October 4, 2006
Education Dept. Urged to Recoup $278 Million in Loan Subsidies
By JONATHAN D. GLATER, NY TIMES

The federal Department of Education will have to decide whether to seek to recover hundreds of millions of dollars in student loan subsidy payments to a loan company that the department’s inspector general has found were improper.

In a report released late last week, the inspector general recommended that the department recover $278 million paid to Nelnet, a student lender based in Lincoln, Neb. The payments were made under a program that guarantees a 9.5 percent interest rate on some loans regardless of prevailing market rates.

The subsidies were offered in the 1980’s to support the federal student loan program at a time when market interest rates were higher. But as interest rates fell to historic lows in recent years, the subsidy program offered a way for lenders to earn higher-than-market returns.

Since some payments continue under the program, which has been criticized by lawmakers and student advocates, the report warned that the government might improperly pay $882 million more to Nelnet unless the department took action. The inspector general gave Nelnet 30 days to respond to the report.

Nelnet challenged the report’s findings. Mike Dunlap, chairman and co-chief executive of the company, said, “We will continue to seek a resolution of this matter with the department and will also examine all other available remedies that prove the merits of our position.”

Katherine McLane, press secretary for the Education Department, said it was “reviewing the report and will consider Nelnet’s response before issuing a decision.”

An audit by the inspector general’s office found that through a series of financing moves, Nelnet increased the size of its portfolio of loans eligible for the guaranteed interest rate to nearly $3.7 billion in June 2004, from $551 million in March 2003. The report found that the increased amount of loans “was ineligible to be billed under the 9.5 percent floor.” Representative George Miller of California, the senior Democrat on the House education committee, said the department should recover the payments.

“We must be vigilant about ensuring that available tax dollars are used to provide affordable college loans to families, not to provide excessive subsidies to banks,” he said.

Michael Dannenberg, director of education policy at the New America Foundation, a nonpartisan public policy research institute in Washington, said, “When a student loan company like Nelnet rips off taxpayers on college loans, students and families end up with less” financial aid.

Congress tried to eliminate the 9.5 percent guarantee in the early 1990’s, but some lenders were allowed to keep collecting the higher interest rates.

“This is a typical story of a complicated program hidden from the scrutiny of taxpayers who are getting ripped off,” said Luke Swarthout, higher education advocate at U.S. Public Interest Research Group in Washington. “To really solve this problem requires the Department of Education to stop payment on these illicit 9.5 percent loans and to demand repayment for subsidies that were wrongly charged.”

Easy Money: How Congress Could Increase Federal Student Aid Funding at No Additional Cost to Taxpayers