Nelnet

Exclusive: Higher Ed Watch Reveals the Man Who Blessed the 9.5 Student Loan Scandal

Stephen Burd — Wed, 08 Oct 2008 17:16:00 -0400

[This is the third in a Higher Ed Watch series "Revisiting the 9.5 Student Loan Scandal." The series takes a closer look at the origins of the scandal with the purpose of trying to resolve unanswered questions and dispel lingering myths surrounding it. Links to earlier parts of the series are available here and here and are included in the post.]

Regular readers of Higher Education Washington Inc. (HEWI), a pro-student loan industry publication, were probably not too surprised by a recent blurb it ran discouraging lawmakers from reopening the 9.5 percent student loan case. After all, it's hardly news that supporters of the Federal Family Education Loan (FFEL) program are unenthusiastic about any further inquiry into the scandal, which is estimated to have cost taxpayers more than $1 billion in improper payments made to student loan providers.

But these readers may be surprised by what the publication did not disclose. The blurb failed to note the central role its founder -- the lawyer and student loan-industry lobbyist John Dean -- played in counseling the loan company Nelnet on its planned attempt to gain windfall profits from the government.

By Nelnet's own account (see p. 56), the Nebraska-based loan company did not move forward with its plan to aggressively grow the volume of loans it would claim to be eligible for the 9.5 percent subsidy rate until after it received a series of legal opinions, starting in March 2003, from Dean assuring the company of the lawfulness of these actions.

Higher Ed Watch has obtained these legal opinions, which the Department of Education Inspector General recently released as part of a Freedom of Information Act request.

Dean expressed his views most clearly in a January 2004 letter in which he advised Nelnet that the loans it planned to manipulate would be "entitled" to the 9.5 percent "special allowance paid by the U.S. Department of Education under the rules applicable to loans made or purchased with the proceeds of such tax-exempt bonds."

In the letter, Dean acknowledged that the guidance that the Education Department had provided lenders on the 9.5 percent issue over the years was "unclear and at times contradictory." He warned that "in the view of some" of the Department officials he had privately consulted, the type of loan and bond manipulations Nelnet was contemplating were not "in the best interests of the Department."

Still Dean asserted that the Nelnet had "an unanticipated opportunity" to gain a huge return. And he suggested that the Department would not be able to refuse Nelnet's claims without first altering its regulations through a lengthy negotiated rulemaking process. "We believe that if the Department attempted to revise the relevant policies related to pre-October 1, 1993 tax-exempt bond estates without formal regulatory action, the resulting policies would be subject to legal challenge," he wrote. (The Government Accountability Office disputed this view in a report it issued in September 2004 in which it urged the Department to immediately cut off the payments to Nelnet and other loan companies engaged in similar practices.)

In addition, Dean provided assurances to the company that any payments it received would be safe even if legislative or regulatory action was taken to ban these practices in the future. "We don't believe" that it would be "legally possible for the Department or Congress to retroactively" require the loan company to refund these subsidy payments, he wrote.

Based on this advice, Nelnet proceeded with its plan -- increasing from $550 million in 2003 to $4 billion in 2004 the amount of loans for which it sought the 9.5 percent subsidy rate.

In September 2006, the Department's Inspector General (IG) came to a very different conclusion from Dean. The I.G. determined that Nelnet had violated the law and urged the Department to require the return of the funds that had been illegally obtained. Education Secretary Margaret Spellings eventually concurred with the IG's opinion but allowed Nelnet to keep the $278 million it had received in overpayments.

Given the role that Dean played, is it any wonder that HEWI would oppose any further inquiry into the 9.5 percent case? Hopefully, lawmakers will reject his publication's misguided advice.

Avoiding Scrutiny: Lenders Dismiss Calls for Revisiting the 9.5 Percent Student Loan Scandal

Stephen Burd — Tue, 07 Oct 2008 16:30:00 -0400

[This is the second in a Higher Ed Watch series "Revisiting the 9.5 Student Loan Scandal." The series takes a closer look at the origins of the scandal with the purpose of trying to resolve unanswered questions and dispel lingering myths surrounding it. A link to the first part of the series is available here and is included in the post.]

At Higher Ed Watch, we recently called on Congress to reopen the 9.5 percent student loan case. We believe that lawmakers should exercise their oversight responsibilities and get to the bottom of the scandal, which is estimated to have cost taxpayers more than $1 billion in improper subsidy payments made to student loan providers. Among other things, they should try to determine the origins of the scandal and the role that the Bush administration played in allowing it to occur.

