U.S. Expands Probe of Student Loan Issuers

Federal auditors are expanding their investigation of whether lenders are improperly calculating interest rates on student loans or taking advantage of a legal loophole in the federal college loan program.

The Education Department’s inspector general said last week that Nelnet Inc., a student lender based in Lincoln, Neb., should repay $278 million in improperly calculated loan payments.

Now the Pennsylvania Higher Education Assistance Agency is being investigated, said the inspector general’s counsel, Mary Mitchelson.

“We’re looking at the same sort of thing that we looked at in New Mexico and Nelnet,” Mitchelson said.

Last year the inspector general concluded that the New Mexico Educational Assistance Foundation had collected as much as $36 million in excess federal payments.

Education Secretary Margaret Spellings ruled, however, that no repayment was required, finding that the state agency “complied with applicable laws, regulations and department guidance on this issue.”

A banking industry representative on Monday expressed confidence that Nelnet wouldn’t be required to repay any money either.

“It was a legal loophole, and Nelnet appears to have been conscientious in understanding the statute and proceeding with what they felt was a permissible interpretation of the law,” said John Dean, special counsel to the Consumer Banking Assn.

The audit of Nelnet found the company was taking advantage of a law that until 1993 had guaranteed banks a minimum interest rate of 9.5% on some types of loans to college students.

Nelnet shifted money into old loan accounts so that new lending would receive the older and higher interest rate, said Michael Dannenberg, director of education policy at the New America Foundation, a nonpartisan public policy group.

The audit concluded that Nelnet was improperly paid about $278 million from 2003 to mid-2005. But Nelnet said it had received guidance from Education Department officials indicating that its interpretation of the law was permissible.

The company’s stock, which has fallen 26% this year, lost 65 cents to $30.09 on Monday.