Predicted Outcome on Student Loan Scandal

Secretary of Education Margaret Spellings will decide any day now whether to enforce the Department of Education's Inspector General's recommendation that student loan giant Nelnet be forced to give up $1.2 billion in improperly claimed taxpayer subsidies. That's a big decision that rests in Spellings' two trusted hands.

Higher Ed Watch has reported on the substance of the 9.5% student loan scandal at issue here and here. Yesterday, we uncovered and deconstructed the Bond Market Association's spurious defense of Nelnet. Today, we consider the politics of the issue and make a prediction.

Simply put, politically, it would be foolish to let Nelnet off the hook. And Margaret Spellings is no fool. She can see that a pro-Nelnet decision on this issue is tailor-made for a Democratic Congress. Imagine the oversight hearing.

Here are your potential witnesses:

In the white hats, youve got the Inspector General who says the $1.2 billion in taxpayer money should be taken back. Youve got the Government Accountability Office who separately has said these taxpayer payments were never legal. Youve even got a human interest story in the civil servant whistleblower who repeatedly tried to get the Department of Education to at least try to stop the escalating taxpayer payments.

In the black hats, youve got the head of the Office of Federal Student Aid, who is a former Sallie Mae Vice President and who oversaw the escalating payments without saying a word. Youve got Spellings herself should she make a pro-Nelnet decision. And youve got the Nelnet executives who told Wall Street for more than a year that they werent sure about the legality of these escalating 9.5% loan claims and who then made giant contributions to the Republican Party after the auditors came knocking.

Here's the political key:

If Spellings goes soft on Nelnet, it empowers the Democratic Congress to whack much, much harder other taxpayer subsidies to Sallie Mae and all the other student loan lenders out there in order to finance the Democrats' top agenda item of cutting student loan borrower interest rates in half.

The particulars of the 9.5% loan scandal don't matter to the general public. What they will get through the press and what will resonate politically is the new majority saying, were on the side of students and families, while theyre on the side of banks and corruption. And that can have all sorts of bad derivative effects for lenders who have never even thought about 9.5% loans.

The storyline has already appeared here and here, and the media is teed up for more.

Here's our prediction:

Either (1): Spellings agrees in part and disagrees in part with the Inspector General. She lets Nelnet keep around 10% of its ill-gotten gains due to recycling, but takes back the 90% due to their reverse money laundering scheme. The Department arguably has signed off on the propriety of the recycling process, but never signed off on the propriety of Nelnet's reverse money laundering / 9.5% loan growth scheme.

Or (2): Spellings cuts a settlement deal with Nelnet. But the terms of that settlement better be very, very good for taxpayers and students. Otherwise the Democratic Congress will still have its oversight hearing and political storyline.

Students, not banks. That message resonates and wins. Watch for it.