Spellings Suspends Future Nelnet Payments

HIGHEREDWATCH.ORG

Lenders Able to Keep Hundreds of Millions in Past Taxpayer Subsidy Payments; Billions in Future Payments Stopped

Jerry Irvine | January 19, 2007

The U.S. Department of Education announced today a settlement with student loan giant Nelnet regarding what the agency’s Inspector General has said are some $1.2 billion in improper taxpayer subsidy claims for a special class of student loans that the company claims are entitled to a government-guaranteed 9.5% annual rate of return. The Department will let Nelnet keep approximately $278 million (23.9%) in previously provided subsidy payments and “suspend or cease” approximately $882 million (76.1%) in future payments for the loans at issue.

The Department also announced it will halt future payments to other holders of the special class of student loans at issue. The agency's Inspector General had called on the Department to recoup all past payments associated with the improper subsidy claims and halt future payments as well.

But during a conference call with reporters, Department officials said they chose not to recall hundreds of millions of dollars in past payments, because of concern about “putting out of business” small lenders who made similar claims. According to its corporate filings, Nelnet holds $22.9 billion in outstanding student loan assets.

"Good government requires more. The Department of Education should have taken back every penny Nelnet wrongly claimed and instead given that money to students,” said New America Foundation Education Policy Program Director Michael Dannenberg, who pursued the scandal since 2004 -- first while working for Senator Edward M. Kennedy, and now at the New America Foundation.

“This scandal occurred because we have a student loan system rife with inefficiencies and opportunities for abuse by lenders, much more than students. Washington will have an opportunity in the coming months to fix the fundamental problem of politicians writing student loan bank subsidy rates into law. Only the free market, by means of an auction, can ensure that the government subsidy to student loan providers is as low as possible," Dannenberg said.

According to Jon Oberg, the retired Education Department civil servant who first publicly blew the whistle on Nelnet at a New America Foundation event, “Today’s decision is good news as far as it goes, but it still rewards Nelnet at least $278 million for their audacity.”

Higher Ed Watch will release further analysis of Secretary Spellings' 9.5% loan decision next week. Stay tuned.

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Comments

Cookie jars and politics

Submitted by D.C. Observer (not verified) on January 22, 2007.

I'm not surprised that the Department of Education chose not to drop the hammer on Nelnet. After all, the government created the program under which Nelnet, N. Mexico and now apparently PHEAA have purportedly thrived. A single group's actions may raise eyebrows about that organization's business practices but when MANY groups all engage in the same activity it becomes pretty clear that the problem lies with those who crafted and maintained the poorly designed rules and not with those who had to abide by them. You can't tell a group of kids not to take from the cookie jar and then selectively punish a few of them when they all take from the candy jar sitting next to it. In the end, it looks like the most politically swallowable solution prevailed. Nelnet rightfully gets the slap on the wrist it deserves for taking a loophole and aggressively exploiting it while the Department of Education can claim that it saved itself just less than a billion dollars in excess payments. If the PHEAA probe produces similar findings, one should not be surprised to see a similar response from Spellings. In fact, anything but would raise suspicions of favoritism and reduce the Education Department's already shaky credibility.

Let's abolish the Department of Ed

Submitted by Ellie Phunt (not verified) on January 23, 2007.

It sounds like Democrats and Republicans are now in agreement about the Department of Ed being completely worthless, spineless, etc. Let's just get rid of it altogether. . .