NEWS SCOOP: Ed. Dept. IG Calls on Nelnet to Return $278M in Student Loan Subsidies and Halt $882M in Future Subsidy Billing

The Department of Education's Inspector General (IG) has called on Nelnet to return $278 million in taxpayer subsidy payments for a controversial student loan accounting practice and halt billing the Department of Education more than $882 million in future taxpayer subsidy payments.

The breathtaking audit is sure to rile Nelnet stockholders while cheering competitor Sallie Mae's. According to the IG,

"The Higher Education Act includes a special allowance [subsidy] calculation for loans funded by tax-exempt obligations issued before October 1, 1993. The quarterly special allowance [subsidy] payments for these loans may not be less than 9.5 percent. . . When interest rates are low, the 9.5 percent floor provides a significantly greater return than lenders receive for other loans.

In April 2003, Nelnet implemented a process ("Project 950") to increase the amount of its loans receiving special allowance [taxpayer subsidy payments] under the 9.5 percent floor. . . . Nelnet repeated this process many times, increasing the amoung of loans it billed under the 9.5 percent floor from about $551 million in March 2003 to about $3.66 billion in June 2004.

. . . . Nelnet's Project 950 did not fund loans from an eligible source in compliance with the Higher Education Act, regulations, and other guidance issued by the [Education] Department. We estimate that Nelnet was improperly paid more than $278 million in special allowance payments for these loans from the quarter ended March 31, 2003 through the quarter ended June 30, 2005, and that Nelnet could be improperly paid about $882 million for the ineligible loans after June 2005 if Nelnet's improper billings are not corrected.

. . . . We recommend that the Chief Operating Officer (COO) for [the Department of Education's Office of] Federal Student Aid instruct Nelnet to exclude all Project 950 loans from its claims for payment under the 9.5 percent floor. We also recommend that the COO require the return of the overpayments described in this report."

Two weeks ago, the New America Foundation unveiled the whistleblower who brought the Nelnet scheme to the attention of the media and lawmakers. Last week, we reported that the White House has gotten involved in the Nelnet scandal.

Today's IG report is great news for taxpayers and potentially students and families. If the Education Secretary follows up on the Inspector General's recommendations, almost $1.2 billion will be saved. Instead of going to Nelnet, those saved taxpayer funds could send more than 100,000 students to public college for free.

Stay tuned Monday morning to Higher Ed Watch for more on the Nelnet 9.5% student loan scandal and the Department of Education's next step.