(crossposted from FastCompany.com )
MyRichUncle was an intriguing startup student loan company with an innovative, white-knight approach when I wrote about them in the 2006 Fast Company 50.
When I talked to them, the two 20something founders seemed cocky, but sincere. They believed they could bypass the punitive terms and high-pressure sales tactics used by other student lenders in favor of better analytics to predict students' chances of repayment, and that they could build customer loyalty through transparency. They gained a higher profile in 2007 when they took out a full page ad in the New York Times to publicize the shady collusion between college financial aid officers and other student loan companies. Lenders like Sallie Mae often offered colleges kickbacks and sweeteners in exchange for inclusion on "preferred lender" lists. The ad campaign helped fuel a large-scale investigation into these practices by New York State Attorney General Andrew Cuomo, which led in turn to some federal policy crackdowns, including subsidy cuts to lenders.
But the student loan market today looks very different than it did in 2007 when it was seeing 27 percent annual growth. In fact, there's a looming crisis.
Throughout those years of growth, federal and private student loans were heavily repackaged and securitized just like home loans and credit card debt. So in the face of the credit crisis, 168 lenders have pulled out of the program. So-called "subprime students," typically at community and for-profit schools, are having trouble getting federal or private student loans, and all students are seeing fewer discounts on loans. More student loan defaults may be looming as the economy sheds jobs. And the Treasury Department and Federal Reserve have quietly authorized up to a $260 billion bailout for the student loan industry, separate from the $700 billion bailout we've all heard so much about.
MyRichUncle won't be seeing any of that money. They had had trouble raising capital as the market got tighter, had stopped making new loans, and today, declared bankruptcy. As if they didn't have enough trouble, it came out in December that one of their former employees allegedly embezzled $2.3 million from their accounts. Troy Hill, of Jersey City, blew much of the cash on several Mercedes, bling from Jacob the Jeweler, and two coffeehouse franchises.
The student loan market is definitely not getting any more clean or transparent in this atmosphere of scarcity and panic. In this environment, it's a tough time to be the nice guys.