Education Dept. Improperly Paid $278 Million in Subsidies

The Education Department improperly paid lender Nelnet Inc. more than $278 million in student-loan subsidies from early 2003 through mid-2005 and should demand repayment of the money, the department's inspector general said in a report released yesterday.

The department erred in awarding payments that gave Nelnet a much higher return than lenders are ordinarily entitled to receive on federally subsidized student loans, the report said.

The type of subsidy Nelnet claimed has long been criticized as a windfall for lenders, and Congress has sought to curtail it because it guaranteed lenders a minimum interest rate on certain loans even when prevailing rates were much lower. If the department does not stop making the improper payments, Nelnet could receive an additional $882 million, the report said.

Nelnet said in a news release that it followed the rules. The company, based in Lincoln, Neb., told investigators that the department paid its bills without objection, according to the report. Nelnet moved loans through a series of transactions to continue claiming they qualified for the subsidy, and it increased the amount of loans for which it sought government payments from about $551 million in early 2003 to about $3.7 billion in mid-2004, the report said.

Education Secretary Margaret Spellings "wants a thorough and comprehensive review of the inspector general's report . . . after which the department will make known how it will proceed," department spokeswoman Katherine McLane said.