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The Inspector General Weighs in Again on the 9.5 Student Loan Scandal

Published:  June 3, 2009

[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).

Many of these loan providers have used these program reviews as evidence (see Exhibit 99.1 at the end of this document) that they never did anything wrong. Take the Kentucky student loan agency, for instance. In May 2006, the Financial Partners division published a program review report, which concluded that KHESLC had undercharged the government. The report included a spreadsheet of loans that it said were eligible for the 9.5 payments, and invited the nonprofit student loan agency to determine the additional amount of subsidy payments it was owed.

Officials with the Kentucky agency have repeatedly cited this program review as evidence that its 9.5 claims were legitimate. In a letter to the Inspector General (starting on page 32 of the document), Edward J. Cunningham, the agency's executive director, wrote that the findings in the report demonstrate "that KHESLC has applied the regulations properly and has complied with the spirit and letter of the applicable statutes, regulations, and sub-regulatory guidance with regard to the issue of the 9.5 percent floor." [For a more detailed discussion of the agency's use of these funds, click here.]

But the IG rejects that argument, saying that "we do not find" the recommendations in that program review to be "consistent with the HEA [the federal Higher Education Act], regulations, and other policy guidance issued by the Department."

The Inspector General doesn't provide any further explanation of its reasoning. But in a separate report that it issued in April, the IG raised grave concerns about the program reviews that were initiated by the Financial Partners division during this period of time. The IG said that these reviews cannot be relied upon because they were conducted by regional Education Department staff without adequate time or training to conduct them properly. What's more, the IG said, the division did not consult with the Education Department's Office of General Counsel before issuing reports that dealt with "sensitive" issues to ensure that their findings were consistent with federal student aid law and regulations.

As we said before, these program reviews certainly raise the question of whether officials in the Financial Partners division were trying to provide lenders with cover at a time when the loan companies' 9.5 claims were coming under increasing scrutiny from Congress and the Inspector General's office. Were they meant to protect the lenders from having to return the excess subsidies that they received? And who ultimately signed off on them? Did the buck stop with Matteo Fontana, the general manager of the Financial Partners division, who was ultimately forced to resign from the Education Department due to his ties to loan companies that have been well documented by Higher Ed Watch and others? Or did it go further up the chain of command at the Federal Student Aid office or the previous administration's leadership at the Department of Education itself?

At Higher Ed Watch, we believe that the public has a right to know the answers to these questions. If government officials were complicit in a scheme to fleece taxpayers, they should be held accountable for their actions.

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