MyRichUncle is Out of Cash

(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.

Comments

[FullMontyHall]

Would your definition of "more civilized countries" include Canada and the UK?
And what kinds of colleges would be free: barebones U as well as amenity-rich, lab- and facility-rich mega universities with state-of-the-art fitness centers, air conditioned dorms, brand new athletic arenas? St. Cloud State as well as Harvard? Fredonia State as well as Duke?
US taxpayers should not be asked to subsidize the affluent lifestyles afforded at some schools. And unless you're prepared to institute price controls, then what tools are left for families that want to send their kids to Duke, Harvard and Ohio State? Grants, scholarships and loans.

[kstuff]

KillTheMes­senger-gre­at comment. A student should not have to go into excessive amounts of debt to have a future.

[KillTheMessenger]

One wonders why we need student loans at all. In more civilized countries students get access to universities and colleges for free or close to free. That's how a well run society thinks about education: it's an investment into the future that needs to be made by the taxpayer, not the students.

[FullMontyHall]

MRU and Anya were the strangest bedfellows.
In response to what they thought were sharp business practices by student loan companies, MRU founders employed scortched-earth tactics, buying hundreds of thousands of dollars of full-page ads casting aspersions on and maligning the reputations of an entire class of people.
And for what? To make the almighty buck.
Of course, it all backfired. An investigation that produced not one wit of evidence of financial harm gave Congress the cover to make the largest cuts in federal student loans in history. As they must have said in MRU's executive offices that day, "be careful what you wish for."
So Anya's love affair with MRU is over. What did she ever see in them? Perhaps, the enemy of my enemy is my friend.