Exclusive: Higher Ed Watch Reveals the Man Who Blessed the 9.5 Student Loan Scandal

[This is the third 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. Links to earlier parts of the series are available here and here and are included in the post.]

Regular readers of Higher Education Washington Inc. (HEWI), a pro-student loan industry publication, were probably not too surprised by a recent blurb it ran discouraging lawmakers from reopening the 9.5 percent student loan case. After all, it’s hardly news that supporters of the Federal Family Education Loan (FFEL) program are unenthusiastic about any further inquiry into the scandal, which is estimated to have cost taxpayers more than $1 billion in improper payments made to student loan providers.

But these readers may be surprised by what the publication did not disclose. The blurb failed to note the central role its founder — the lawyer and student loan-industry lobbyist John Dean — played in counseling the loan company Nelnet on its planned attempt to gain windfall profits from the government.

By Nelnet’s own account (see p. 56), the Nebraska-based loan company did not move forward with its plan to aggressively grow the volume of loans it would claim to be eligible for the 9.5 percent subsidy rate until after it received a series of legal opinions, starting in March 2003, from Dean assuring the company of the lawfulness of these actions.

Higher Ed Watch has obtained these legal opinions, which the Department of Education Inspector General recently released as part of a Freedom of Information Act request.

Dean expressed his views most clearly in a January 2004 letter in which he advised Nelnet that the loans it planned to manipulate would be “entitled” to the 9.5 percent “special allowance paid by the U.S. Department of Education under the rules applicable to loans made or purchased with the proceeds of such tax-exempt bonds.”

In the letter, Dean acknowledged that the guidance that the Education Department had provided lenders on the 9.5 percent issue over the years was “unclear and at times contradictory.” He warned that “in the view of some” of the Department officials he had privately consulted, the type of loan and bond manipulations Nelnet was contemplating were not “in the best interests of the Department.”

Still Dean asserted that the Nelnet had “an unanticipated opportunity” to gain a huge return. And he suggested that the Department would not be able to refuse Nelnet’s claims without first altering its regulations through a lengthy negotiated rulemaking process. “We believe that if the Department attempted to revise the relevant policies related to pre-October 1, 1993 tax-exempt bond estates without formal regulatory action, the resulting policies would be subject to legal challenge,” he wrote. (The Government Accountability Office disputed this view in a report it issued in September 2004 in which it urged the Department to immediately cut off the payments to Nelnet and other loan companies engaged in similar practices.)

In addition, Dean provided assurances to the company that any payments it received would be safe even if legislative or regulatory action was taken to ban these practices in the future. “We don’t believe” that it would be “legally possible for the Department or Congress to retroactively” require the loan company to refund these subsidy payments, he wrote.

Based on this advice, Nelnet proceeded with its plan — increasing from $550 million in 2003 to $4 billion in 2004 the amount of loans for which it sought the 9.5 percent subsidy rate.

In September 2006, the Department’s Inspector General (IG) came to a very different conclusion from Dean. The I.G. determined that Nelnet had violated the law and urged the Department to require the return of the funds that had been illegally obtained. Education Secretary Margaret Spellings eventually concurred with the IG’s opinion but allowed Nelnet to keep the $278 million it had received in overpayments.

Given the role that Dean played, is it any wonder that HEWI would oppose any further inquiry into the 9.5 percent case? Hopefully, lawmakers will reject his publication’s misguided advice.