Loan industry officials are understandably unenthusiastic about having Congress revisit the scandal. In a recent blurb entitled "Student Loan ‘Loophole' -- Will Congress Look Back or Look Ahead?", Higher Education Washington Inc, (HEWI) a publication owned and run by a top student loan industry lobbyist, warned that such an inquiry would distract Congress from focusing "on issues of student loan access and liquidity":

Several lender representatives say Congress should focus on the future, and that the "overpayments" were both legal, and received only after the lenders repeatedly asked the Department of Education for guidance in whether they were proper. But whether Congress holds hearings on the matter or not, this is just another event which will make any effort to restore liquidity to the market by restoring subsidies to lenders (which were cut under last year's College Cost Reduction and Access Act) that much more difficult.

This argument is not only incredibly self serving and cynical but also contains factual errors. For one thing, the notion that these overpayments were legal is simply untrue. In 2006, the U.S. Department of Education's Inspector General concluded that the mechanisms lenders were using to aggressively grow the volume of loans that they claimed to be eligible for 9.5 percent subsidy payments violated the law. In January 2007, Education Secretary Margaret Spellings concurred with this opinion when she barred Nelnet and other lenders that refused to submit to independent audits from seeking any further 9.5 percent payments.

In addition, the idea that lenders obtained these payments only after seeking guidance from the Department is also patently false. The only company that openly sought the Department's guidance before claiming the payments was Nelnet. Others, such as the Pennsylvania Higher Education Assistance Agency (PHEAA) and the Kentucky Higher Education Student Loan Corporation, overbilled the government without alerting the authorities first.

Don't take our word for it. In their response to the Inspector General's September 2006 audit [see p.61], Nelnet's lawyers wrote that the company could have "quietly" made the claims "without attracting attention to them," as others did. Nelnet, the lawyers wrote, "is unaware of any other participant in the entire education finance industry who proactively contacted the Department." [Of course, it's entirely unclear why Nelnet thought that the Department had approved its actions. The agency's formal response to the loan company studiously avoided answering the company's questions about the appropriateness of its actions. Did the Department's political appointees secretly give Nelnet the green light to proceed? That's one of the most important questions Congress needs to investigate.]

But perhaps the best response to HEWI's larger point -- that Congress shouldn't waste its time focusing on past misdeeds at a time when lenders are struggling -- comes from Kevin Carey, our colleague at Education Sector. In a post on The Quick and the Ed, Carey cites a comment made by the chief executive of the South Texas Higher Education Authority to The Chronicle of Higher Education, in which she said that loan agencies "across the nation have moved forward beyond the 9.5 loan issue." Carey writes:

According to The Chronicle, the South Texas Higher Education Authority "was found to have claimed 93 times the amount of loans now considered eligible for the 9.5 percent program." But never mind, because they have "moved forward beyond" all of that messy business. Why be stuck in the past? I'm going to remember this when prosecutors come knocking on my door after discovering my scheme to defraud taxpayers out of huge sums of money. Come on fellas - I've moved forward! Or maybe I'll try this out at home with my wife. Yes, it's technically true that I failed to put the garbage out for three consecutive weeks...But why dwell on past mistakes? I've moved forward sweetheart - why can't you?

At a time when the federal government is being asked to bail out student loan providers, we think it is especially incumbent on Congress to get to the bottom of these past misdeeds. Loan companies that bilked taxpayers out of more than $1 billion should not be given a free ride. At the very least, any help they receive should be contingent on them returning the money they improperly obtained from the government.

The folks at HEWI obviously disagree. But they may have other reasons for wanting to avoid further scrutiny into the 9.5 loan scandal. We'll explore those reasons soon. Stay tuned.

Revisiting the 9.5 Percent Student Loan Scandal

Stephen Burd — Tue, 23 Sep 2008 13:13:00 -0400

[This is the first in a Higher Ed Watch series "Revisiting the 9.5 Student Loan Scandal." The series takes a closer look at the origins of the scandal with the purpose of trying to resolve unanswered questions and dispel lingering myths surrounding it.]

