Justice Department Should Weigh In On Student-Loan Loophole Scandal, Senator Says

Rep. Thomas Petri, R-Wis., wrote to Secretary of Education Margaret Spellings this week asking whether she plans to involve the Justice Department in the investigation of a federal subsidy loophole that benefited nonprofit student loan providers and may have cost the federal government nearly $1.2 billion (“Republican Lawmaker Presses Spellings on Loan-Loophole Losses,” The Chronicle of Higher Education, Oct. 3, 2008).

“In order to restore integrity to the guaranteed-loan program,” Petri wrote, “it is vital that we understand where abuse has occurred.”

The audit of 14 student loan companies, published last month, found that a loophole in a government subsidy program, which guaranteed a 9.5-percent return on nonprofit lenders’ student loans, may have inadvertently allowed lenders to collect nearly three times the amount of subsidies they would have otherwise been entitled to.

If the actions of these lenders are representative of all student loan companies that participated in the subsidy program, writes Paul Basken of The Chronicle, “it would mean the government lost nearly $1.2 billion in improper payments over a six-year period, or about twice the previous estimates.”


Lenders Allowed to Keep Subsidies, Continue Using Program

The government subsidy program — initiated almost 30 years ago to encourage lenders to offer affordable student loans at a time when interest rates were high — gave nonprofit student loan lenders a guaranteed 9.5 percent rate-of-return on student loans they issued.

In 1993, after interest rates had dropped, Congress eliminated the 9.5-percent interest rate guarantee but grandfathered in all loans that lenders issued at the 9.5 interest rate before the cutoff date. To get around the cutoff, some lenders began “recycling” new loan money through old accounts to make them eligible again for the expired 9.5-percent subsidy rate (“Government Losses on 9.5 Percent Loan Loophole May Exceed $1 Billion,” The Chronicle of Higher Education, Sept. 18, 2008).

The audit’s findings come after Spellings, in January 2007, allowed lenders who had taken advantage of the loophole to keep the disputed subsidy payments they had already received. As part of her settlement offer, she also said that student loan providers who wanted to continue billing the government under the 9.5-percent rate program would have to provide independent audits proving their calculations were not based on the loophole.

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