Education Department Settles With Nelnet Student Loan Company, Accused of Overbilling

The Bush administration announced a settlement Friday with a leading student loan company accused of overbilling the government by hundreds of millions of dollars.

Under the deal, the Education Department said any future payments the company, Nelnet, has pending from the agency for subsidies on student loans will go through a review process to determine what the proper amounts should be.

Nelnet spokesman Ben Kiser said the company isn't expecting to go through such a review, because, the company does not expect to continue to bill the government at a special, high rate.

Click here for more Education news.

The settlement follows an audit by the Education Department's inspector general last September which said failure to change Nelnet's billing practices could lead to the company receiving more than $800 million in overpayments.

Education Secretary Margaret Spellings rejected the inspector general's recommendation that the department should seek to recover past overpayments. The audit estimated that Nelnet has been improperly paid more than $278 million by the government.

Recovering past payments could be precedent setting, Sara Martinez Tucker, under secretary for higher education issues, told reporters during a conference call.

She said federal officials did not want to set a precedent that could put small nonprofit lenders out of business.

"This decision was reached in the best interests of taxpayers and students as well as the integrity of the federal student loan programs," Tucker said in a statement.

Sen. Edward Kennedy, chairman of the Senate committee overseeing education issues, criticized the settlement for not requiring the recovery of past payments.

"The administration should have settled for nothing less than the full recovery of Nelnet's ill-gotten proceeds from these loans," said Kennedy, D-Mass.

Nelnet Chairman and co-CEO Mike Dunlap issued a statement saying the company disagreed with the inspector general's audit but was "pleased to have reached a resolution that allows us to avoid costly litigation."

The audit by the inspector general's office found that Nelnet has improperly sought and received an artificially high rate of return on many of its loans.

The rate — a 9.5 percent guaranteed return — was put in place in the 1980s when interest rates were high.

At the time, Congress guaranteed lenders the 9.5 percent return on student loans financed by tax-exempt bonds. When interest rates later declined, the old guaranteed rate stayed in effect, funneling billions of federal dollars to lenders.

Congress ended the 9.5 percent guarantee in 1993, but Nelnet found ways to keep getting that rate of return, according to the federal audit. Nelnet used payments it received from pre-1993 loans to make new loans and then claimed the old 9.5 percent guarantee. It did that over and over again, a practice referred to as loan recycling, according to the audit.

The inspector general's report said the company created a special project in 2003 — when interest rates hit a low point — to increase the amount of loans receiving the special rate, in violation of the law and department regulations.

The company disputes that it made money off ineligible loans and says it informed Education Department officials of its recycling practice. The federal audit said, however, that Nelnet left out key information, including that its practice would lead to an increase in loans getting the old guaranteed rate of return.

Nelnet officials have said the company followed the department's guidance and that any loans billed at the higher rate were fully eligible.

As part of Friday's settlement, the Education Department also plans to review future payments to other lenders to ensure that those seeking the 9.5 percent rate of return are eligible to receive it.

Click here for more Education news.