Murray, Kennedy, Obama and Dorgan Demand Answers on Improper Payments to Lenders

(Washington, D.C.) – Today, U.S. Senators Patty Murray (D-WA), Edward Kennedy (D-MA), Barack Obama (D-IL), and Byron Dorgan (D-ND), sent a letter to the Department of Education’s Inspector General’s Office asking for a complete accounting of the overpayments received by lenders as part of the 9.5 percent Special Allowance Rate program.  According to information contained in an Inspector General’s report in 2006, and in the Washington Post on October 20th the federal government may have overpaid lenders by hundreds of millions of dollars from 2003 to 2006.  Senators Barbara Mikulski (D-MD) and Hillary Clinton (D-NY) also signed the letter.

The 9.5 percent Special Allowance Payment rate began in the 1980’s as a way to increase student access to low-cost loans at a time of high interest rates.  However, when interest rates fell, the program survived and became beneficial to many lenders since the guaranteed subsidy rate remained at 9.5 percent.  At the same time, several lenders received improper payments under this program for loans which were not actually eligible for the 9.5 percent subsidy.  This resulted in the overpayment of potentially hundreds of millions of dollars from the Department of Education to these lenders. 

In the letter, the Senators ask the Inspector General to conduct a careful investigation of the total amount of taxpayer dollars spent on overpayments.

“We believe that the total amount of improper payments is a knowable number, and that taxpayers deserve to know the total amount of these payments," the Senators wrote. "Taxpayers also deserve information on which lenders were involved, what methods they used to claim these subsidies unfairly, and why the Department allowed the inappropriate subsidies to be paid.  We request that you conduct a careful investigation of these issues.”

"At a time when millions of students and families are struggling to meet the high cost of college, we owe them a full, fair, and transparent accounting of any possible waste or fraud in the student loan programs."

The full text of the letter follows:

October 31, 2007

The Honorable John P. Higgins, Jr.

Inspector General

U.S. Department of Education

400 Maryland Avenue, S.W.

Washington, D.C. 20202

Dear Inspector General Higgins:

 We are writing to request that your office undertake an investigation to determine the full amount of improper special allowance payments made by the Department of Education to student loan lenders through the “9.5 percent loan” subsidy.

 We greatly appreciate your previous investigations on this issue, which, among other findings, revealed that the Department made $278 million in improper 9.5 percent special allowance payments to Nelnet.  As you know, however, dozens of lenders have received 9.5 percent special allowance payments during the 27-year history of the subsidy, so it is likely that the sum total of improper payments is much higher.  According to an analysis of Department data by the Washington Post, between 2003 and 2006 alone, as much as $300 million may have been improperly paid to other lenders who received 9.5 percent special allowance payments.

 As early as 2005, Members of Congress had asked the Department to conduct an audit of all lenders that increased the volume of loans claimed as entitled to the 9.5 percent guaranteed rate of return.  The Secretary of Education recently stated that her office does not plan to conduct such an audit, and expressed doubt that the total amount of overpayments is even “a knowable number.”  We believe that the total amount of improper payments is a knowable number, and that taxpayers deserve to know the total amount of these payments. Taxpayers also deserve information on which lenders were involved, what methods they used to claim these subsidies unfairly, and why the Department allowed the inappropriate subsidies to be paid.  We request that you conduct a careful investigation of these issues.

 Since the 9.5 percent loan scandal first emerged, Congress has acted to limit the inappropriate growth of these loans through recycling, and the Department has prohibited lenders from receiving inflated 9.5 percent special allowance payments in the future.  These steps will help curtail future abuses, but the public deserves full knowledge of the funds that were misspent in the past.  Your thorough investigation of this issue will help us determine the extent to which Congress needs to oversee the Department’s administration of the federal student loan programs more closely, and inform future debate on the Federal Family Education Loan Program. 

At a time when millions of students and families are struggling to meet the high cost of college, we owe them a full, fair, and transparent accounting of any possible waste or fraud in the student loan programs.  We welcome the opportunity to work with you.

With respect and appreciation, 

Sincerely,