As the Bush administration nears its end, key questions remain about its role in a scandal that allowed student loan companies to bilk taxpayers out of more than $1 billion by overcharging the government for subsidy payments on loans they made to students. At Higher Ed Watch, we think it's especially vital to get answers to the following questions: what did the political appointees at the Education Department know about the 9.5 percent scandal and when did they know it?

Before delving into these questions, it's important to recall the details of the scandal, which has been largely overshadowed in recent years by higher-profile student loan controversies and the credit crunch.

The roots of the 9.5 scandal date back to the 1980s when poor economic conditions and soaring loan costs prompted Congress to keep nonprofit lenders, which use tax-exempt bonds to finance their loans, in business by guaranteeing them a return of 9.5 percent on loans. Congress rescinded that policy in 1993 but grandfathered in the loans already made, believing that the volume of 9.5 loans would decline as they were paid off.

Instead, a group of lenders devised a strategy to aggressively grow the volume of loans that they claimed were eligible for the inflated payments. They did so by transferring loans that qualified for the 9.5 subsidy payment to other financing vehicles and recycling the proceeds into new loans that they claimed were then eligible for the subsidy. A particularly egregious actor was Nelnet, which was created in 1998 when Nebraska's nonprofit student loan agency converted to for-profit status. By repeating the transfer and recycling process over and over, Nelnet increased the amount of loans for which it sought the 9.5 percent rate from about $550 million in 2003 to nearly $4 billion in 2004.

Profits began to slow after Congress passed bills in 2004 and then again in 2006 to try to prevent lenders from engaging in these type of loan and bond manipulations. At the time, Department officials claimed that they didn't have the authority to stop these practices without Congressional action or a lengthy rulemaking process. Some believed otherwise, and questioned whether the Department's inaction indicated that it was complicit in the scandal.

All told, according to a report last week The Chronicle of Higher Education, the government appears to have lost nearly $1.2 billion in overpayments to lenders over a six-year period.

Still today, the Bush administration officials who run the Education Department bristle at the suggestion they gave a green light to lenders to fleece taxpayers, or knowingly looked the other way while it was happening. But even they have come to acknowledge that they were slow to react to the abuses-- ignoring calls from their own employees, key lawmakers, and the Government Accountability Office to put a stop to it. The political appointees say they didn't fully understand 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.

Department of Education officials say that once the picture became more clear, Education Secretary Margaret Spellings took decisive action to cut off the payments. In January 2007, Spellings barred Nelnet and other lenders that refused to submit to independent audits from making any further 9.5 percent claims. This action, department officials say, saved taxpayers more than $800-million in future subsidy payments to Nelnet alone.

But Spellings' decision in the Nelnet case raised more questions than it answered -- because she ultimately let Nelnet off the hook by rejecting the IG's recommendation to require the company to return the $278-million it had received in overpayments. Instead, she reached a settlement agreement that allowed Nelnet to hold onto the funds as long as it didn't submit future 9.5 percent claims. In addition, she extended the terms of the agreement to all other lenders that had taken part in the scheme, assuring them that they would not have to return excess subsidy payments they had improperly obtained.

In explaining this ruling, Education Department officials initially said that they were not requiring Nelnet to return the overpayments because of concerns about putting small non-profit lenders who had made similar claims out of business. "In some parts of the country, these small not-for-profits are the only option we have," Sara Martinez Tucker, the Department's under secretary of education, told reporters at the time. "We were trying to make the best decision for the taxpayer and for students."

But testifying before the House Committee on Education and Labor in May 2007, Spellings backed away from that explanation and offered another more intriguing one. She said she felt it was better to settle with Nelnet than risk losing in court. "We had significant legal exposure," she said, and "significant liability potential."

Spellings expanded on these statements in comments she made to The Washington Post in the fall of 2007. "The department, I believe, had some responsibility with respect to that confusion [over the rules governing the 9.5 subsidy rates.]," she said.

"We had legal risk, in my view, and the prudent course of action was to, once and for all, end this practice and provide certainty in the industry that that was not allowable," Spellings told the newspaper. "While it cost us $278 million to make that final call, it also saved us potentially a billion dollars had we lost the litigation."

To this day, it remains unclear why Spellings was so pessimistic about the Department's chances in a potential Nelnet lawuit. Had the Department confused lenders simply by its inaction? Or had political appointees at the Department given Nelnet and other loan companies the impression that they had approved their actions? Many lenders did not partake in the scheme. Should those that tried to game the system not be held accountable?

