Will She or Won't She?

The Education Department's Inspector General has called on student loan giant, Nelnet, to return more than $278 million in taxpayer subsidy payments and halt billing the U.S. Treasury an additional $882 million. That's almost $1.2 billion in taxpayer subsidies that could go to students instead of Nelnet. It's now up to Education Secretary Margaret Spellings to decide whether to enforce the Inspector General's recommendation to get the money back.

Margaret Spellings and Wonkette look way
too much alike. Ever seen them together

in the same place? At the same time?

If Spellings overrules the Inspector General, she also will have to reverse the Bush Administrations past position. The Administration to date has maintained that Nelnet did not have prior approval for the near $1.2 billion in student loan special subsidies being charged to federal taxpayers.

Nelnet, however, is hanging its hat on a decision by the Secretary to overule the Inspector General in a related case out of New Mexico. The Inspector Generals 2006 audit of Nelnet, like his 2005 audit of the New Mexico Education Assistance Foundation, found that the lender practice of extending 9.5% subsidy payments was improper. Spellings overruled the Inspector Generals audit of the New Mexico lender, saying that New Mexico had permission from the previous Administration to continue billing for the special subsidy.

But documents discovered by Higher Ed Watch indicate major differences between the New Mexico and Nelnet cases. New Mexico's financial reports show that it "refund[ed] existing debt issues" (aka bonds) in order to continue claiming its previous level of special student loan subsidies.

Nelnet in contrast didn't simply "refund existing debt issues" in order to continue claiming its previous level of special subsidies. No, Nelnet did more. Nelnet issued new bonds and dramatically grew its portfolio of the heavily subsidized loans by over 900%. Unlike New Mexico, Nelnet turned clean money into an ever growing amount of dirty loans.

While the New Mexico lender successfully claimed to have Department of Education permission to preserve its federal subsidies, Nelnet can't persuasively claim to have received permission for its growth stategy. To the contrary, former Education Secretary Rod Paige (Spellings predecessor) and OMB Director Josh Bolton (now President Bushs chief of staff) in September 2004 wrote Congress that it had been the previous Clinton Administration's policy only to permit lenders to maintain previous subsidy levels (i.e. "refund existing debt issues"). They did not say, nor has any Administration ever said, that Nelnet's growth scheme had Department of Education approval.

In fact, former Education Secretary Rod Paige specifically wrote Congress in November 2004 that the Bush Administration did not approve of Nelnet's growth procedure.

"[Question:] Did the Department approve of the methods that Nelnet and other lenders are using?

[Answer:] The Department did not approve or disapprove of the methods that Nelnet and other lenders were using. Rather, the Department implemented the requirements of the Higher Education Act of 1965, as amended (HEA), existing Department regulations, and interpretations of those regulations, including an interpretation issued by the prior administration expressly permitting lenders to extend the excessive special allowance payments indefinitely."

Truth is Nelnet has always known it didn't have approval from the Department of Education for its subsidy growth scheme. Nelnet waited more than a year before telling Wall Street investors that it was booking as income its growing, claimed 9.5% loan payments, because the company new it was on shakey ground.

Eventually though, the temptation got too great. Nelnets July 2, 2004 SEC filing indicated that the company had received verbal communication from some unnamed person at the Department of Education suggesting that their scheme would not be stopped. That "verbal communication" basis apparently seemed pretty flimsy to the SEC. When they began investigating, Nelnet's stock took a dive.

And so here we are two years later. Secretary Paige's November 2004 letter says the Administration did not approve of Nelnet's 9.5% loan growth scheme. Will Secretary Spellings reverse the Bush Administration's previous claims and instead say that Nelnet had approval for its taxpayer rip-off scheme carried out between 2001 and 2004? Or will Spellings stand strong?

This Nelnet competitor no doubt privately is hoping for the latter.