Student Loan 'Showdown'

Blog Post
Sept. 18, 2006

The stage has been set for a showdown between the Secretary of Education and the Department of Educations Inspector General. The two have taken different positions over a corporate welfare loophole worth billions of dollars in taxpayer payments to the student loan industry. The Secretary ok'd use of the loophole by a small non-profit lender. The IG said she was wrong. But the big money showdown over a case with distinguishable facts is set to come.

In the Spring 2005, the IG audited a small New Mexico not-for-profit student loan organization and found that it had been incorrectly billing taxpayers for a subsidy that guaranteed itself a 9.5% rate of return on each student loan funded with refinanced tax-exempt bonds. A 9.5% return might not seem like a lot today, but in 2005 interest rates were less than 3.5%, making for a more than $30 million taxpayer payout to New Mexico for these loans.

Nelnet Sees the IG Report The trouble, according to the IG, is that Congress repealed the subsidy in 1993. What was the point of the repeal, the IG noted, if bonds used to support the loans in question could be refinanced forever with the inflated (and taxpayer subsidized) 9.5% return guarantee attaching to new loans issued years after 1993? It's what our favorite textbook on legislative interpretation calls the "meaningfulness doctrine."

So, the IG called for New Mexico to return its $30 million in 9.5% loan subsidy payments. But the Secretary disagreed and overruled the IG on grounds that the Department had approved the New Mexico 9.5% loan recycling procedure. The IG wrote to Congress that the Secretary was wrong.

But the big showdown is set to come over another far larger student loan provider that did something different and worse than New Mexico. Before New Mexico came to light, this senator smelled smoke (disclosure: Higher Ed Watch staff used to work for him) and called on the IG to audit the leading abuser of 9.5% loans -- the giant for-profit Nelnet corporation based in Lincoln, Nebraska. The IG responded and is supposed to release his audit this month.

It appears the IG's draft audit of Nelnet calls for a return to federal taxpayers of the $322 million in funds that Nelnet already has collected from taxpayers for its refinancings of 9.5% bonds plus a halting of future Nelnet planned billings of taxpayers that the Omaha World Herald says industry experts estimate to equal in excess of $1.3 billion.

Nelnet fears the Secretary of Education will back the IG, viewing its case differently than New Mexico's. Unlike New Mexico, Nelnet aggressively abused the 9.5% subsidy. Nelnet didn't just refinance its 9.5% loan bonds to extend their life beyond 1993. Through an additional creative financing method, Nelnet also grew its claimed 9.5% loan volume more than nine fold in the four years stretching from 2001 to 2005. In the first four years of the Bush Administration, Nelnet went from claiming over $300 million in 9.5% loans to claiming over $3 billion worth -- all the while successfully billing U.S. taxpayers for an inflated subsidy that Congress thought it got rid of in 1993.

Nelnet is hoping Secretary of Education Margaret Spellings will overrule the IG once again, as she did for New Mexico. Will she? Will the IG's report be buried until after the fall election? Will someone else in the Administration take notice of the more than $1.2 billion at stake?