‘Captured by the Interests It’s Supposed to Regulate’: A Whistle-Blower’s Grim Assessment of the Ed. Dept.

Over just a few years beginning in 2002, several of the nation’s student-loan providers used an accounting trick to illegally claim some $700 million in taxpayer-funded subsidies.

It took a determined federal bureaucrat, Jon H. Oberg, more than a decade of work on his own initiative to figure it out and claw back just 10 percent of that amount.

With his legal battle nearing an end, the former Navy officer and university professor sees important lessons in the case. Chief among them: Even an enterprise as seemingly altruistic as higher education is not immune to serious abuse. And the victims of that abuse are usually the ones who can least afford it.

The scandal involved a program known as 9.5 Loans, in which the government promised nonprofit lenders a fixed 9.5-percent rate of return on student loans at the beginning of the 1980s — a time of relatively high interest rates. By 1993, interest rates had fallen, and Congress voted to shut off that subsidy for any new student loans.

In 1997, while working as a congressional liaison in the Department of Education, Mr. Oberg brought to Congress a proposal that the subsidy payments be shut off entirely, even for continuing loan agreements.

But, he said, the staff member he met at the House education committee — who previously worked for the Pennsylvania Higher Education Assistance Agency, or Pheaa, one of the nonprofit loan agencies later found to be exploiting the 9.5 Loan loophole — dismissed the idea out of hand.

Then in 2003, working as a researcher for the Education Department, Mr. Oberg noticed that payments to lenders under the 9.5 program, which should have been winding down since the 1993 vote, were actually increasing.

After a long fight that his own government bosses didn’t want to join, Mr. Oberg helped win back some $70 million in overpayments by taxpayers. But in some places, such as Kentucky, the legal settlements may be hurting students who had been promised benefits using that money. And at other lenders, such as Pheaa and Nelnet, some executives walked away with millions of dollars in individual bonuses. And Pheaa remains strong — its FedLoan Servicing division was given an exclusive contract in 2012 to manage loans under the federal government’s Public Service Loan Forgiveness program.

In an interview with The Chronicle, Mr. Oberg, speaking from his farm outside Lincoln, Neb., provides his fullest-ever account of the 9.5 program saga. The interview has been edited for length and clarity.

Q. How did 9.5 Loans come into your life?

A. They came in 1997, when it came time for Congress to reauthorize the Higher Education Act. The Department of Education proposed a number of amendments, and one required the total repeal of anything to do with 9.5 Loans.

Q. Why did that amendment seem necessary at the time? Congress had already voted four years earlier to allow the subsidies only for loans that already existed.

A. The subsidy still applied to loans in repayment, and the Clinton administration wanted to move resources from paying lenders to helping more students. Even without the 9.5 subsidy, an administration analysis found, the lenders were being overpaid on subsidies. I thought that made every bit of sense. We didn’t know about any abuses at that time.

Q. The basic scheme — adding new loan values into existing loan accounts that were legally still eligible for the 9.5 subsidy — never occurred to anybody at the Department of Education?

A. Right.

Q. Do you think any of the lenders were lobbying for that back in 1997, perhaps thinking that if they kept the 9.5 Loan program alive, they might figure out a way of exploiting it?

A. Working for the Education Department, I walked the package of amendments up to the Hill, and gave them to Sally Stroup, the education-committee staff member on the House side. Looking through the amendments, she saw the one on 9.5 Loans and immediately said, “Stop right there, take it back, we’re not doing that.” It was so abrupt I said, “What, what, let me explain,” and she said, “Don’t do it, we’re not going to accept it.” And I said, “OK, all right,” and left.

[Ms. Stroup had earlier worked for Pheaa. Later she served as assistant U.S. secretary of education for postsecondary education in the Bush administration, and as a lobbyist for for-profit colleges. She could not be reached for comment, and did not respond to requests for comment when the 9.5 Loans first received news coverage.]

In 2003, I remembered that moment. I was working in the Education Department’s research office, and had finished up a couple of projects, and I was looking for something that I should get my teeth into. And I remembered that those 9.5 payment funds were supposed to be declining. And when I went to look them up, in the spring of 2003, I found that those at Pheaa were not declining — they were growing.

Q. Just at Pheaa, or elsewhere too?

A. I looked at the New Mexico Educational Assistance Foundation, which had just posted financial reports, and saw theirs was going up too. Some, including the Vermont Student Assistance Corporation, or VSAC, and the Kentucky Higher Education Student Loan Corporation, joined after seeing others do it.

Nobody at the Department of Education could explain why the payments were growing, so I reported it to the department’s inspector general. Their first answer back was, “Oh, there’s nothing going on.”

