Nelnet Defends Decision to Subpoena the Ed. Dept.

Late last week, the student loan company Nelnet acknowledged for the first time that it has subpoenaed the U.S. Department of Education for records it believes will definitively show that the Bush administration had approved the company’s plans to aggressively grow its 9.5 percent student loan holdings. Higher Ed Watch broke the story in a blog post earlier this month.

In an interview with the Lincoln Journal Star, Ben Kiser, a spokesman for Nelnet, defended the company’s decision to issue the subpoena, saying that it would provide the corporation with evidence it needs to fight a whistleblower lawsuit brought by Jon Oberg, the former Education Department researcher who uncovered the 9.5 student loan scandal. In December, a federal court judge allowed the lawsuit, which seeks the return to the federal government of $1 billion in taxpayer subsidy overpayments, to proceed against Nelnet and five other student loan companies.

“In order to defend against the groundless claims in the lawsuit, it is natural that Nelnet would request documents in the Department’s file,” Kiser told the newspaper. “Since the government elected not to intervene and prosecute the case, a subpoena to the Department is the proper way to obtain this evidence.”

As we have previously stated, the release of these documents could be a major breakthrough in helping to resolve some of the long unanswered questions surrounding the Bush administration’s role in the 9.5 student loan scandal. Specifically, we hope that these records, which are likely to become public as the lawsuit progresses, will provide answers to the following questions: what did the Education Department’s former political leaders know about the lenders’ scheme to gain windfall profits, when did they know it, and why did they take so long to do anything about?

Denials from the Bush Administration

Nelnet, which was created in 1998 when Nebraska’s non-profit student loan agency converted to for-profit status, was by all accounts the most aggressive participant in the scheme. Through loan and bond manipulations that it repeated over and over again, Nelnet increased the amount of loans for which it sought the 9.5 percent rate from $393 million in 2001 to more than $3.3 billion in 2004.

The good times, however, came to an end in January 2007 when Education Secretary Margaret Spellings barred Nelnet and other lenders that refused to submit to independent audits from receiving any further 9.5 payments. But she did not require the lenders to return the overpayments they already received.

Bush administration officials have long denied that they signed off on Nelnet’s growth scheme. In a letter to Sen. Edward Kennedy in November 2004, Education Secretary Rod Paige (Spellings’ predecessor) wrote that the Department “did not approve or disapprove of the methods that Nelnet and other lenders were using.”

After Spellings made her ruling, the Department’s former leaders acknowledged that they were slow to react to the abuses -- ignoring calls from their own employees, key lawmakers, and the Government Accountability Office to put a stop to it. They said that they didn’t fully understand the extent to which Nelnet and other lenders were gaming the system until the Department’s Inspector General released an audit report in September 2006 explaining the illegality of the Nebraska loan company’s actions.

Nelnet Tells a Different Story

Nelnet officials, however, are confident that they can show that Department officials gave them the green light. In a filing with the U.S. District Court for the Eastern District of Virginia this fall, the company’s lawyers made clear that they intend to make the Department’s role in the case a central part of their defense:

“In the case of Nelnet, the evidence would include witnesses to meetings between the company and the Department regarding this issue. It would include witnesses to phone calls between the company and the Department. It would include witnesses to the settlement agreement entered into between the company and the Department. All of these witnesses would testify to matters that reflect the intent of Nelnet...”

The loan company also points to statements that Spellings has made over the last several years, explaining why she decided to allow Nelnet to keep hundreds of millions of dollars it had received in overpayments. “The Department, I believe, had some responsibility with respect to that confusion [over the rules governing the 9.5 subsidy rates],” Spellings told The Washington Post in the fall of 2007.

“We had legal risk, in my view, and the prudent course of action was to, once and for all, end this practice and provide certainty in the industry that that was not allowable,” she stated. “While it cost us $278 million to make that final call, it also saved us potentially a billion dollars had we lost the litigation.”

To this day, it remains unclear why Spellings was so pessimistic about the Department’s chances in a potential Nelnet lawsuit. Had the Department confused the lender simply by its inaction? Or had political appointees at the Department given Nelnet the impression that they had approved its actions?