Educ. Dept. to Answer For Loan Subsidies

Politicians From Both Parties Seek Answers About Nelnet Decision From Education Dept.

Lawmakers from both parties are pressuring the Education Department to explain why it let a student loan company keep $278 million in subsidies that an audit found improper.

The pressure indicates that both parties are focused on the increasing costs of higher education.

The loan company, Nelnet, received the payments through a subsidy program that guaranteed a 9.5 percent interest rate on student loans. In an accord reached in January, the department allowed Nelnet to keep the $278 million it had received but suspended future payments of more than $800 million until a future audit could determine whether the company was eligible for the money.

Ten Democrats on the House Education and Labor Committee, as well as a separate bipartisan group of 10 members of Congress, sent letters to the department last week seeking an explanation of that decision.

Two weeks ago, Senator Edward M. Kennedy, the Massachusetts Democrat who is chairman of the Senate Committee on Health, Education, Labor and Pensions, asked the department for copies of all communications with the company since last August on the decision not to seek recovery of the money.

A spokeswoman said Mr. Kennedy planned a full investigation into the case.

"I am interested in the rationale underlying your decision to reject the recommendation by the department's inspector general that the chief operating officer for Federal Student Aid 'require the return of the overpayments' made to Nelnet," Mr. Kennedy wrote.

He asked the department to provide the documents by March 31.

In a follow-up letter, Mr. Kennedy asked March 7 whether the department had received a necessary approval from the Justice Department before reaching the agreement.

A spokeswoman for the Education Department, Katherine McLane, said the agency was reviewing the letters.

The letter from the 10 Democrats on the House committee was sent on March 7 to Education Secretary Margaret Spellings. It also asked for a description of actions that the department might take toward other companies that might be receiving similar payments.

"The Nelnet example represents a serious misuse of federal funds, and it is likely that this is not an isolated case," the letter said. "It is critical for you to conduct full oversight."

In their letter sent on March 6, the bipartisan group of lawmakers — seven Republicans and three Democrats, none of whom signed the Wednesday letter — criticized the decision to settle with Nelnet, of Lincoln, Neb., as fiscally irresponsible and warned that it set a poor precedent.

The letter asked the department to revisit this decision and give an explanation if it did not try to recover the money.

The guaranteed interest rate was established in the 1980s, when rates were high, to keep lenders in the loan business. Congress tried to rein in the program in 1993, but the loans ballooned as lenders found ways to increase portfolios that they said were eligible for the guarantee.

A spokesman for Nelnet, Ben Kiser, said, "We reached an amicable agreement with the department on this issue in January and consider this issue resolved."

Representative Thomas E. Petri, a Wisconsin Republican who signed the group letter, said in a telephone interview, "I don't think any of us think we should sit idly by and let people just game the system."

Mr. Petri noted that the overpayments could help finance efforts to make college more affordable, perhaps by increasing grants for poor students. "That's not liberal or conservative," he said. "That's just a basic responsibility that we have."

Advocates for students hope the letters may be the first step in a broader review of the loan industry, and hailed the pressure on the department.

"The fact that you have requests from Democrats, but then also people like Jeff Flake, who is one of the most fiscally conservative members of the Republican Party — that breadth is significant," said Luke Swarthout, higher-education associate with U.S. Public Interest Research Group in Washington.

Mr. Flake signed the March 6 latter.

Senator Kennedy sent letters to Education Department officials and contractors involved in Reading First, a $1 billion-a-year program in which he demanded to see all correspondence and contracts between Reading First and the White House, the department and other entities.

The letters went out hours after the department's inspector general found that the program's main contractor had failed to screen for conflicts of interest.