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Student Lenders Reap Millions in Excess Subsidies

October 22, 2007

by Paulina Mis

In recently published (previously-known) financial aid news, student lenders were found to have made millions by accepting excess subsidies from the government. By finding loopholes in government regulations, the student lender Nelnet, one of the biggest offenders, was able to collect $278 million in excess payments between 2003 and 2005. Based on calculations released by the Washington Post, other lenders accepted an estimated $300 million in excess subsidies between 2003 and 2006—paid for by taxpayers.

Because students applying for government aid are restricted in how much they can borrow, the government offers subsidies to lenders who borrow to students. In exchange for the money, lenders offer students loans at rates that, although usually higher than those offered by the government, tend to be lower than those offered by unsubsidized lenders.

When average student loan interest rates were higher, the government guaranteed lenders a 9.5 percent interest rate for loans. Once average loan rates fell, many lenders continued to take in large subsidies.

And although the government lowered some subsidy sums after rates fell, they continued to guarantee a 9.5 percent rate on loans previously funded with tax-exempt bonds. To extend the pool of loans still eligible for larger subsidies, Nelnet divided tax-free bonds among various pools. They would then claim that pools of loans at least partially composed of tax-free bonds were eligible for 9.5 percent subsidies.

The government did little to stop them in the past, and it is doing little to punish them now. According to the Washington Post, the Department of Education Secretary Margaret Spellings did admit that the government shouldered some of the responsibility for the “confusion”. However, she indicated no intent to pursue full accounting, nor did she suggest that reimbursement from lenders would be sought.


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