The High Price of Loan to Learn

By almost all accounts, Catherine B. Reynolds nonprofit company EduCap, which lends private student loans under the brand name Loan to Learn occupies a fairly unique space in the student loan industry. There are other nonprofit private student loan providers. But those tend to be state-affiliated organizations that offer private loans at cheaper rates than banks and other for-profit lenders. In contrast, EduCap is an independent company that offers private loans that are as expensive, and in many cases even more expensive, than its for-profit competitors.

According to company documents obtained by Higher Ed Watch, the average weighted interest rate EduCap charges on its loans is slightly above 11 percent, and about one third of its portfolio has interest rates of 11.25 percent of higher. More than 12 percent of its loan pool carries interest rates higher than 14.25 percent, and about 4 percent have interest rates of 17.25 or greater. In addition, the company requires borrowers to pay upfront fees to take out the loans of as much as 10 percent of principal borrowed. According to Mark Kantrowitz, the publisher of FinAid, a Web site about student aid, 4 percent in upfront fees on a 10-year loan is the equivalent of a 1 percent increase in the interest rate charged.

Nonprofit, tax-exempt organizations are allowed to keep only a tiny portion of the revenue that they make. The rest must either be returned or spent in ways that benefit the public. They therefore dont have as much of an incentive to turn a profit off of the loans, and so are able to reduce the cost of these high-interest private loans to borrowers.

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. The rate on these loans is variable but is adjusted only once yearly, based on the auction rate of MELA tax-exempt bonds (which are currently valued at about 3.85 percent) plus a spread of an additional 2.5 percentage points. Other nonprofits also try to keep their rates down. The top rate that the nonprofit Missouri Higher Education Loan Authority (MOHELA) charges its mostly risky borrowers, for instance, is between 10 and 11 percent.

Not only does EduCap's Loan to Learn charge higher rates to less creditworthy students than these nonprofits, in many cases, its private loans have higher top rates than those charged by for-profit firms. For example, according to rate information compiled by FinAid, the highest rate charged on Astrive Student Loans, a private loan product from Citizens Financial Group, for undergraduates is about 13 percent. The worst rate that CitiBank charges is about 12.5 percent, and it doesnt add on any origination fees. [Sallie Mae, on the other hand, trumps EduCap, charging the riskiest students up to 19 percent on their private loans, with origination fees up to 8 percent.]

EduCap officials will say that such comparisons are unfair, because we are not comparing the deals that individual students are getting. And they have a point in the private loan arena, the terms that individual students are charged are largely based on their specific circumstances. Therefore, its hard for us to know whether a particular student would fare better getting a loan from EduCap or CitiBank although it seems fair to assume that they would better off getting their loans from the Maine Higher Education Loan Authority.

But the difficulty in making these comparisons points to the incredible lack of transparency in the non-federally guaranteed, private loan marketplace. Most students cant even find out the terms of their private loans until they're just about to sign their promissory notes. Congress is expected to soon consider legislation, introduced recently by Sen. Chris Dodd (D-CT), that would require private loan providers to provide more detailed information about the terms and conditions of their loan products.

Are borrowers happy with their Loan to Learn loans? Officials with EduCap think so. They shared with us an e-mail from Alan Collinge, the founder of Student Loan Justice, saying that he hasn't heard any complaints from students who have borrowed loans with this company. But at Higher Ed Watch, we have received numerous complaints, some of which can be read here.

So if the nonprofit EduCap, which has lower costs because it's tax-exempt, is not reducing the costs of its private loans, what exactly is it spending its excess revenue on?

Thats a question that The Washington Post addressed in an extremely illuminating article last week. Its also one that the Internal Revenue Service, the Government Accountability Office, and now the Senate Finance Committee are planning to investigate. And it's one we plan to address in a future blog post.

Stay tuned.