Higher Ed Watch has learned that the student loan company Nelnet recently had a subpoena issued to the U.S. Department of Education for documents it believes will definitively show that the agency's former leaders signed off on the company's plan to aggressively grow its 9.5 percent student loan holdings. Nelnet took this action shortly after a federal court judge ruled in favor of allowing a False Claims lawsuit filed by Jon Oberg, the former Education Department researcher who uncovered the 9.5 student loan scandal, to proceed against the company and five other lenders.
The release of these documents, which are likely to become public as the lawsuit progresses, could be a major breakthrough in helping to resolve some of the long unanswered questions surrounding the Bush administration’s role in the 9.5 student loan scandal. Specifically, what did the Department’s former political leaders know about the lenders’ scheme to gain windfall profits, when did they know it, and why did they take so long to do anything about it?
The roots of the 9.5 case go back to the 1980s when Congress guaranteed non-profit lenders, which use tax-exempt bonds to finance their loans, a minimum rate of return of 9.5 percent on federal student loans made with these bonds. As interest rates on other student loans fell in the 1990s, policymakers became concerned that these non-profit student loan providers were making a killing. So in 1993, Congress rescinded that policy but grandfathered in loans made from the old bonds, believing that the volume of 9.5 loans would decline as they were paid off and the bonds retired.
Instead, beginning in 2002, a small group of lenders devised a strategy to aggressively grow the volume of loans that they claimed were eligible for the 9.5 guarantee. This was a goldmine for lenders in the existing low interest rate environment (at the time, the borrower interest rate on regular loans hovered around 3.5 percent.) They accomplished this scheme 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. The lenders repeated this process over and over again.
The most active participant in the scheme was Nelnet, which was created in 1998 when Nebraska’s non-profit student loan agency converted to for-profit status. By constantly repeating this process, Nelnet increased the amount of loans for which it sought the 9.5 percent rate from $393 million in 2001 to more than $3.3 billion in 2004.
As a researcher in the Education Department's Institute for Education Sciences, Oberg discovered the scheme in 2003 while reviewing internal agency spreadsheets that showed that the total volume of outstanding 9.5 loans was growing rather than shrinking. He brought his concerns to his superiors at the Department but they brushed them off. His supervisor, Grover Whitehurst, ordered him to stop pursuing the issue.
Oberg had also reported his findings to the Department's Inspector General, which launched its own investigation into the 9.5 scandal. His work paid off in September 2006 when the Inspector General declared the lenders' loan and bond manipulations to be illegal. In January 2007, Education Secretary Margaret Spelling concurred with the Inspector General's opinion and barred the student loan company Nelnet and other lenders that refused to submit to independent audits from receiving any further 9.5 payments. But she did not require the lenders to return the overpayments they had already received.
Later, in explaining her decision to allow Nelnet to keep hundreds of millions of dollars, Spellings said she felt that it was better to settle with the loan company than to risk losing in court. “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,” she said in an interview with The Washington Post. “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 lawsuit. 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?
Nelnet officials certainly believe that they were given the green light. In a filing with the U.S. District Court for the Eastern District of Virginia, the company’s lawyers made clear that they intend to make the Department’s role in the case a central part of their defense.
“In the case of Nelnet, the evidence would include witnesses to meetings between the company and the Department regarding this issue. It would include witnesses to phone calls between the company and the Department. It would include witnesses to the settlement agreement entered into between the company and the Department. All of these witnesses would testify to matters that reflect the intent of Nelnet...”
At Higher Ed Watch, we are pleased by these developments, as we believe that this type of information should have seen the light of day years ago. After all, doesn’t the public have a right to know whether government officials were complicit in a scheme to fleece taxpayers? And doesn’t it have the right to see how the Federal Family Education Loan (FFEL) program has been a magnet for fraud and abuse?
As we’ve said before, Jon Oberg should be congratulated for his tenacity in trying to get to the bottom of the scandal. It looks like his efforts are starting to yield results.
[Editor's Note: A spokesman for Nelnet declined to comment on the subpoena, except to say,"We believe the allegations of the lawsuit are entirely meritless and intend to vigorously defend the claims."]