Confusion Cited In Overpayments To Student Lenders

But some officials within the department realized as early as 2002 that the opposite was occurring: Lenders were taking steps to inflate the volume of loans that qualified for the subsidies. They did that by shifting the financing of loans among bonds that qualified for the special subsidies and bonds that did not. Lenders then claimed that the larger pool of loans financed by both types of bonds qualified for the subsidies.

Some inside the department sounded alarms.

"I have come across what appears to be significant federal waste," department researcher Jon H. Oberg wrote in a 2003 memo to agency officials. "I estimate it amounts to about $30,000 per day, perhaps more."

Oberg urged the department, without success, to clarify the rules on subsidy payments through a letter to lenders or new regulations.

"We tried hard in 2002 to modify" federal guidance to lenders "but had to back off," Mirek Halaska, director of a Texas field office, wrote in a 2004 e-mail to department officials.

In 2003, Nelnet devised a plan, known internally as Project 950, according to the inspector general's report, that shuffled loan financing quickly from one bond to another to increase the volume of loans that qualified for the subsidies. Nelnet wrote the department in May 2003 to ask for confirmation that its plan was legal. The department, then led by Rod Paige, did not respond for 13 months. In that time, Nelnet inflated the volume of loans qualifying for the subsidies from $551 million to about $3.66 billion, the inspector general found. In June 2004, the department sent Nelnet a three-paragraph reply that offered no conclusion on whether the plan was legal.

In May 2005, the inspector general reported that the New Mexico Educational Assistance Foundation had collected as much as $35 million in excessive payments and urged the department to recover the money. The nonprofit lender disagreed with the findings. So did Spellings, who took office in January. She decided not to seek to recoup the funds.

But Spellings took action after the inspector general's September 2006 report on Nelnet found that the lender stood to collect an estimated $882 million in future years if the problem wasn't fixed. In a January settlement between the government and Nelnet, the lender denied wrongdoing and was allowed to keep all subsidies as long as it stopped collecting the disputed subsidies in the future. Spellings extended the policy to every lender in the country.

"We had legal risk, in my view, and the prudent course of action was to, once and for all, end this practice and provide certainty in the industry that that was not allowable," Spellings told The Post. "While it cost us $278 million to make that final call, it also saved us potentially a billion dollars had we lost the litigation."

The government's total cost, however, is undoubtedly higher than $278 million because Nelnet did not act alone. Spellings said the agency has no plans to conduct audits to calculate a total. "I don't know if it's a knowable number," she said. "I guess it's knowable by somebody. But my inspector general doesn't know it, to my knowledge. And I don't. We haven't found out."

Nelnet spokesman Ben Kiser reiterated that Nelnet did nothing wrong and followed the law as the department had articulated it.

In July, the department responded to a Post request for data on the 9.5 percent loan subsidies. The Post analyzed payments from 2001 to 2006 to lenders from across the country, attempting to use criteria applied in the inspector general's report on Nelnet. The analysis found as much as $330 million in potential overpayments to 10 other lenders.

Department officials contend that only comprehensive audits can determine the amount overpaid to lenders. Diane Auer Jones, assistant secretary for postsecondary education, called The Post's analysis flawed. "We don't believe meaningful inferences can be made" from the data the department provided, Jones said in a statement. But four experts in higher education finance who reviewed the analysis at The Post's request -- Christopher Avery, a Harvard University professor; Laura W. Perna, a University of Pennsylvania professor; Robert B. Archibald, a College of William & Mary professor; and Robert Shireman, president of the Institute for College Access and Success -- said it would provide a rough estimate of the potential cost to taxpayers.

Ellis E. Tredway, an executive vice president for Brazos Higher Education Authority, said the lender was not to blame for receiving what the Post analysis found may have been $20 million in overpayments. The Education Department, he said, was responsible.

"I think there is fault with the department," Tredway said. "They came out with a new interpretation of what history had been."