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How One Firm Mined the Student-Loan Mess
Tiny MyRichUncle Draws
New Clients After Taking On
College Financial-Aid System
By ANNE MARIE CHAKER
August 2, 2007

In recent weeks, a relatively small student-loan company has taken out ads in major newspapers including USA Today and California's Orange County Register, touting itself as "conflict free." Those words in the ad are surrounded by a collage of newspaper headlines about recent revelations about conflicts of interest in the student-loan industry.

The ad is by MRU Holdings Inc., better known as New York-based MyRichUncle, and it comes exactly one year after the maverick lender took out a string of strongly worded ads that some credit with having sparked investigations into questionable relationships between colleges and lenders. A number of lenders had allegedly been offering incentives to university's financial-aid officials in exchange for getting on the "preferred lender lists" that schools hand out to prospective student borrowers.

Now, with families' trust in their college financial-aid officials broken, more people are looking to alternative resources for student loans, such as Internet search engines and lenders that pitch directly to the consumer. And many of them are turning specifically to MyRichUncle.

The company says calls from customers increased 87% last month from a year earlier. A spokeswoman declined to disclose the actual numbers of queries it gets or loans it provides. But the company says originations of its main private-student-loan product more than doubled in the fiscal year ended June 30, compared with a year earlier. And federal loan applications in just the past month have more than tripled. MyRichUncle "is a beneficiary of consumers exercising their choice to shop around," says Vishal Garg, chief financial officer.

Regulators caution that borrowers still must be vigilant and not assume they are getting the best deal by avoiding college financial-aid offices. The office of New York Attorney General Andrew Cuomo, which conducted intense probes of schools' preferred-lender lists, says it has now begun looking into Internet-based and direct-to-consumer marketing practices, too. "We need to ensure that we rid not only the preferred-lender list of conflicts, but also eliminate any deceptive practices taking place on the direct-marketing side," says Benjamin Lawsky, deputy counselor and special assistant to the New York attorney general, who declined to name any specific companies being targeted.

Amid all this, MyRichUncle -- which says it hasn't been contacted by Mr. Cuomo's office -- made a name for itself in a short period of time. It had been carving out a promising niche by promoting its competitively priced products directly to the consumer. But it has yet to make a profit. It was the newspaper ads last year targeting preferred-lender lists that brought the company national attention.

Such lists were a long-established practice whereby colleges steered students toward specific lenders. Financial-aid officers have said the practice helps whittle down the confusing array of choices in the marketplace. As a result, the vast majority of students end up borrowing from one of the listed lenders, even though they don't necessarily offer the best deals.

One of the MRU ads called the relationships between schools and lenders a "racket." Another said more pointedly, "Before you choose, ask your financial aid office about the lenders on their preferred lender list. Ask if any of these lenders offered kickbacks or incentives to get on the list."

By taking aim at financial-aid officers, who form an important link to customers, MyRichUncle was taking a big risk. And indeed, reaction was swift and sharp. At the University of the South in Sewanee, Tenn., financial aid director David Gelinas sent an email to a MyRichUncle representative, saying: "Please do not visit or contact me." The University of Mississippi's financial-aid director, Dewey Knight, sent an email to a MyRichUncle sales representative, saying he would "not receive or certify loan requests from your company."

Lisa Cain, whose daughter is attending a private college in Boston, says that the school's financial-aid office resisted when she said she was considering MyRichUncle. She had received a list of recommended lenders from the college, but decided to shop around as she began noticing headlines about schools' cozy relationships with banks. The administrative assistant in Tequesta, Fla., ultimately, she chose MRU over the objections of the school, and says she has been pleased.

"The bottom line is, this is a lot of money," says Ms. Cain. "I need to go with the best interest rate."

Attorney General Cuomo's probe into colleges' lending arrangements has led over two dozen schools, including Columbia University in New York and Drexel University in Philadelphia, to settle claims of deceptive trade practices involving undisclosed payments from lenders. Financial-aid officials at some of the best-known schools in the country have lost their jobs for taking stock or other payments from student-loan firms. And some of the biggest student-loan firms have reached settlements with Mr. Cuomo's office, totaling about $14 million.

Just yesterday, Mr. Cuomo announced that he subpoenaed 40 universities as his investigation expands to possible deals between university athletic departments and student-loan companies.

MyRichUncle was founded by two former classmates at New York's Stuyvesant High School. Raza Khan and Mr. Garg, both 29, are children of Indian immigrants who grew up in the city's Queens borough. Both attended New York University on scholarships and started on their career paths -- separately -- from their dorm rooms. Mr. Garg traded stocks for a hedge fund. Mr. Khan built Web sites for companies.

They came together again on MyRichUncle, which floundered in its first few years. The venture launched in 2001 with a novel investment idea: matching student borrowers with an investor -- "a rich uncle." But it didn't take off. Then the founders noticed opportunity in one segment of student loans, those that aren't backed by the federal government. Because federal law limits what students can borrow through less-expensive government-backed loans, rising tuition costs are forcing more students to borrow from private lenders. This market has more than tripled in the past five years, to $17.3 billion, according to the New York-based College Board.

The company went public in 2004, entered the private-loan market in 2005 and a year later unveiled a niche private loan. Using a pricing model they believed could predict a student's future ability to pay, they targeted students who were being denied traditional private loans. These were students who didn't have a co-signer or whose parents had bad or no credit history -- for instance, recent immigrants. They took into account such metrics as grades, major and school attended. No parent co-signer would be required, and the interest rate was based on a future ability to pay.

Last June, MyRichUncle entered the federal-student-loan business, but with a twist. Most lenders offer popular federally backed student loans at interest rates that are set by the government -- currently 6.8% on the most common program, known as a Stafford loan, and 8.5% on the Parent Loan for Undergraduate Students, or PLUS.

To draw business, many lenders discount those rates after a certain number of on-time payments. But because young borrowers often slip up, many don't qualify for the discounts. MyRichUncle offers a steep discount on those rates from the get-go -- 5.8% for Stafford and 6.75% for PLUS (though still charging an origination fee -- totaling 1.5% of the original principal balance -- which other lenders might waive).

Another twist: The product would be marketed directly to students, and not through schools' financial-aid offices. But its larger rivals had a near lock on prospective borrowers, via the college preferred-lender lists.

So the company took out its now-notorious ads in major national newspapers. One ad that ran last summer said, "You need to know that going through your financial aid office may cost you a premium. The only way to be sure you're getting the best rate is to go direct."

Following the widely publicized lending investigations, officials at MyRichUncle say they feel vindicated. The company is still hemorrhaging money. In the six months ended Dec. 31, 2006, its net loss was $17.6 million, compared with $10.6 million a year earlier. But Mr. Khan says those losses are narrowing as it builds its portfolio.