Spellings Suspends Future Nelnet Payments

The U.S. Department of Education announced today a settlement with student loan giant Nelnet regarding what the agencys Inspector General has said are some $1.2 billion in improper taxpayer subsidy claims for a special class of student loans that the company claims are entitled to a government-guaranteed 9.5% annual rate of return. The Department will let Nelnet keep approximately $278 million (23.9%) in previously provided subsidy payments and suspend or cease approximately $882 million (76.1%) in future payments for the loans at issue.

The Department also announced it will halt future payments to other holders of the special class of student loans at issue. The agency's Inspector General had called on the Department to recoup all past payments associated with the improper subsidy claims and halt future payments as well.

But during a conference call with reporters, Department officials said they chose not to recall hundreds of millions of dollars in past payments, because of concern about putting out of business small lenders who made similar claims. According to its corporate filings, Nelnet holds $22.9 billion in outstanding student loan assets.

"Good government requires more. The Department of Education should have taken back every penny Nelnet wrongly claimed and instead given that money to students, said New America Foundation Education Policy Program Director Michael Dannenberg, who pursued the scandal since 2004 -- first while working for Senator Edward M. Kennedy, and now at the New America Foundation.

This scandal occurred because we have a student loan system rife with inefficiencies and opportunities for abuse by lenders, much more than students. Washington will have an opportunity in the coming months to fix the fundamental problem of politicians writing student loan bank subsidy rates into law. Only the free market, by means of an auction, can ensure that the government subsidy to student loan providers is as low as possible," Dannenberg said.

According to Jon Oberg, the retired Education Department civil servant who first publicly blew the whistle on Nelnet at a New America Foundation event, Todays decision is good news as far as it goes, but it still rewards Nelnet at least $278 million for their audacity.

Higher Ed Watch will release further analysis of Secretary Spellings' 9.5% loan decision next week. Stay tuned.