How Congress Could Spoil Catherine Reynolds’ Comeback

As we reported on Tuesday, Washington, DC socialite Catherine Reynolds is seriously considering jumping back into the private student loan market. Her return would be big news because she left the business three years ago embroiled in controversy — with her non-profit company EduCap, which marketed private loans under the brand name Loan to Learn, facing heavy and deserved scrutiny from the Internal Revenue Service, the Senate Finance Committee, and the news media over its questionable practices.

But this is not a done deal yet. The question of whether or not Reynolds re-enters the private student loan business rests largely in the hands of Congress, which is currently considering legislation that could stop her in her tracks.

We are referring to a proposal that is included in the House of Representatives version of the mammoth financial regulatory overhaul bill that would require colleges to certify a student’s need for private loans before that individual could receive them from companies, like EduCap, that market these high-cost loans directly to students. The plan aims to give college financial aid administrators the opportunity to counsel students about their financial aid options so that they do not unwittingly take on unnecessary private loan debt. This is important because, according to the U.S. Department of Education, nearly two-thirds of undergraduates who borrowed private loans in the 2007-08 academic year did so even though they hadn’t exhausted their eligibility for lower-cost federal student loans first. One quarter of these private loan borrowers did not take out any federal loans at all.

At the time, students were regularly being inundated with television and radio advertisements and pop-up ads on the Internet from direct-to-consumer private loan companies that were promising them easy-to-obtain loans of tens of thousands of dollars a year [The subsequent credit crunch drove many of these companies out of business or at least to be more selective in who they targeted]. The ads did not mention that the loans they were offering lacked the fixed rates, consumer protections, and flexible repayment options of federal student loans. Even worse, many of these companies at least implicitly discouraged students from taking out lower-cost and less-risky federal loans by stressing how much easier it was to obtain a private loan.

In these respects, EduCap was among the worst offenders. Through Loan to Learn, Reynolds marketed private loans to undergraduates of up to $50,000 a year, with effective interest rates as high as 18 percent. At Higher Ed Watch, we also heard from borrowers and former company employees that a single missed payment automatically sent a borrower’s account to a collection agency, which would then add on fees and, as a result, cause the total size of the loan to balloon.

Meanwhile, in its advertisements and marketing material, EduCap went out of its way to stress the complexity of the federal financial aid application process, and the convenience of applying for private loans, which could be accomplished with just a few clicks on the company’s website. In a handbook entitled “Demystifying Financial Aid,” the company described the process of filling out a FAFSA as a grueling ordeal. It warned, for instance, that hundreds of thousands of FAFSA applications are “RETURNED FOR ERRORS” each year, lengthening what the handbook described as an interminable application process.

In addition, as the United States Student Association complained to the Federal Trade Commission in September 2006, EduCap also included other “false and deceptive” claims in the handbook about federal loans that were meant to dissuade students from applying for them. For instance, the company warned that there are “strict deadlines” for applying for federal student loans, when in fact there really aren’t. [As we explained here, students can take out federal loans at the end of the school year for expenses they incurred during the school year.] In addition, the company made a big deal about how its loans could “be used for any education-related expense, including those not covered by most federal aid (computers, books, transportation)” — when, in fact, federal loans can be used for those very same purposes.

The proposal in the House financial regulatory overhaul bill is meant to put an end, once and for all, to these types of abusive practices. With the guidance of financial aid administrators, students would hopefully be steered to exhaust their cheaper federal student aid options first. And those students who have no choice but to take out private loans would be prohibited from borrowing amounts that exceed their schools’ overall cost of attendance.

But Reynolds isn’t taking this sitting down. According to Congressional sources, she has launched a lobbying campaign against the House proposal — bringing in Democratic bigwigs, including a leading labor union organizer, to support her efforts.

Reynolds and her surrogates achieved a major victory last month when the Senate approved its version of the Wall Street reform bill without the “certification” provision in it. Sen. Chris Dodd (D-CT) resisted the pleas of advocates of financial aid administrators, students, and consumers, as well as some student loan industry officials, to amend the legislation to include the House proposal. As we recently reported, Dodd continues to support a toothless alternative measure he helped push through Congress in 2008 that requires students seeking private loans to “self-certify” that they are aware of their federal student loan options.

House and Senate lawmakers will soon resolve differences between the two versions of the legislation. We remain hopeful that with Reynolds waiting in the wings, lawmakers will see just how vital this reform proposal is. Because, as we said on Tuesday, her track record speaks for itself.