"A child's learning is the funtion more of the characteristics of his classmates than those of the teacher." James Coleman, 1972

Sunday, October 21, 2007

Spellings Will Not Pursue A Full Accounting

No, no, I am not talking about the poor, black, and brown children--their accountability is absolutely necessary for public schools to be painted as failures. I am talking about absent accountability for the hundreds of millions of dollars in interest payments paid out to corporations for continuing to farm old student loans.

Despite a call from her own Inspector General, Spellings has no intention of trying to collect the $268 million from Nelnet, or the recently-discovered $300 million paid out to other corporations. From WaPo:

Education Secretary Margaret Spellings has acknowledged that the federal government "had some responsibility" for "confusion" over subsidy rules that helped student loan companies reap hundreds of millions of dollars in potentially excessive payments at taxpayer expense.

But Spellings said in a recent interview that she has no plans to pursue a full accounting of the cost of what the Education Department's inspector general termed "improper" payments in a program that guarantees lenders a 9.5 percent interest rate for certain loans even when market rates are much lower. Nor does the department plan to seek reimbursement.

The inspector general concluded last year that the government had overpaid one lender, Nebraska-based Nelnet, $278 million from 2003 to 2005 -- a finding the lender disputes. In addition, a Washington Post analysis of data obtained recently through the Freedom of Information Act suggests that potential overpayments to other lenders from 2003 to 2006 could total roughly $300 million.

Two lenders, the New Hampshire Higher Education Loan Corp. and the Arkansas Student Loan Authority, said they returned millions of dollars in subsidy payments voluntarily after they discovered errors themselves.

"It seemed like they would just pay subsidies to almost anyone without checking at all," said Tara Payne, a vice president of the New Hampshire lender.

The existence and approximate magnitude of the questionable payments has been known for some time, but until now there has not been an estimate of a total. The Government Accountability Office warned three years ago that a failure to shut down legal loopholes could lead the government to pay billions of dollars in unnecessary subsidies.

Although some subsidy payments in the 9.5 percent program are broadly accepted as legitimate, critics have questioned aggressive financing techniques that lenders used in recent years to expand the volume of loans that qualify for the lucrative subsidy. Auditors for Education Department Inspector General John P. Higgins Jr. concluded that some of those techniques failed to meet criteria that would qualify the lenders for payments.

In 2004 and 2006, Congress enacted legislation meant to phase out the subsidy. Spellings went a step further in January, shutting down any future payments of the sort the inspector general had questioned.

But Spellings said she would not pursue reimbursement of any previous payments because rules had not been made clear to the lenders. "The department, I believe, had some responsibility with respect to that confusion," she said in a recent interview with The Post.

Indeed, the subsidy's 27-year history shows that the government at some points sought to restrict the subsidy and at other points stood by while lenders used aggressive financial techniques to maximize profits during years of low market rates.

The program began in 1980 as an effort to help ensure student access to low-cost loans at a time of double-digit interest rates. The government guaranteed lenders a 9.5 percent return on loans financed by tax-exempt bonds.

When interest rates fell, the guarantee became a boon for lenders. Congress pared back the program in 1993 but retained the 9.5 percent guarantee for loans financed with previously issued tax-exempt bonds. It was assumed the subsidies would dwindle and eventually disappear.

But some officials within the department realized as early as 2002 that the opposite was occurring: Lenders were taking steps to inflate the volume of loans that qualified for the subsidies. They did that by shifting the financing of loans among bonds that qualified for the special subsidies and bonds that did not. Lenders then claimed that the larger pool of loans financed by both types of bonds qualified for the subsidies.

Some inside the department sounded alarms.

"I have come across what appears to be significant federal waste," department researcher Jon H. Oberg wrote in a 2003 memo to agency officials. "I estimate it amounts to about $30,000 per day, perhaps more."

Oberg urged the department, without success, to clarify the rules on subsidy payments through a letter to lenders or new regulations.

"We tried hard in 2002 to modify" federal guidance to lenders "but had to back off," Mirek Halaska, director of a Texas field office, wrote in a 2004 e-mail to department officials.

In 2003, Nelnet devised a plan, known internally as Project 950, according to the inspector general's report, that shuffled loan financing quickly from one bond to another to increase the volume of loans that qualified for the subsidies. Nelnet wrote the department in May 2003 to ask for confirmation that its plan was legal. The department, then led by Rod Paige, did not respond for 13 months. In that time, Nelnet inflated the volume of loans qualifying for the subsidies from $551 million to about $3.66 billion, the inspector general found. In June 2004, the department sent Nelnet a three-paragraph reply that offered no conclusion on whether the plan was legal.

In May 2005, the inspector general reported that the New Mexico Educational Assistance Foundation had collected as much as $35 million in excessive payments and urged the department to recover the money. The nonprofit lender disagreed with the findings. So did Spellings, who took office in January. She decided not to seek to recoup the funds.

But Spellings took action after the inspector general's September 2006 report on Nelnet found that the lender stood to collect an estimated $882 million in future years if the problem wasn't fixed. In a January settlement between the government and Nelnet, the lender denied wrongdoing and was allowed to keep all subsidies as long as it stopped collecting the disputed subsidies in the future. Spellings extended the policy to every lender in the country.

"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," Spellings told The Post. "While it cost us $278 million to make that final call, it also saved us potentially a billion dollars had we lost the litigation."

The government's total cost, however, is undoubtedly higher than $278 million because Nelnet did not act alone. Spellings said the agency has no plans to conduct audits to calculate a total. "I don't know if it's a knowable number," she said. "I guess it's knowable by somebody. But my inspector general doesn't know it, to my knowledge. And I don't. We haven't found out."

Nelnet spokesman Ben Kiser reiterated that Nelnet did nothing wrong and followed the law as the department had articulated it.

In July, the department responded to a Post request for data on the 9.5 percent loan subsidies. The Post analyzed payments from 2001 to 2006 to lenders from across the country, attempting to use criteria applied in the inspector general's report on Nelnet. The analysis found as much as $330 million in potential overpayments to 10 other lenders.

Department officials contend that only comprehensive audits can determine the amount overpaid to lenders. Diane Auer Jones, assistant secretary for postsecondary education, called The Post's analysis flawed. "We don't believe meaningful inferences can be made" from the data the department provided, Jones said in a statement. But four experts in higher education finance who reviewed the analysis at The Post's request -- Christopher Avery, a Harvard University professor; Laura W. Perna, a University of Pennsylvania professor; Robert B. Archibald, a College of William & Mary professor; and Robert Shireman, president of the Institute for College Access and Success -- said it would provide a rough estimate of the potential cost to taxpayers.

Ellis E. Tredway, an executive vice president for Brazos Higher Education Authority, said the lender was not to blame for receiving what the Post analysis found may have been $20 million in overpayments. The Education Department, he said, was responsible.

"I think there is fault with the department," Tredway said. "They came out with a new interpretation of what history had been."

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