Unanswered Questions

Blog Post
Jan. 23, 2007

Some media outlets have suggested that the Education Department's decision last week to reach a settlement with Nelnet "appeared to bring to a close a controversy of more than two years." But nothing could be further from the truth.

In reality, the Department's actions raise more questions than answers. And Higher Ed Watch expects that Congressional Democrats will hold oversight hearings to demand answers to those questions.

For instance, under what statutory authority can a government agency conclude that a corporation illegally has obtained federal funds and then not demand that the company return that money? Or at least reach a settlement in which some of that money is returned?

And what was the legal basis for the Department's decision? In its announcement Friday, the Department says that it "concurred" with the Inspector General's report that "Nelnet submitted claims for loans that were not made from eligible sources of funds." But it doesn't explain how it reached that conclusion. Does the Department concur in its conclusion or its conclusion and reasoning?

The lack of clarity is not a minor point, as it has implications for other lenders -- particularly nonprofit ones like the Pennsylvania Higher Education Assistance Authority, which is being investigated by the Inspector General's Office -- that recycled loans to take advantage of the 9.5-percent subsidy rate. Does the Department now believe as the Inspector General does that the recycling of loans was illegal? And how would that interpretation square with the Department's decision in the New Mexico Educational Assistance Foundation case, in which the Education Secretary rejected the Inspector General's recommendation to require the New Mexico agency to return payments that the foundation had received as a result of loan recycling?

The Department's decision suggests a wide-sweeping rejection of the practice, as it has cut off all pending claims to 9.5 payments until audits are completed by independent accounting firms. In fact, Department officials said they were not requiring Nelnet to return the overpayments because of concerns about "putting out of business" small non-profit lenders who made similar claims.

Sara Martinez Tucker, Under Secretary of Education, said at a news conference on Friday that the Department was primarily worried about the welfare of student-loan borrowers. "In some parts of the country, these small not-for-profits are the only option they have. We were trying to make the best decision for the taxpayer and for students," she said.

Who are these not-for-profit lenders that might go out of business if they were required to return the overpayments? Where is the analysis that supports such a position? In this day and age, when 32 national lenders hold 90 percent of federal student loans, it's hard to imagine that students -- no matter where they live -- would have any trouble obtaining the loans they need to pay for college.

Given the lack of details on how the Department reached its decision, it begs the question: was the decision to settle the case more about politics than policy?

At the very least, it appears that the White House was keeping close tabs on the case. In fact, Higher Ed Watch has learned from knowledgeable sources that the Department's leaders were called to the White House first in September before the Inspector General's report on Nelnet became public and again around New Years to discuss the case. Why would the White House get involved? It wouldn't have anything to do with those huge campaign contributions that Nelnet made to the Republican Party, would it?

And was the Department's decision to settle the case exclusively about its concern over the fate of the nonprofit lenders? Or did Department officials want to avoid litigation to prevent embarrassing revelations about the role the agency played or failed to play in allowing lenders to reap windfall profits from taxpayers improperly?

Higher Ed Watch suspects that these are just some of the questions that Sen. Edward M. Kennedy (D-MA) and Rep. George Miller (D-CA) will want to explore in the coming weeks.