The U.S. Education Department has announced that it will not require the National Education Loan Network, a major for-profit student-loan provider based in Nebraska, to return hundreds of millions of dollars in government subsidies, but it will cut off the overpayments going forward.
The department will also stop paying lenders at the highest subsidy rate until they can prove, via audit, that they qualify for it.
Under the terms of the settlement, announced in January, Nelnet, as the provider is known, will be allowed to keep $278-million in payments that the department’s Office of Inspector General says it improperly received from January 2003 through June 2005. It will lose out on an estimated $882-million in future federal subsidies.
It is unclear how much the government will save by cutting off the higher payments to other lenders. As an industry, lenders received $32-million in such payments in the third quarter of the last fiscal year.
The department’s decision comes just under four months after its Office of Inspector General released a report on an audit that concluded that Nelnet had overcharged the government for subsidies on loans it made using certain refinanced bonds. The audit recommended that the department not only end the excess subsidies, but also “require the return” of past overpayments.
Department officials said they chose not to reclaim the money because they did not want to set a precedent that could require the agency to recover money from small nonprofit lenders that had made similar claims. They said they did not want to put smaller lenders out of business and reduce student borrowing options.
“Out of respect to the taxpayer, we felt we had an obligation to say we would not pay until we could certify” that lenders qualified for the higher subsidy, said Sara Martinez Tucker, under secretary of education, who announced the decision. “But we also worried about the students,” she said. “In some parts of the country, these small not-for-profits are the only option they have. We were trying to make the best decision for the taxpayer and for students.”
No Big Surprise
Sen. Edward M. Kennedy, the Massachusetts Democrat who had requested the audit, called the settlement “a loss for students and taxpayers, who are the victims of Nelnet’s greed.”
“The administration should have settled for nothing less than the full recovery of Nelnet’s ill-gotten proceeds from these loans,” he said in a written statement.
But the department’s decision did not come as a complete surprise to those who had hoped it would make an example of Nelnet, the biggest beneficiary of the higher subsidy. In 2005, Secretary of Education Margaret Spellings rejected the inspector general’s advice in a similar audit involving the New Mexico Educational Assistance Foundation, allowing that nonprofit lender to keep $36-million that the audit had deemed “overpayments.”
At issue in both audits are payments the Education Department makes to lenders that have financed new student loans with tax-exempt bonds.
In the 1980s, Congress allowed 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 until recently 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 the inspector general’s audit, 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 last February.
In the audit, the inspector general said lenders were eligible to receive the 9.5-percent rate of return only on so-called first-generation loans (those made using the original pre-1993 bonds) and second-generation loans (those made using payments, interest, or subsidies received on loans financed with the original bonds). But any loans made with the proceeds of second-generation or later loans do not qualify for the subsidy, the audit concluded.
Last week the department issued a letter to lenders concurring with the audit’s interpretation of federal regulation. The letter said the department would allow lenders to keep millions in alleged overpayments if the lenders accepted the department’s interpretation of which loans were eligible to receive the highest subsidy, submitted to an audit, and agreed to certify in future billings that the loans were eligible for the subsidy.
Oversight to Increase
Nelnet officials have said they had received the department’s approval to expand Nelnet’s portfolio of 9.5-percent loans. After the audit was released, sources with knowledge of the inspector general’s investigation said the company hired the law firm of Akin Gump Strauss Hauer & Feld to lobby the administration on its behalf.
In a statement issued after the settlement was announced, Mike Dunlap, chairman and co-chief executive officer of Nelnet, said his company continued to disagree with the audit’s findings but was “pleased to have reached a resolution that allows us to avoid costly litigation to demonstrate the merits of our position.”
“This agreement allows us to put an end to this audit and move forward,” he said.
But officials at other student-loan agencies said they were unhappy with the secretary’s decision to suspend all payments at the 9.5-percent rate of return. One official, who spoke on condition of anonymity for fear of angering the Education Department, called it “grossly unfair” to make lenders pay for audits “to prove you’re innocent.”
Another official said the department’s letter to lenders represented a significant shift in federal policy, and not simply a restatement of the rules.
“The Department of Education has seen fit to pay the 9.5-percent special-allowance rate on these loans for years,” the official said. “To declare them ineligible today makes clear that we’re dealing with a new policy that not even the department was aware of.”
The department’s settlement with Nelnet does not mark the end of its investigation into lenders’ billing practices. The Office of Inspector General is conducting a similar probe of the Pennsylvania Higher Education Assistance Agency to determine whether it, too, overcharged the federal government.
Meanwhile, Democrats in Congress have said they will step up oversight of the lending industry in the coming year. Democrats have accused the administration of being too soft on the student-loan industry, in part because it is a major donor to Republican campaigns. Among lenders, no company has been more generous than Nelnet, which gave $153,000 to the National Republican Congressional Committee in the first three quarters of 2006, according to the Center for Responsive Politics.
Nelnet also made a $50,000 donation to the Hispanic Scholarship Fund in September, when Ms. Tucker, the education under secretary, was still its president and chief executive.
Asked why Ms. Tucker did not recuse herself from the Nelnet decision, a department spokeswoman, Samara Yudof, said the under secretary’s participation “did not raise impartiality concerns by Department of Education ethics officials.”
“Dozens of organizations gave grants to her former employer, HSF, and she is not required to be recused from talking or dealing with all former grant givers,” she said.
http://chronicle.com Section: Government & Politics Volume 53, Issue 22, Page A18
