Pennsylvania Loan Provider Under Investigation

Pennsylvania's Higher Education Assistance Agency (PHEAA) is now being audited by the Inspector General for 9.5% student loan billing problems. The guarantee at issue provided student loan companies a taxpayer subsidy on top of student interest payments in order to ensure providers a 9.5% rate of return for loans already guaranteed by the government against default.

In 1993, Congress passed legislation intended to phase out the 9.5% rate of return guarantee. But the subsidy has continued to be claimed for over a dozen years, and in recent times, claims by a select number of lenders have grown in size. PHEAA is one of a handful of loan companies that has increased its claims for 9.5% loan subsidy.

In 2002, PHEAA held approximately $844 million in 9.5% loans. By 2004, PHEAA claimed to hold $2 billion worth of 9.5% loans. According to 2005 testimony from Sallie Mae, a rival that has tried to buy PHEAA, two-thirds of the PHEAAs earnings comes from claimed 9.5% loans.

The U.S. Department of Educations Inspector General has audited other holders of 9.5% loans and concluded that all of associated subsidies must be paid back for loans financed after 1993. Over half of PHEAA's claimed 9.5% loans were financed after 1993, meaning that one-sixth of PHEAA's earnings are at stake in their pending audit.

The first two lenders audited by the Department of Education were New Mexicos student loan agency (another non-profit like PHEAA) and Nelnet (a large for-profit lender), which Higher Education Watch has learned were identified in 2003 correspondence to the Inspector General as having irregularities in their billings of federal taxpayers. The Inspector General has now confirmed irregularities in those two cases. A third lender whose procedures were questioned in that original correspondence to the Inspector General was PHEAA.

The Secretary of Education overruled the Inspector General in the New Mexico case (to which the IG objected), but the Nelnet case is pending and Nelnet and PHEAA are very different from New Mexico. Nelnet and PHEAA aggressively abused the 9.5% loophole, whereas New Mexico did not. New Mexico never grew the volume of loans it claimed was entitled to the 9.5% rate of return. But Nelnet and PHEAA did. A lot. In fact, Nelnet and PHEAA were growing their claimed 9.5% loan volume at a time when New Mexico was phasing down its claims as per the 1993 federal statute.

Are PHEAA directors confident that they can withstand the Inspector General's audit of their 9.5 loan portfolio?

Suredly, PHEAA will argue that an adverse finding will hurt students. That claim might be more credible if PHEAA hadn't been wasting its resources on big bonuses for top executives. According to Governor Ed Rendell, the $900,000 in bonuses doled out this year to seven already well-paid PHEAA executives will cost about 190 students each a full grant of $4,500.

Before news of the audit surfaced, Rendell called for an overhaul of PHEAA. Seems the audit only has strengthened his case.