A number of student loan companies have been targeted in a whistleblower suit alleging that the lenders violated the federal False Claims Act by misusing a loophole in the federal student loan program. Nelnet, of Lincoln, Nebraska, was the lead defendant in the suit filed in federal court in Virginia by former Department of Education researcher, Jon Oberg. Nelnet, however, claims that it settled the matter with the federal government over two years ago. And that seems to be the problem, according to Oberg.

Nelnet and the other lenders named in the suit made claims to the government’s student loan program for “special allowance” payments permitted under a federal subsidy program that guaranteed a 9.5 percent return for a narrow class of student loans. The program was created in the 1980s to make low-cost student loans available during an economic downturn when interest rates were extremely high.
In 1993, the subsidy was phased out, but lenders exploited a loophole to make even more loans eligible for the subsidy by bundling older loans with newer ones, thus receiving the subsidy on the new loans as well.

After the Department of Education learned of the abuse, it settled with Nelnet in 2007, allowing the company to keep the profits it had already received from the practice, but requiring the lender to give up the profits it would have received in future subsidies. Oberg, the whistleblower, called the settlement outrageous and filed suit under the False Claims Act to recover profits made by the other lenders and by Nelnet prior to the settlement. According to Oberg, the settlement was like “catching the bank robber on the steps of the bank with a bag of money and saying ‘you can keep the money if you don’t rob any more banks.’”

Other lenders named in the suit include: the Kentucky Higher Education Student Loan Corp.; Sallie Mae; Southwest Student Services Corp., a Sallie Mae subsidiary; the Pennsylvania Higher Education Assistance Agency; the Panhandle Plains Higher Education Authority; the Vermont Student Assistance Corp.; Brazos Higher Education Services Corp.; Education Loans Inc. of South Dakota; and, the Arkansas Student Loan Authority. The government has thus far declined to intervene in the suit.

For the full story, go to Lincoln’s Journal Star.