[This is the seventh in the 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, here, here, here, here and here.]

A new report that the U.S. Department of Education's Inspector General (IG) released on Friday about the Kentucky Higher Education Student Loan Corporation (KHESLC) should put to rest, once and for all, a key argument that lenders have been using to defend their involvement in a scheme to gain windfall profits at the government's and taxpayers' expense. The IG rejects the loan companies' claims that their actions were lawful because several officials at a key office within the Education Department had approved them.

In January 2007, then-Education Secretary Margaret Spellings put a stop to what has become known as the 9.5 scandal, in which a group of lenders were improperly growing the volume of federal student loans that they claimed were eligible for the 9.5 guarantee available on loans financed through tax-exempt bonds issued before 1993.

But, as Higher Ed Watch first revealed last month, the Financial Partners division of the Department's Federal Student Aid (FSA) office carried out a controversial series of program reviews from the fall of 2005 through the summer of 2006 that signed off on these student loan companies' 9.5 billing practices. In some cases, the program reviewers even showed the lenders how they could take greater advantage of these inflated subsidies (at the time the borrower interest rate on regular federal student loans hovered around 3.5 percent).