Nelnet settles with feds over controversial loan subsidy

 26 comment(s)  
 E-mail Story
 Print Story
  Share

 digg it!
 Facebook
 del.icio.us
Seed Newsvine
Fark It
Reddit

Text Size: 

Tools Sponsor

BY MATT OLBERDING / Lincoln Journal Star

Lincoln student loan company Nelnet has reached a settlement with the U.S. Department of Education that will allow it to keep $278 million in disputed profits from a controversial loan subsidy.

As part of the agreement, Nelnet agreed to not take advantage of the subsidy in the future, depriving the company of more than $880 million in potential profits.

The matter may be settled, but the issues aren’t, as critics of Nelnet’s business practices, including U.S. Sen. Ted Kennedy, took on the terms of the deal.

The settlement comes after a report issued by the Education Department’s Office of Inspector General last fall concluded Nelnet got the $278 million improperly and should repay it. The OIG also concluded Nelnet stood to earn an additional $882 million in the future from the subsidy.

The company says overall, it has earned approximately $322 million from the subsidy.

Nelnet Chairman and co-CEO Mike Dunlap said he was glad to have the issue disposed of, but the company still disputed the department’s conclusions.

Nelnet has said it followed department guidance for handling the loans. 

“While we disagree with the audit report, we are pleased to have reached a resolution that allows us to avoid costly litigation to demonstrate the merits of our position,” Dunlap said. “The agreement allows us to put an end to this audit and move forward.”

Under Secretary Sara Martinez Tucker,  who oversees higher education issues, said the settlement “was reached in the best interests of taxpayers and students as well as the integrity of the federal student loan programs.”

The Education Department said it agreed with the Inspector Genera’s report, but will not seek to require Nelnet to return any of the $278 million because doing so might also require it to go after money other lenders have received, including some small nonprofit lenders, and that could put them out of business.

Nelnet critics quickly lashed out at the deal.

Kennedy, D-Mass., who has been a frequent critic of the company and the loophole that allowed it to take advantage of the 9.5 percent subsidy, had harsh words for Friday’s settlement announcement.

“The administration should have settled for nothing less than the full recovery of Nelnet’s ill-gotten proceeds from these loans,” Kennedy said in a statement. “The Inspector General’s audit made it crystal clear that Nelnet’s claim of a 9.5 percent subsidy rate was absolutely indefensible. The Department of Education’s settlement is a loss for students and taxpayers, who are the victims of Nelnet’s greed.“

Jon Oberg, a former Nebraskan and retired Education Department civil servant who uncovered the use of the loophole by Nelnet and other student lenders, said the settlement was good news in some respects.

“But it still rewards Nelnet $278 million for their audacity,” Oberg said.

The agreement is supposed to resolve Nelnet’s handling of loans that received a 9.5 percent special allowance payment.

When it was implemented in the 1980s, the 9.5 percent provision was meant to be a penalty on loans financed with tax-exempt bonds.

But through a series of modifications in later years, combined with a large drop in interest rates, it became a loophole that allowed Nelnet and other student lenders to be guaranteed a rate higher than market rates on certain types of loans.

Nelnet has acknowledged it took advantage of the loophole because competitors were doing so but says it has opposed the practice as public policy since early 2003, stopped adding loans that qualified for it when legislation was introduced to forbid it and didn’t book revenue it was collecting from the practice until it consulted federal authorities on its legality.

Several critics have said Nelnet was the biggest abuser of the loophole.

As of Dec. 31, Nelnet said it was holding $3 billion in loans eligible for the 9.5 percent subsidy.

The settlement allows Nelnet to keep all 9.5 percent payments it received before July 1 of last year.

Claims pending since then will not be paid, and the company will not utilize the subsidy in the future.

“We believe, based on the guidance that’s included in the agreement, that we do not anticipate having loans eligible for the 9.5 special allowance payment,” said Nelnet spokesman Ben Kiser.

The settlement was announced after the close of financial markets Friday.  Nelnet’s stock climbed more than 3 percent in after-hours trading.

Many financial analysts have said they thought the potential fallout from the loan controversy was already priced into Nelnet’s stock, which has been hovering near a 52-week low.

In a federal securities filing after the announcement, the company said it would incur $24.5 million in charges for the fourth quarter of 2006 because of the settlement. It said the agreement was not expected to have any adverse effect on its ongoing operations.

Reach Matt Olberding at 473-2647 or molberding@journalstar.com.