynolds' largesse has been her husband, Mr. Wayne Reynolds. According to the Post, EduCap has donated at least $9 million to the American Academy of Achievement, a nonprofit company run by Mr. Reynolds, "which then paid at least $1.7 million" to ASC Management Co. a for-profit company "whose sole shareholder is Wayne Reynolds."

Mr. Reynolds told the Post that 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 lavish muti-million dollar annual gathering where a handful of the nation's graduate students are brought together for several days with luminaries from the worlds of arts and politics, such as Stephen Spielberg and Laura Bush, to hear their inspirational stories. Ms. Reynolds is an active participant in these events.

In addition to Ms. Reynolds' annual $1 million compensation, contributing to her husband's own nonprofit which pays him approximately $500,000 a year, Loan to Learn's parent company EduCap also has spent high student loan borrower interest payments to buy and operate a $31 million Gulfstream IV lear jet, which at least according to the Washington Post Ms. Reynolds occasionally has used "to fly her family and friends on personal vacations." An EduCap spokesman has denied that the jet was ever used for that purpose.

Not disputed are other donations from the company's coffers connected to the Reynolds family. For example, the "foundation" donated $400,000 to a private school after the Reynolds daughter was accepted to in 2001.

But wait. There's more. The nonprofit, tax-exempt Loan to Learn parent company also has spent high student loan borrower interest payments to finance its all-expense paid conferences and board meetings at luxury resorts in exotic locations. [In October, the company was forced to cancel an all-expense-paid, four day trip to the Caribbean it had planned for financial aid administrators and others after Higher Ed Watch broke the story.] The Post describes a board meeting the company held in 2005:

The accomodations 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.

</p>

Ms. Reynolds defends her company's spending, however, saying its activities are no more lavish than those of major for-profit lenders, such as Sallie Mae. But isn't that the point? Loan to Learn is a nonprofit company, publicly subsidized with tax favored status, that is supposed to act in furtherance of the public good. If Loan to Learn's EduCap wants to act as a for-profit company, then it should be treated as a for-profit company by the Internal Revenue Service.

As one of the nation's top ten private loan companies, revoking Loan to Learn's non-profit status would generate a good amount in increased federal tax collections. That money could then be redirected to Loan to Learn borrowers and others not getting very good deals on their private student loan debt. We know charity begins at home, but surely there are limits.