College Cash on Hand

, Matthew Hickman, Leave a comment

Typically, when students attempt to obtain loans for college they look toward federal student loans. In fact, the student loan industry is currently dominated by federal loans. However, there has been a meteoric emergence of private student loans; students now have more choices and more lenders from which to choose. Recently, the American Enterprise Institute (AEI) sponsored a conference discussing different aspects of the student-loan industry, including the history, consumers, middlemen, and future. In addition, AEI detailed the alternatives to federal student loans. Richard Lee Colvin, of Columbia University, and Joseph Williams, author of Cheating Our Kids: How politics and Greed Ruin Education, were two guests who discussed what private-loan organizations are involved in the market. They also suggested how these companies make profit and remain competitive in the industry.

From an outsider’s point-of-view, Colvin claims, “There has always been a very large private component to the [student-loan industry].” In fact, Student-loan purveyors have increased; in 1997 students could choose from 79 different private-loan programs, but in 2003 there were an estimated 272 different private-loan programs. What has caused this increase? Colvin suggests, “I think entrepreneurship has really been one of the driving forces behind the growth in the private-loan market.” Arguably, the most successful private-loan company is My Rich Uncle, which was founded in 2001, and has since “questioned some of the operating assumptions of the industry.” My Rich Uncle established a completely new model, and raised cash, not through securitizations, but through lines of credit.

My Rich Uncle, and other private-loan companies, is engaged in a sophisticated advertising and marketing campaign, “To begin with they have a really cool name.” In fact, My Rich Uncle paid $18,000 to secure their domain name, and “they use that name to drive their marketing efforts.” These efforts include utilizing “very cool hip graphics, fresh tone, and quotes like ‘We know your pain.’”

The Internet has made My Rich Uncle extremely profitable; they have the ability to do volume on the Internet and they can originate loans very quickly at a very low cost. Also, they use the Internet as a campaign tool against the federal-loan industry, “A theme of these websites is the federal-loan system is just too confusing; it’s just too hard,” whereas doing business with private-loan companies online is “easy.” Furthermore, private-loan companies use many different websites simply as funnels for their original homepage. Ultimately, “This money would not be available to [students] at all without some of these practices…lenders really are merchants of opportunity.”

EduCap, unlike My Rich Uncle, is a not-for-profit organization founded in a more traditional manner; they exist to provide information for students looking at obtaining alternative loans. In order to disseminate information, EduCap established “partnerships with organizations that had nothing to do with higher education, but that had access to lots of people.” In fact, Williams details partnerships “with groups like the Chamber of Commerce, the National Rifle Association, [and] major corporations around the country, who through the partnerships were able…to market…the loans that EduCap had to offer.” This new way of thinking led to a completely different landscape for higher education.

However, Colvin and Williams are not wholly optimistic about private and alternative loans. Colvin is concerned that “a number of these websites don’t mention interest rates, or only mention the interest for students that get the very best credit.” Also, Colvin still has questions, “What are the approval rates? How much are people really borrowing? What’s the income distribution of the borrowers?” Although Colvin see promise, he wonders, “Is this the way we want to finance higher education in this country?” Williams is more optimistic than Colvin, but like many people, is still concerned that lenders make such a high profit off defaults; he believes organizations like EduCap should stem that problem if possible.

Supporters of alternative and private loans claim that detractors are attacking lenders and misleading the public. John A. Hupalo, of First Marblehead Corporation, points to negative articles in different publications that actually describe “success stories.” Hupalo suggests that higher education be restructured to add a place for private loans, “What we’re trying to do is supplement the good work that’s going on in other aspects of the financial aid community.”

The private and alternative loan industry is still very much in its infancy. Therefore, it’s difficult to get questions answered or find bevies of information on many of the young organizations. However, the companies are very real, and as it becomes easier to turn a profit in the industry, the companies will continue to multiply. AEI serves to shine light on the operations of organizations such as My Rich Uncle and EduCap so that the public is more informed when making difficult decisions. Generally, Colvin and Williams believe the private loan industry will do more good to help needy students, but there is the possibility of abuse.

Matthew Hickman is an intern at Accuracy in Media.