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Nelnet Student Loan Company Will Keep Millions in Subsidies

By Jonathan D. Glater
THE NEW YORK TIMES

The Bush administration reached an accord with a student loan company that will let it keep $278 million in subsidies that the inspector general of the Education Department found improper, the department said yesterday.

Under the agreement, the department will suspend future payments of more than $800 million, in addition to the $278 million paid to the company, Nelnet, until an audit determines whether the company was eligible for the money.

The inspector general’s office said Nelnet billing practices could lead to its receiving that much in overpayments.

Under Secretary of Education Sara Martinez Tucker said the department had decided not to recover past payments because such a precedent might require it to pursue other loan companies, too, possibly driving smaller ones out of business and reducing borrowing options.

“We were trying to make the best decision for the taxpayer and the student,” Ms. Tucker said in a conference call with reporters.

The settlement drew criticism from Democrats in Congress days after the House approved a bill to cut interest rates on some new federal student loans and reduce lenders’ guaranteed profits.

“The administration should have settled for nothing less than the full recovery of Nelnet’s ill-gotten proceeds from these loans,” said Senator Edward M. Kennedy, Democrat of Massachusetts and chairman of the Senate Health, Education, Labor and Pensions Committee. “The Department of Education’s settlement is a loss for students and taxpayers, who are the victims of Nelnet’s greed.”

Representative George Miller, Democrat of California and chairman of the House Committee on Education and Labor, said his panel would investigate the accord. “We will ensure that taxpayer dollars are used properly,” Mr. Miller said in a statement.

Mike Dunlap, chairman and co-chief executive of Nelnet, of Lincoln, Neb., said the company had done nothing wrong.

“We are pleased to have reached a resolution that allows us to avoid costly litigation to demonstrate the merits of our position,” Mr. Dunlap said.

The audit by the inspector general found that Nelnet had improperly exploited a subsidy program that guaranteed it 9.5 percent interest on loans. The guarantee was established in the 1980s, when interest rates were high, to keep lenders in the college-loan business.

Congress tried to rein in the program in 1993, but the loans ballooned as lenders found ways to increase their portfolios of loans that they said were eligible for the guarantee.

In September, the office of the Education Department inspector general said Nelnet, acting when interest rates were low, enlarged its portfolio of eligible loans to nearly $3.7 billion in June 2004, from $551 million in March 2003. The report found that the increased amount “was ineligible to be billed under the 9.5 percent floor.”

As of Dec. 31, Nelnet said it had $3 billion in loans it considered eligible for the 9.5 percent payments.

Nelnet is not the sole lender accused of using such techniques. The Education Department said it would stop paying claims from other lenders seeking subsidy payments until those claims had been audited.

In 2005, the inspector general found that a nonprofit loan company in New Mexico improperly exploited the subsidy program to obtain millions of dollars in overpayments. That lender, the New Mexico Education Assistance Foundation, was also allowed to keep the subsidy it had received.

The issue is politically charged. Democrats have in the past accused the Education Department of being lax in preventing lenders from exploiting the program, in part because of the administration’s connections with lenders. Nelnet officers and its political action committee have been major donors to Republicans.

The Education Department had said it was following policies that the Clinton administration established.

Democrats have made the loans a prime issue, focusing on soaring costs of higher education and college graduates’ increasing debt burdens.