A whistleblower lawsuit over the alleged misuse of subsidy funds has been filed by a former Department of Education researcher. The researcher had reported the loophole that allowed student loan companies, including Nelnet, a student loan company located in Lincoln, Nebraska, to reap hundreds of millions in profits at taxpayers’ expense. Jon Oberg, a University of Nebraska-Lincoln graduate and former aide to a former U.S. Senator, filed the suit in U.S. District Court for the Eastern District of Virginia, against Nelnet and several other Defendants. Nelnet, the lead Defendant, settled its differences with the federal government more than two years ago.

The suit seeks the return of about $1 billion in “special allowance” payments wrongfully obtained under a federal subsidy program. The subsidy guaranteed a 9.5% return on a limited class of student loans. It was created in the 1980s to ensure low-cost student loans at a time when the economy was souring and interest rates were high. The civil suit seeks triple damages – $3 billion – plus civil penalties of $11,000 for each violation.

It was largely phased out in 1993, but companies found a loophole that allowed them to actually expand the number of loans receiving the subsidy by recycling older loans and packaging them with newer ones. It was reported that Nelnet has acknowledged using the loophole. The Department’s Inspector General recommended the company repay the federal government $278 million. Instead, in a rather interesting development, Nelnet and the Department of Education reached a settlement in January 2007 that allowed the lender to actually keep the $278 million. Under the settlement Nelnet agreed to stop using the subsidy, giving up as much as $882 million in future profits.

Also named as Defendants in the civil suit are: Sallie Mae; Southwest Student Services Corp., a Sallie Mae subsidiary; the Kentucky Higher Education Student Loan Corp.; the Pennsylvania Higher Education Assistance Agency; the Vermont Student Assistance Corp.; the Panhandle Plains Higher Education Authority; Brazos Higher Education Services Corp.; the Arkansas Student Loan Authority; and Education Loans Inc. of South Dakota. The case is expected to go to trial early next year. Interestingly, earlier this summer, Nelnet was chosen by the U.S. Department of Education to be one of four student loan companies that will service federal student loans. Bert Rein represents the whistleblower in this case.

Source: Lincoln Journal Star

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