Getting to the Truth
If nothing else, the False Claims lawsuit that Jon Oberg has filed against the main perpetrators of the 9.5 student loan scheme should help resolve at least some of the unanswered questions surrounding the scandal -- a goal we have been pursuing at Higher Ed Watch over the last year.
While the lawsuit seeks the return to the federal government of $1 billion in excess student loan subsidies these lenders improperly obtained, it also sheds more light on the origins of the lenders' strategy to gain windfall profits at the government's and taxpayers' expense, and the unwillingness of the U.S. Department of Education's political leaders at the time to put a stop to it.
Here are some of the most interesting tidbits included in the complaint:
- The lawsuit identifies the Pennsylvania Higher Education Assistance Agency (PHEAA) as having been the "first, or among the first, to employ the 9.5 scheme," and estimates that it received approximately $92 million in overpayments.
- PHEAA's success employing the strategy had a domino effect, encouraging other loan companies, like Nelnet, to "emulate what it was doing." Nelnet, which was created in 1998 when Nebraska's non-profit student loan agency converted to for-profit status, became the most active participant in the scheme, making about $407 million in improper 9.5 student loan subsidy claims, the complaint states. In turn, the Kentucky Higher Education Student Loan Corporation (KHESLC) "observed Nelnet's activity" and decided "to increase its own 9.5 claims." According to a recent Inspector General's report, KHESLC engaged in a massive loan and bond refinancing and recycling project over the course of four days in January 2004 so that it could claim 9.5 subsidy payments on "nearly all of its loan portfolio."
- The lawsuit suggests that both PHEAA and KHESLC relied on the authority of the Education Finance Council (EFC), the national trade group for non-profit lenders, to justify their practices. While the complaint doesn't state this explicitly, it hints that EFC played a central role in devising the strategy that allowed some of its members to raid the federal treasury. If true, this would be very significant, as officials with close ties to the group held prominent positions at the Education Department and on the Republican staff of the House committee with jurisdiction over student loan policy while the 9.5 scandal was occurring. For example, Bill Hansen was the president and chief executive officer of EFC from 1993 to 2001 before becoming the Deputy Secretary of Education during President Bush's first term. Meanwhile, Kathleen Smith served as the chief of staff and director of corporate communications at EFC before becoming a top aide on the House education committee under Rep. John Boehner, the Ohio Republican. As head of the panel, Boehner vigorously opposed efforts to require lenders to return the overpayments. Smith returned to EFC in 2005 to become its president. She stayed until November 2008, when she took a civil service job at the Department.
- The lawsuit undercuts a central argument that the Education Department's former political leaders have made to explain why they were slow to react to the abuses. They have said they were unaware of the extent to which Nelnet and other lenders were gaming the system until the Department's Inspector General (IG) released an audit report in September 2006 explaining the illegality of the loan company's actions. The complaint makes clear, however, that as early as 2003, Oberg had warned his superiors about the lenders' scheme -- providing them with detailed memos explaining how the loan companies were engaging in loan and bond manipulations to improperly grow their 9.5 student loan holdings. This suggests that the Department's leaders had other motives for failing to act expeditiously to stop the lenders from bilking taxpayers.
- The lawsuit reveals that an Education Department official provided his or her tacit approval for Nelnet's scheme to overcharge the federal government. According to the complaint, "Nelnet was advised by the Department employee, according to two separate accounts shared with Dr. Oberg contemporaneously, that the Department of Education would never put approval in writing but that Nelnet could take its chances that the Department would never ask for the money back." The complaint does not identify who the employee was, but it is believed to be a former high ranking official in the Department's Office for Postsecondary Education.
At Higher Ed Watch, we applaud Jon Oberg for his tenacity in trying to get to the bottom of the scandal and to recover the government's money. But it's outrageous that our political leaders have left this job to a private citizen.
In June, Rep. Tom Petri (R-WI) sent a letter to Education Secretary Arne Duncan recommending that the Department "explore all options" to recover "these illegal subsidies" that these lenders obtained. "To my knowledge, no funds have been recovered regarding illegal subsidies claimed by lenders and no disciplinary action has been taken against Department of Education officials who allowed this abuse to occur," Petri wrote. "I strongly believe the current Administration should work to restore the integrity of this program by getting to the bottom of this scandal."
Congressman Petri is right. We hope that Secretary Duncan was listening.