Avoiding Scrutiny: Lenders Dismiss Calls for Revisiting the 9.5 Percent Student Loan Scandal

[This is the second in a Higher Ed Watch series “Revisiting the 9.5 Student Loan Scandal.” The series takes a closer look at the origins of the scandal with the purpose of trying to resolve unanswered questions and dispel lingering myths surrounding it. A link to the first part of the series is available here and is included in the post.]

At Higher Ed Watch, we recently called on Congress to reopen the 9.5 percent student loan case. We believe that lawmakers should exercise their oversight responsibilities and get to the bottom of the scandal, which is estimated to have cost taxpayers more than $1 billion in improper subsidy payments made to student loan providers. Among other things, they should try to determine the origins of the scandal and the role that the Bush administration played in allowing it to occur.

Loan industry officials are understandably unenthusiastic about having Congress revisit the scandal. In a recent blurb entitled “Student Loan ‘Loophole’ — Will Congress Look Back or Look Ahead?“, Higher Education Washington Inc, (HEWI) a publication owned and run by a top student loan industry lobbyist, warned that such an inquiry would distract Congress from focusing “on issues of student loan access and liquidity”:

Several lender representatives say Congress should focus on the future, and that the “overpayments” were both legal, and received only after the lenders repeatedly asked the Department of Education for guidance in whether they were proper. But whether Congress holds hearings on the matter or not, this is just another event which will make any effort to restore liquidity to the market by restoring subsidies to lenders (which were cut under last year’s College Cost Reduction and Access Act) that much more difficult.

This argument is not only incredibly self serving and cynical but also contains factual errors. For one thing, the notion that these overpayments were legal is simply untrue. In 2006, the U.S. Department of Education’s Inspector General concluded that the mechanisms lenders were using to aggressively grow the volume of loans that they claimed to be eligible for 9.5 percent subsidy payments violated the law. In January 2007, Education Secretary Margaret Spellings concurred with this opinion when she barred Nelnet and other lenders that refused to submit to independent audits from seeking any further 9.5 percent payments.

In addition, the idea that lenders obtained these payments only after seeking guidance from the Department is also patently false. The only company that openly sought the Department’s guidance before claiming the payments was Nelnet. Others, such as the Pennsylvania Higher Education Assistance Agency (PHEAA) and the Kentucky Higher Education Student Loan Corporation, overbilled the government without alerting the authorities first.

Don’t take our word for it. In their response to the Inspector General’s September 2006 audit [see p.61], Nelnet’s lawyers wrote that the company could have “quietly” made the claims “without attracting attention to them,” as others did. Nelnet, the lawyers wrote, “is unaware of any other participant in the entire education finance industry who proactively contacted the Department.” [Of course, it’s entirely unclear why Nelnet thought that the Department had approved its actions. The agency’s formal response to the loan company studiously avoided answering the company’s questions about the appropriateness of its actions. Did the Department’s political appointees secretly give Nelnet the green light to proceed? That’s one of the most important questions Congress needs to investigate.]

But perhaps the best response to HEWI’s larger point — that Congress shouldn’t waste its time focusing on past misdeeds at a time when lenders are struggling — comes from Kevin Carey, our colleague at Education Sector. In a post on The Quick and the Ed, Carey cites a comment made by the chief executive of the South Texas Higher Education Authority to The Chronicle of Higher Education, in which she said that loan agencies “across the nation have moved forward beyond the 9.5 loan issue.” Carey writes:

According to The Chronicle, the South Texas Higher Education Authority “was found to have claimed 93 times the amount of loans now considered eligible for the 9.5 percent program.” But never mind, because they have “moved forward beyond” all of that messy business. Why be stuck in the past? I’m going to remember this when prosecutors come knocking on my door after discovering my scheme to defraud taxpayers out of huge sums of money. Come on fellas – I’ve moved forward! Or maybe I’ll try this out at home with my wife. Yes, it’s technically true that I failed to put the garbage out for three consecutive weeks…But why dwell on past mistakes? I’ve moved forward sweetheart – why can’t you?

At a time when the federal government is being asked to bail out student loan providers, we think it is especially incumbent on Congress to get to the bottom of these past misdeeds. Loan companies that bilked taxpayers out of more than $1 billion should not be given a free ride. At the very least, any help they receive should be contingent on them returning the money they improperly obtained from the government.

The folks at HEWI obviously disagree. But they may have other reasons for wanting to avoid further scrutiny into the 9.5 loan scandal. We’ll explore those reasons soon. Stay tuned.