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Taxpayers Pick Up the Tab
by Mary Waldron
On Friday, September 29, 2006, the U.S. Department of Education issued an audit citing the National Education Loan Network (Nelnet)'s alleged wrongful use of tax-exempt bonds to profit from high-interest payments made by the U.S. government. According to the audit, Nelnet has collected $278 million in federal subsidy payments, in addition to $882 million it wrongly charged the U.S. government. Nelnet has disputed these findings but insists it will "work with the department to resolve them."

So how has this student loan lender managed to cash in so enormously? By abusing a loophole in federal law that was intended to be closed in 1993. This loophole originated from a student loan program that allowed lenders to finance loans using non-taxable bonds issued before October of 1993 and thereby acquire government-subsidized interest rates of 9.5 percent. Although borrowers still paid a low rate of 3.37 percent, loans processed with these bonds were guaranteed interest rates of 9.5 percent, which left a 6.13-percent margin of pure profit for lenders and a hefty bill for U.S. taxpayers. Despite the government's attempt to block the use of tax-exempt bonds through the Higher Education Reconciliation Act, some lenders still found ways to reuse the pre-1993 loan funds.

In order to ensure their success rate, Nelnet deliberately expanded its supply of loans qualifying for higher interest rates or "special allowances" through "Project 950." According to the audit, "Nelnet used a series of transactions to increase the amount of loans ostensibly funded by tax-exempt obligations from approximately $551 million" in 2003 to $3.66 billion in 2004. The loophole was abused when the lender moved loans in and out of non-taxable trust estates, sometimes over the course of a single day, in order to approve them at the 9.5-percent rate. Even if a bond only funded a loan temporarily, the 9.5-percent rate was set in place for the life of the loan.

The audit also highlights correspondence between the Department of Education and Nelnet concerning approval to implement the procedures in question. Although Nelnet claims it was under the impression that it had "gained approval" from the Department of Education, the audit states that Nelnet "did not identify the eligible source of funds that would be used to purchase and qualify loans for the 9.5-percent floor, did not state directly that the process would be repeated many times, and did not state that the process would result in a substantial increase in the amount of loans billed under the 9.5-percent floor."

The Institute for College Access and Success (TICAS), a nonprofit watchdog group, has attempted to call the government's attention to this injustice for years. In 2004, it issued a report entitled "Money for Nothing," which stated that federal officials were fully aware of the ongoing abuses of the loophole. One of the report's writers, Robert Shireman, said, "The regulators are holding the door open while these companies raid the U.S. Treasury. The Secretary of Education had the authority to end this exploitation of taxpayers two years ago, and he has the authority today. We are calling on him to take immediate action and to seek the return of the funds already paid."


Article Title : Taxpayers Pick Up the Tab
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