At Higher Ed Watch, we believe these are vital questions to ask and we will do our best, in the coming days and weeks, to try to shed light on them. Meanwhile, we hope that Congress will exercise its oversight responsibilities and demand answers to these questions themselves. To start, lawmakers should require the Department to turn over all communications it had with lenders about the 9.5 percent payments since the beginning of the Bush Administration.

After all, doesn't the public have a right to know whether public officials were complicit in a scheme to fleece taxpayers?

Higher Ed Roundup: Week of July 7 - July 11

Ed Policy — Fri, 11 Jul 2008 20:53:00 -0400

California Halts State Oversight of For-Profit Colleges

Ties Between Sallie Mae and Guarantee Agency Come Under Renewed Scrutiny

Student Loans Still a Problem, Says Outgoing Ed. Dept. IG

California Halts State Oversight of For-Profit Colleges

State oversight over for-profit trade schools in California came to a grinding halt on July 1, when a temporary law regulating proprietary institutions in the state expired. In a last-minute attempt to thwart the deadline, Democratic legislators tried unsuccessfully to pass an emergency measure creating a new regulatory system for monitoring the schools. Republicans, siding with the for-profit higher education industry, voted against the legislation, arguing that it would impose overly-burdensome requirements on their institutions. Democrats and consumer groups denied that characterization, saying that the measure had been significantly watered down to address the schools’ complaints. As a result of the impasse, the state will have no oversight authority over the sector until at least January, when the legislature is expected to bring the bill up for a vote again. In addition, schools are no longer required to contribute to a state tuition recovery fund that reimburses students who attend schools that unexpectedly shut down, leaving little money for those left in the lurch.

Ties Between Sallie Mae and Guarantee Agency Come Under Renewed Scrutiny

A controversial 2004 decision by the U.S. Department of Education to bless a lucrative arrangement that exists between the student-loan giant Sallie Mae and the USA Funds, the country's largest guarantee agency, has come under renewed scrutiny after a copy of a contract between the two companies was leaked on the Internet late last month. A former top Department official, who reviewed the contract after it was leaked, said that the arrangement clearly violates the law, which forbids for-profit lenders from owning nonprofit entities such as guarantee agencies. "The contract is saying that USA Funds is the guarantor in name only," Larry Oxendine, who was the Department's director of student aid policy and analysis until he retired last summer, told The Chronicle of Higher Education. "Sallie Mae does everything and makes all the decisions on behalf of USA Funds." Responding to the criticism, Department officials reaffirmed the 2004 ruling -- which was made by Matteo Fontana, a former Sallie Mae official who was in charge of overseeing the Federal Family Education Loan (FFEL) program at the time -- but said it was interested in learning more about potential conflicts of interest that may exist between guarantors and lenders. In that spirit, the Department sent a letter to the leaders of the 35 guarantee agencies, requesting detailed information about any contractural arrangements they may have with loan providers.

Student Loans Still a Problem, Says Outgoing Ed. Dept. IG

The Federal Family Education Loan (FFEL) program remains extremely vulnerable to waste, fraud, and abuse, says John Higgins Jr., the Department of Education's outgoing Inspector General. In a recent interview with The Chronicle of Higher Education, Higgins, who is retiring this month after serving in the government for 40 years, said that because the FFEL program is so complex, the Department often turns to people inside the student loan industry to regulate it. Putting lenders in charge of overseeing the loan program almost inevitably leads to potential conflicts of interest, he said. Under Higgins' watch, the IG's office has often criticized the Department's lax oversight over the lenders and guarantee agencies that participate in FFEL. He also found himself at odds with the Department's political leaders over his recommendations to require lenders to return hundreds of millions of dollars they received in improper 9.5 percent subsidy payments. An investigation his office conducted into the student loan company Nelnet's efforts to overbill the U.S. Treasury won the Alexander Hamilton Award, a prize the government gives to inspector generals for "outstanding achievements in improving the integrity, efficiency, and effectiveness of Executive Branch agency operations."

