When Jon H. Oberg was a researcher at the Department of Education 13 years ago, he discovered a loophole that let student loan companies reap hundreds of millions of dollars in excessive payments from the government.
On Wednesday, an appeals court reversed an order that threw out the case against the Pennsylvania Higher Education Assistance Agency (PHEAA), a company that collects and applies student loan payments for the government.
The decision puts the lawsuit back in play and dredges up a scandal that signaled the beginning of the end of a system that enriched financial firms at the expense of taxpayers.
Before President Obama’s makeover of the student loan system in 2010, the federal government was essentially a silent partner in a $60 billion program. Private lenders used their own money to finance student loans, but behind the scenes the government paid a portion of the interest to make the debt more affordable.
In the 1980s, the government guaranteed lenders a 9.5 percent return on loans financed by tax-exempt bonds. The guarantee became a windfall for lenders when interest rates fell. Congress eliminated the subsidy in 1993, but lenders quickly packaged new loans with old ones to keep getting the subsidy payments.
Oberg noticed that lenders were shuffling loan financing from one bond to another to increase the volume of loans that qualified for the subsidies. He said he warned his supervisors, but was rebuffed.
Other officials caught the federal waste, including the department’s inspector general. The watchdog concluded in 2006 that the government overpaid one lender, Nelnet, $278 million from 2003 to 2005. Nelnet disputed the findings and was allowed to keep the money, but settled the Oberg case for $55 million without admitting any wrongdoing.
In the case of PHEAA, the inspector general said the company received about $33 million in excessive payments, a charge the state-run nonprofit lender disputed. Just like Nelnet, PHEAA was allowed to keep the money, but still faced a legal fight from Oberg.
The lender argued that as an arm of the state of Pennsylvania it could not be sued for fraud under a law known as the False Claims Act. While the district court bought that argument, the appeals court concluded that lender is independent of the state.
PHEAA spokesman Keith New declined to comment on the ruling since the case is ongoing. Oberg’s lawyer, Christopher Mills, did not immediately respond requests for comment.
In the wake of the so-called 9.5 scandal, Democrats began calling for the government to only provide direct federal loans, a move that Obama eventually made when he entered office.
To manage its outsize portfolio of loans, the government gave contracts to some former lenders, including Nelnet and PHEA, to collect and apply borrower loan payments.
Want to read more about the student loans? Check out these stories: