Nelnet announced Friday that it will pay $55 million to settle a whistleblower lawsuit alleging it defrauded the government by improperly benefiting from a student loan subsidy program.
The suit was brought by former U.S. Education Department researcher Jon Oberg and sought $3 billion in damages from Nelnet and several other companies.
Nelnet said in a news release that the suit alleged it gained $407 million in improper profits from the subsidy, putting its potential liability, with triple damages, at more than $1.2 billion.
"We are pleased to have reached an agreement to successfully resolve this outstanding matter," Nelnet said in a statement. "While we believe the case brought by Mr. Oberg was without merit and that we would have prevailed at trial, settlement eliminates the uncertainty, distraction and expense of a trial."
Oberg's attorney, Bert Rein, declined to comment Friday, and it was unclear whether the other companies named as defendants in the suit had reached similar settlements.
A spokeswoman for defendant Sallie Mae declined to comment.
U.S. District Judge John F. Anderson, presiding over the case for the Eastern District of Virginia, filed an order Friday canceling a trial set to begin Tuesday and staying any further motions in the case.
Anderson's order says there will be no more pleadings in the case unless they are related to "the resolution of claims by the parties."
He set a status conference for Oct. 1 "in the event there has not been a resolution of the claims with all the current defendants."
The parties had been in settlement conference ordered by the court since Wednesday.
Oberg filed a suit against Nelnet, Sallie Mae and several other lenders under a provision of the Federal Civil False Claims Act allowing private citizens to sue in the name of the U.S. government, charging fraud.
In addition to the $3 billion in damages, the suit also sought civil penalties of $11,000 for each violation of civil law.
Oberg, a University of Nebraska-Lincoln graduate and former aide to Nebraska Sen. Jim Exon, was working as a researcher at the federal Department of Education when he brought to light the loophole that allowed student loan companies to exploit a government subsidy program to guarantee a 9.5 percent rate on their loans.
The subsidy program, which began in the 1980s to provide competitive returns in a high interest rate environment, was phased out in the '90s.
However, Nelnet and other companies found a way to continue to get the subsidy by packaging new loans with older loans that were grandfathered in.
Nelnet entered into a settlement with the education department in January 2007 that allowed it to keep $278 million in past profits it earned from the subsidy but stop using the subsidy going forward, giving up as much as $882 million in future profits.
The settlement did not protect Nelnet from civil lawsuits, however.
Nelnet has always maintained it had the education department's permission to treat the subsidy the way it did, and Friday's settlement does not include any admission of wrongdoing.
Nelnet said it will pay the settlement, which must still be approved by the Justice Department, out of existing cash and take a pretax charge in the third quarter.
The company's stock closed down nearly 3 percent at $19 a share Friday before the settlement was announced.
Reach Matt Olberding at 402-473-2647 or email@example.com.