Roundup: Week of January 21 - January 25

Ed Policy — Fri, 25 Jan 2008 00:00:00 -0500

Economic Woes Hit Sallie Mae, Nelnet

Tightening credit markets and the slowing economy appear to be spreading into the student loan industry, as two major lenders announced recently that they will be cutting jobs and shying away from riskier loans. Last Friday, Virginia-based Sallie Mae said it would be trimming 350 jobs across the country, roughly 3 percent of its workforce. Nelnet, located in Nebraska, announced it would cut 300 jobs, about 10 percent of its workforce — its second round of major layoffs since September. Both companies also announced changes to the loan services they would be offering. Sallie Mae said it would be more selective about offering private loans to students with low credit scores and those enrolled at schools with low graduation rates. Nelnet, meanwhile, announced it would stop offering loan consolidation services and would be more selective with the loans it offered.

The job and loan cuts were among a slew of negative Sallie Mae stories this week. The loan provider also reported that increased borrowing costs and loan defaults caused the company to lose $1.6 billion in the fourth quarter of 2007. In addition, Sallie Mae revealed that the Securities and Exchange Commission has been asking questions about public disclosures by high-level executives around when they sold shares of Sallie Mae stock — a likely outgrowth of the probe into allegations of insider trading by current CEO Al Lord. Somewhere, former Sallie Mae CEO, Larry Hough, is smiling.

Cuomo Extends Study Abroad Probe with 15 Subpoenas

New York Attorney General Andrew Cuomo’s investigation of study abroad companies reappeared this week with the announcement that his office had sent subpoenas to 15 colleges and universities. The investigation originally began back in August as an outgrowth of Cuomo’s student loan investigation, which uncovered numerous improper dealings between colleges and student aid providers. Cuomo initially sent subpoenas in August and September to five study abroad providers, uncovering a series of deals in which the programs would pay colleges a portion of their fees in exchange for signing up students. Despite this, the investigation lay largely dormant until Cuomo reportedly sent subpoenas out to more than a dozen colleges this week, including prestigious institutions such as Harvard, Brown, and Columbia. According to the New York Times, these subpoenas ask colleges about their process for selecting approved study abroad programs and whether they have received any inducements to sponsor a specific program.

Three More Colleges Announce Aid Expansions

Dartmouth, Bowdoin, and Colby colleges all announced substantial changes to their financial aid packages this week, following the recent lead of Harvard and Yale. Dartmouth’s expansion is the most impressive of the three, eliminating tuition contributions for students from families making under $75,000 annually, replacing all loans with scholarships, and considering all international applications need-blind. Dartmouth’s announcement differs from plans recently unveiled by Harvard and Yale, which cut costs significantly for upper-income families but still kept some form of contribution for all families making more than $60,000 a year. Meanwhile, Colby and Bowdoin announced this week that they would eliminate all loans from current and future student aid packages and replace them with grants, an impressive move given that both have endowments well under $1 billion (subscription required).

Roundup: Week of November 26 - November 30

Ed Policy — Fri, 30 Nov 2007 00:00:00 -0500

Nelnet Audit Receives Top Prize from the Council on Integrity and Efficiency

The Inspector General's Office at the Department of Education has received the top award the government gives to federal inspector generals for its investigation into the student loan company…

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Roundup: Week of October 8 - October 12

Ed Policy — Fri, 12 Oct 2007 01:00:00 -0400

Hillary Clinton Includes Two New America Policy Proposals in Her Education Plan

Two New America policy proposals: required multi-year tuition levels and greater use of endowments to

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Roundup: Week of August 20 - August 24

Ed Policy — Fri, 24 Aug 2007 01:00:00 -0400

9.5% Program Cost Taxpayers $3.5 Billion Since 2001

From 2001 to 2006 the Department of Education paid out $3.5 billion under a subsidy program designed to guarantee nonprofit student loan providers a 9.5 percent rate of return, the

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Higher Ed Watch Investigation Pays Off

Ed Policy — Tue, 14 Aug 2007 01:00:00 -0400

In a reversal, student loan giant Nelnet will pay $1 million to settle a Nebraska investigation into deceptive marketing practices after all. Two weeks ago, Nebraska Attorney General Jon Bruning's office announced he would forgive Nelnet its original $1 million settlement commitment and close the case without further action. But after…

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Nebraska Attorney General Attacks Andrew Cuomo

Ed Policy — Thu, 09 Aug 2007 01:00:00 -0400

Nebraska Attorney General Jon Bruning (R-NE) attacked New York State Attorney General Andrew Cuomo's (D-NY) student loan investigation yesterday, saying it's "widely perceived as an embarrassment" and that student loan giant Nelnet is an "ethical, decent, and honest company."

The Nebraska Attorney General goes on to say, "I…

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