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Education Secretary Defends Loans Record
Oversight Is Lax, Committee Chief Asserts

By Amit R. Paley
Washington Post Staff Writer
Friday, May 11, 2007

Education Secretary Margaret Spellings, facing aggressive questions about her department's oversight of the $85 billion-a-year student loan industry, offered a vigorous defense of her actions yesterday and called for a multi-agency effort to prevent corruption in the loan system.

"Federal student aid is crying out for reform," Spellings told the House education committee. "The system is redundant, it's byzantine and it's broken. In fact, it's often more difficult for students to get aid than it is for bad actors to game the system."

In a sometimes-tense hearing, Democratic lawmakers accused the Bush administration of failing to clamp down on conflicts of interest and various industry practices that have drawn criticism from Congress and attorneys general across the nation. The House voted this week to increase federal regulation of the loan business.

"The Education Department's oversight failures have been monumental," said Rep. George Miller (D-Calif.), chairman of the committee. "Was this simply laziness? Was it incompetence? Was it a deliberate decision to look the other way while these things happened? Or was it a failing more sinister than that?"

Miller disclosed at the hearing that the Justice Department is examining a controversial accounting loophole used by Nelnet, a Nebraska-based lending company, in an attempt to collect more than $1 billion in government subsidies. Spellings decided this year to halt the payments but allowed Nelnet to keep $278 million it had collected.

Ben Kiser, a Nelnet spokesman, said the company is "fully cooperating" with the Justice Department and remains "confident that there are no grounds for any action against Nelnet." The department is looking into potential civil fraud, according to a source who spoke only on the condition of anonymity because of the matter's sensitivity.

Spellings offered her fullest explanation yet of the decision to settle with Nelnet, saying she believed there was a significant chance that the company would have won if it had filed a lawsuit against the government to continue receiving payments.

But Miller, in one of several verbal sparring sessions with Spellings, said the explanation made little sense. "If it's such an easy case for them, why did they walk away from $1 billion?" he asked.

Spellings said the Bush administration has taken significant steps to regulate the student loan industry. She announced that a task force named to create rules forbidding gifts from lenders to universities had made its recommendations, which she pledged to implement.

One of the biggest areas of contention was the department's oversight of companies that offer private loans, a fast-growing section of the market. Spellings said she had the ability to regulate only federally guaranteed loans, but Miller insisted that she could have used her bully pulpit as secretary to stop controversial practices in the private loan business.

"Who was monitoring?" Miller asked. "Did they have blinders on?"

Spellings replied: "It was not a violation of the laws I'm charged with overseeing."

"That's become a crutch," Miller said.

Spellings said responsibility for regulation of the private loan market rested with the Federal Trade Commission, Securities and Exchange Commission, Federal Deposit Insurance Corp. and Federal Reserve. But she promised to convene the heads of all the agencies "to coordinate a government-wide endeavor to end student-loan abuse -- no matter where it occurs."

Several Republicans came to the secretary's defense. "We must be cautious not to engage in an endless, partisan fishing expedition that, after a while, runs the risk of becoming a witch hunt instead of a serious pursuit of changes to public policy," said Rep. Howard P. "Buck" McKeon (Calif.), the committee's ranking Republican.

Also yesterday, New York Attorney General Andrew M. Cuomo announced that the parent company of lender Student Loan Xpress, which placed three executives on leave amid a conflict-of-interest investigation, agreed to pay $3 million and sign a code of conduct that forbids controversial business practices.

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