Friday, April 13, 2007

Revolving Door

Wall Street Journal today reports on the "revolving door" between the student loan industry and the department of Education. This is the article I've been waiting for.

Critics Blame Lax Oversight
Resulting From Close Ties
Of Industry, Government
April 13, 2007; Page B1

Four years ago, Sally Stroup, then an assistantsecretary at the U.S. Education Department, got a memo from theagency's inspector general urging her to curb any "illegal inducements"lenders might be using to win college loan business.

Ms. Stroup, who had previously worked for aPennsylvania loan company and a for-profit education concern dependenton student loans, didn't take the memo's advice.

At least eight top officials in the EducationDepartment during the Bush administration either came from student-loanor related organizations or have taken lucrative jobs in that arenasince leaving the agency. Former Education Department staffers say arevolving door between the department and industry has led to laxoversight of federal financial aid. Members of Congress -- includingthe Democrats who head committees overseeing education, Sen. EdwardKennedy of Massachusetts and Rep. George Miller of California -- saythey are concerned about the industry ties. Mr. Miller plans to hold ahearing on student loan abuses this month.
Later the story gets into the 9.5% loophole.

Also in 2003, Mr. Oberg wrote an internal, widely distributed memo warning that lenders were exploiting a legal provision that guaranteed lenders a minimum 9.5% rate of return no matter how low the prevailing rate might be. The 9.5% guarantee was supposed to apply only to loans funded by tax-exempt bonds. Congress eliminated the guarantee in 1993 but grandfathered in the existing arrangement, thinking the high-rate guarantees would disappear. Mr. Oberg warned that the proliferation of these loans could cost taxpayers billions of dollars in excess subsidies.

A later report by the inspector general confirmed Mr. Oberg's findings. It focused on student loan company Nelnet Inc., which figured out a complicated strategy to collect about $278 million in what the report said were excessive payments from the government from January 2003 through June 30, 2005. The report recommended that the department require Nelnet to "return the ... overpayments received and exclude ineligible loans from future billings." In securities filings addressing the issue, Nelnet said it had received verbal approval from the department to collect the higher rate.

Despite the inspector general's report, the Education Department announced this past January that it would let Nelnet keep the bonanza, though not future payments. In a statement, Nelnet spokesman Ben Kiser said the company's receipt of those payments conformed to department regulations.
The obvious point that the article doesn't point out: Nelnet wasn't the only lender exploiting the 9.5% loophole improperly. They were all doing it. What about overpayments to other companies?

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