Disputed Accord in Student Loan Case

Education Department concludes that Nelnet broke law, but settlement lets lender keep $278 million in payments.
January 22, 2007

The U.S. Department of Education announced late Friday that it would allow a student loan provider to keep as much as $278 million in federal subsidies it has already received through its exploitation of a loophole in federal rules.

Department officials portrayed the settlement reached with the Nebraska Education Loan Network, or Nelnet, as a defeat for the for-profit company. They noted that they were declining to pay an estimated $882 million in additional reimbursement requests that the company has pending under the same loophole, and ending future payments on such loans to other lenders as well unless the lenders can prove, through audits, that they qualify for the funds. Nelnet officials themselves, too, took issue with the department's finding but said they had settled the case to allow the company to move on.

But Congressional and other critics accused the department of going soft on Nelnet and other lenders. They blasted administration officials for failing to fully follow the recommendation of the department's inspector general, who contended in a September audit report that Nelnet should be forced to repay all funds earned through the loophole, though which lenders were paid a 9.5 percent government subsidy on a certain class of student loans.

“The administration should have settled for nothing less than the full recovery of Nelnet’s ill-gotten proceeds from these loans," Sen. Edward M. Kennedy (D-Mass.) said in a prepared statement. "The inspector general’s audit made it crystal clear that Nelnet’s claim of a 9.5 percent subsidy rate was absolutely indefensible. The Department of Education’s settlement is a loss for students and taxpayers, who are the victims of Nelnet’s greed."

The department’s action on Nelnet had been eagerly awaited for its signals about how the federal government would deal with a mushrooming controversy long in the making. At issue in the case is Nelnet’s use of 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.

In September, the Education Department’s inspector general released an audit that urged Education Secretary Margaret Spellings to order Nelnet to return the improper payments it had already received and to instruct the company to revise its estimates for future payments to exclude funds for the contested loans.

The audit characterized Nelnet as having quite purposefully sought to expand the pool of loans it held that would qualify for the 9.5 percent “special allowance payments” from the department. Nelnet officials, however, disputed the inspector general’s interpretation and said that the company and other lenders had received misleading guidance from the department at earlier points in the process.

As they awaited word of how the secretary of education would adjudicate the inspector general’s recommendation, student loan watchdog groups like the Project on Student Debt and Higher Ed Watch feared the worst, noting that Spellings had rejected the findings of a similar (but narrower) audit in 2005 involving the New Mexico Educational Assistance Foundation. Anticipation grew as the days, then weeks, then months passed.

Then Friday afternoon -- a traditional dead zone into which makers of unwelcome news often release information that they hope will get buried in the quieter weekend news cycle -- the department arranged a conference call for reporters on an hour’s notice in the very late afternoon. A department spokeswoman said the last-minute nature of the call was necessary because the settlement with Nelnet had “just happened,” and that U.S. officials had made the news known “as soon as that happened.”

Department officials announced that they agreed with the inspector general’s finding that the 9.5 percent loans were improper, and that they were following the audit’s recommendation that the department should not reimburse Nelnet or any other lender for any loans made after July 1, 2006. Sara Martinez Tucker, the new under secretary of education, said the department would cut off future payments because it “agreed to disagree” with Nelnet’s interpretation of federal law and of how the company did or did not comply with it.

But Tucker said that in contrast with the inspector general’s recommendation, the department would not insist that Nelnet (or other lenders, for that matter) return any funds that the government had already paid them under the 9.5 percent program. Tucker said that if the government forced Nelnet to retroactively return funds it had already received, the department would have to do the same thing to other lenders, and such a decision, she suggested, could “jeopardize” the financial status of some small nonprofit lenders, ultimately harming students. (The department's inspector general has at least one otheraudit currently under way, of the Pennsylvania Higher Education Assistance Authority.)

The department’s overall stance in the Nelnet case sought to balance “the interests of taxpayers and students,” Tucker said.

Critics of the department’s decision did not see it that way.

"It's too bad that Nelnet and a handful of other lenders were able to get away with the 9.5 [percent] loan taxpayer ripoff for so long while the administration was asleep at the switch,” Michael Dannenberg, director of the New America Foundation’s Education Policy Program, said in a statement.

“This is tantamount to saying to Willie Sutton, 'You raped and you pillaged and you looted the taxpayer, and we won't do anything to you as long as you promise not to do it again,' ” Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admission Officers, said of the department’s decision both to find that Nelnet had broken the law and to let it keep hundreds of millions of dollars in already collected reimbursements.

He characterized the department’s suggestion that “there's a shortage of capital that forces the government of the United States to tolerate theft in order to maintain access to capital” as an “act of chutzpah,” and said he hoped that Congressional leaders would hold immediate hearings on the department’s behavior in the Nelnet case. “This is a prime candidate for proper oversight by Congress,” Nassirian said.

Kennedy and Rep. George Miller (D-Calif.), who heads the Education and Labor Committee in the House of Representatives, both issued statements suggesting that they would look into the matter.

“The Nelnet 9.5 percent loan scandal has cast a black mark on the student loan industry,” Kennedy said. “It underscores the need for Congress to oversee the loan programs more closely and consider aggressive reforms to the Federal Family Education Loan Program.”

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