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Audit Finds U.S. Overpayments to Lender

November 20, 2007

A U.S. Education Department audit has concluded that another student loan provider inappropriately billed the government for tens of millions of dollars in reimbursements through a now-closed loophole in federal law.

In an audit report released Monday, the Education Department's Office of Inspector General found that American Education Services/Pennsylvania Higher Education Assistance Authority received about $33 million in overpayments -- and possibly much more -- under an exemption in federal law that allowed lenders that financed the student loans they issued using tax-exempt bonds issued before 1993 to earn a government subsidized interest rate of 9.5 percent. Congress engaged in several aborted attempts to fully close the loophole throughout the 1990s and the early part of this decade, but some lenders continued to find ways to take advantage of it by recycling the pre-1993 loan funds, before Congress, as part of the Higher Education Reconciliation Act, finally closed it permanently last year.

Although Education Department officials have rebuffed calls by Democratic leaders in Congress and watchdog groups like the Project on Student Debt and the New America Foundation to do a full accounting of how lenders have taken advantage of the loophole, this is the third audit of individual lenders by the department's inspector general.

A 2005 audit by the agency called on the New Mexico Educational Assistance Foundation to return $36 million it had wrongly collected by taking advantage of the 9.5 percent rate loophole, but Education Secretary Margaret Spellings rejected the auditor's findings. Last fall, the inspector general concluded that the National Education Loan Network had inappropriately billed the government for more than $1 billion. The Education Department resolved the case -- to the dissatisfaction of many -- by allowing Nelnet to keep $278 million in improper payments it had already received but vowing not to pay the rest.

In its audit report Monday, the inspector general said that AES/PHEAA had received $14 million in "special allowance" overpayments on loans refinanced by taxable and ineligible tax-exempt bonds, and another $21 million in loans funded by tax-exempt obligations issued on or after the eligible date in 1993 (there is some overlap in those two figures, which is why the total number is probably closer to $33 million than $35 million). The inspector general urged the Education Department's Federal Student Aid office to insist that the lender reimburse the department for those funds.

In addition, the inspector general's office said it had found a "significant risk" that other loans submitted by the lender under the 9.5 percent floor were ineligible, and that a "separate independent audit" is under way to determine that. So AES/PHEAA's liability could grow, it seems.

Officials from PHEAA did not respond to a request for comment about the inspector general's audit. But in a letter included in the final audit report, in response to the agency's findings, the agency's president, Richard E. Willey, vigorously disputed the inspector general's conclusions, going so far as to discourage the federal office from issuing its final report.

"It is our belief that a full consideration of our views will persuade your office that many portions of the underlying Draft Audit Report are significantly flawed and that there is no reason to issue a Final Report based on the conclusions enunciated in the Draft Audit Report," Willey wrote in September. "While we acknowledge that this outcome may be unusual, it is, in our view, fully justifiable. In fact, we believe that basing a Final Report on the 'findings' included in the Draft Audit Report would, in itself, be unjustifiable and inconsistent with the high standards generally associated with such audits and the public’s perception of the role of the Inspector General."

The inspector general's response: "AES/PHEAA provided no evidence to cause us to revise our findings or recommendations."

The audit brought swift responses from Congressional critics of the 9.5 percent loan loophole. Sen. Edward M. Kennedy (D-Mass.) said in a prepared statement that he was "very troubled" by the inspector general's findings, which he said made it "obvious that we’ve only scratched the surface in terms of revealing the full extent of the 9.5 percent loan scandal.... The Inspector General needs to undertake a full-scale review of every lender that received these subsidies, so students and taxpayers can know which lenders benefited improperly and so the Secretary can recoup all wasteful payments and put the funds back into student aid, where they belong.”

 

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