I reported it up through the chain of command, and my boss at the time said it was not my area of responsibility. So I asked the department’s ethics division for permission to pursue it as an individual, and they approved. I went to the investigative arm of Congress, now known as the Government Accountability Office. By then I had figured out how the agencies were managing to increase their 9.5-loan volumes, and explained it to the GAO. They issued a report in late 2004, saying billions of dollars were at stake, and Congress acted immediately to shut off the payments going forward.

That solved most of the problem. But there was still the matter of how much had been paid out illegally, and if there was going to be any attempt to get that back.

The Department of Education’s inspector general got involved again, and did three audits — of New Mexico, Pheaa, and Nelnet — because I had identified those as problem agencies. And they said, yes, what they were doing was illegal, and said the money should come back.

The secretary at the time, Margaret M. Spellings, confirmed the payments were illegal. But Ms. Spellings said in 2007 that she was not going to try to get the money back, unless the lenders continued to make claims without audits to ensure their legality.

Q. And Sally Stroup, by that time, has been working for the department?

A. Yes, she was there from 2002 to 2006.

Q. And you?

A. I retired from the Department of Education in 2005. But when the secretary said she would not try to reclaim the money, I got interested again. Some congressional aides met with me seeking details. But with nothing happening, and as a last resort, I decided to try suing as a citizen to get the money back.

I did that reluctantly. I thought this was absolutely the wrong lesson. You don’t want the government out there telling its contractors you can make false and illegal claims, and if we catch you you’ll have to stop, but can keep what you’ve gained, even if it’s in the hundreds of millions of dollars. That to me was a moral hazard, when you set up incentives for wrongdoing.

I filed under the False Claims Act. We settled with five lenders in 2010, and a few more in subsequent years. In the end we reached settlements with seven of the nine lenders, and recovered around $70 million.

Q. How many went to trial?

A. One: Pheaa. We lost that case, after coming back three times with successful appeals, and now are pursuing a fourth.

Q. And the other that you didn’t win?

A. The Arkansas Student Loan Authority. It and three other nonprofits lenders argued that they were arms of their state governments and thus exempt from lawsuits. We won on that point against the others, after appeal. We lost on appeal with the Arkansas agency, but it agreed to pay back $6 million of the $12 million we felt it owed.

Q. Beyond Pheaa and Nelnet, are the other nonprofits in a similar place with paying their executives?

A. Not to my knowledge, in most cases. I don’t think Vermont misused their 9.5 funds — I think they were using it for their students. And Kentucky is a sad story. Kentucky started a loan-forgiveness program, using its 9.5 funds. Then the Kentucky legislature took tens of millions of dollars from it to balance the state budget. Then the 9.5 funds were cut off by the federal government. That left hundreds if not thousands of Kentuckians, who were promised loan forgiveness if they went into certain kinds of fields like special education, holding the bag.

Q. How much ultimately did the federal government lose?

A. To my best estimate, the lenders took between $600 million and $800 million. We only got back $70 million because of timing and the settlement process.

Q. So overall, the agencies ended up paying about 10 percent of the amount they took, with no penalty?

A. That’s right. You always have to assess the risk of going to trial. And the companies also suffered millions of dollars in court costs, reputational damage, and the costs of their internal communications being made public. The 9.5 scandal certainly contributed to the decision by Congress in 2010 to end the whole lender-subsidy program, known as FFEL.

Q. What was your share of the settlement?

A. My percentage is set by law between 25 percent to 30 percent of the settlements. That has to cover my very substantial legal expenses, and of course about 40 percent of it goes back to Treasury because it’s taxable.

There was some left over, and a lot has gone to charity, including Veterans Education Success and others working on behalf of students and their families.

Q. What changes, if any, need to be made at the Department of Education?

A. There has been a great deal of fraud, waste, and abuse; record amounts of borrowing; and college affordability is a growing problem. We should perhaps move the loan-collection system out of these servicers and put it onto the tax-withholding system, as other countries do with success. A department that was supposed to benefit higher education has been captured by the interests it’s supposed to regulate.

Q. Does that continue regardless of changes in administrations?

A. I will say without hesitation that under Secretary Paige and now Secretary DeVos, the department has a terrible problem of revolving doors and iron triangles. We’re seeing lives ruined by the Department of Education in the ways it is not responsive to the interests of the constituency it is supposed to be helping. When I was at the department, and even in retirement, I have had many people come and ask for help. Because they have nowhere else to turn. That has to stop.

Paul Basken covers university research and its intersection with government policy. He can be found on Twitter @pbasken, or reached by email at paul.basken@chronicle.com.