Senator calls for comprehensive inquiry into lender practices

Sen. Dick Durbin, D-Il., has called on the Department of Education to review suspect practices by lenders involved in the Federal Family Education Loan program.

Durbin submitted a letter to the department’s inspector general Oct. 31 requesting that the review be expanded to all entities associated with the program and that all regulations agreed to by participants be followed without exception.

The letter came in response to an Oct. 4 New York Times article describing suspect behavior by one of the program’s participants.

The article said that Nelnet, a prominent provider of loans to college students, had possibly exploited a tax loophole that allowed the company to receive subsidy payments from the government at an inflated 9.5 percent interest rate for certain loans that likely did not qualify under the program.

The senator requested the review of not only the lending parties, but also of educational institutions themselves. Has there been collusion between the lenders and certain schools to gain favored lending status? Have inducements been instituted to facilitate such relationships?

“Even if the law does not prohibit lenders from offering inducements in exchange for private loan applications, there is the potential for a conflict of interest,” he said in the letter.

Durbin emphasized that the program’s premise had been to provide support and relief to students from rising college costs – costs that have easily doubled since 1980 and increased well beyond the rate of inflation for 20 consecutive years. It was therefore incumbent on all parties involved, he said, to recognize the mission of the program and to rectify any shortcomings and injustices accordingly.

Durbin noted that inclusion in the loan program mandates responsible behavior by lending institutions, and that any violations of the program rules can result in expulsion from the program, fines and prosecution.

“At a time when college costs continue to rise and students are borrowing more and more to pay for higher education, it is very disturbing to learn that some lenders and some colleges and universities may be engaged in practices that do not appear to be in the best interests of the students,” the letter said.

Durbin went on to question the department’s ability to oversee the program, and he asked for suggestions on possible policy changes at the Department of Education and legislation that could be adopted to curtail such transgressions.

According to Durbin spokeswoman Nadeam Elshami, the inspector general’s office responded late last week that it will initiate an in depth discussion of the matter.

“Officials from the inspector general’s office at the Department of Education will be meeting with our legislative staff later this week to discuss the senator’s request in more detail,” she said.

The seemingly inflated rate dates back to the program’s institution in the 1980s, when rates were considerably higher than they are today and lenders were hesitant to grant such loans without governmental assistance.

The New York Times article said that the Department of Education is currently considering pursuing the recovery of $278 million from Nelnet that may have improperly been distributed. Nelnet has been granted 30 days to respond to the matter.

More alarming still, the government’s review noted that Nelnet may prove the recipient of up to an additional $882 million if immediate action is not taken.

Nelnet chairman Michael Dunlap said the company will makes its case to the government and cooperate in seeking a resolution.

Education advocates have universally condemned the practice of governmental subsidies at such inflated rates, but past efforts to retract or amend the law have been largely unsuccessful.

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