Nelnet to Pay $55-Million to Resolve Whistle-Blower Lawsuit

August 15, 2010

Nelnet will pay $55-million to settle its share of a whistle-blower lawsuit that accuses it and several other lenders of defrauding taxpayers of more than a billion dollars in student-loan subsidies.

The settlement, which Nelnet announced late Friday, is the latest to result from a lawsuit brought by Jon H. Oberg, a former Education Department researcher, on behalf of the federal government. A federal judge ordered Nelnet and seven other student-loan companies to participate in a settlement conference last week after two of the other defendants in the case, Brazos Higher Education Service Corporation and Brazos Higher Education Authority, reached a tentative settlement agreement with Mr. Oberg.

Among the other defendants in the case is Sallie Mae, the nation's largest student-loan company. A year ago, the Education Department's inspector general issued an audit concluding that Sallie Mae overbilled the Education Department for $22.3-million in student-loan subsidies and should be required to return the money to the department.

Nelnet, which is based in Nebraska, did not admit any wrongdoing as part of Friday's settlement, and said in a statement that its "sole reason for proactively resolving the lawsuit is to eliminate all uncertainties." If the lender had lost the case, it could have been liable for three times the $407-million that it allegedly overbilled the government for interest-rate subsidies.

"While we believe the case brought by Mr. Oberg was without merit and that we would have prevailed at trial, a settlement eliminates the uncertainty, distraction, and expense of a trial," Nelnet said in the statement.

The settlement comes seven years after Mr. Oberg discovered that Nelnet and several other lenders were exploiting a loophole in a program that guaranteed a 9.5-percent return on certain loans. Mr. Oberg reported his discovery to his supervisors, but he says he was brushed off and told to work on other things.

The overpayments continued until the Education Department announced, in January 2007, that it would stop paying lenders at the highest subsidy rate until they could prove that they qualified for it. The following month, the department announced that Nelnet would be allowed to keep $278-million in overpayments but would lose out on an estimated $882-million in future federal subsidies.

At issue in the lawsuit are subsidy payments the Education Department made to student-loan companies on loans financed with tax-exempt bonds.

In the 1980s, Congress provided nonprofit lenders—those that finance their loans with tax-exempt bonds—a guaranteed rate of return of 9.5 percent to help protect them at a time when the economy was sour and the cost of making loans was soaring. Congress eliminated that guarantee in 1993 and grandfathered in existing loans.

But most nonprofit lenders and some large for-profit loan companies that have purchased nonprofit agencies maintained that government regulations allowed them to continue to receive the 9.5-percent return by using the returns on loans backed by the bonds to make new loans.

Many lenders profited by that practice, known as "recycling," but none more than Nelnet. According to a 2006 audit by the Education Department's inspector general, the lender raised the amount of loans it billed under the 9.5-percent guarantee from about $551-million in March 2003 to $3.66-billion in June 2004. During that time, students were paying an interest rate on their loans of 3.4 percent, so the government had to make up the difference. Congress permanently closed the loophole that allowed recycling in 2006.