Nelnet

[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."

[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.

 [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.

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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.

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

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Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

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

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

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…

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

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…

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.