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A New Chapter in the 9.5 Scandal
On Monday, a federal court in Virginia unsealed a whistleblower lawsuit filed by Jon Oberg, the U.S. Department of Education researcher who uncovered the 9.5 student loan scandal, against 10 student loan companies that participated in the scheme. The lawsuit, which Oberg filed in 2007 under the federal False Claims Act, seeks the return to the federal government of $1 billion in excess student loan subsidies these lenders improperly obtained.
The roots of the 9.5 student loan case go back to the 1980s when Congress guaranteed non-profit lenders, which use tax-exempt bonds to finance their loans, a minimum rate of return of 9.5 percent on federal student loans made with these bonds. As interest rates on all other student loans fell in the 1990s, policymakers became concerned that these nonprofit student loan providers were making a killing. So in 1993, Congress rescinded that policy, but grandfathered in loans made from the old bonds, believing that the volume of 9.5 loans would decline as they were paid off and the bonds retired.
Instead, beginning in 2002, a small group of lenders devised a strategy to aggressively grow the volume of loans that they claimed were eligible for the 9.5 guarantee. This was a goldmine for lenders in the existing low interest rate environment (at the time, the borrower interest rate on regular loans hovered around 3.5 percent.) They accomplished this scheme by transferring loans that qualified for the 9.5 subsidy payment to other financing vehicles and recycling the proceeds into new loans that they claimed were then eligible for the subsidy. The lenders repeated this process over and over again.
As a researcher in the Education Department's Institute for Education Sciences, Oberg discovered the scheme in 2003 while reviewing internal agency spreadsheets that showed that the total volume of outstanding 9.5 loans was growing rather than shrinking. He brought his concerns to his superiors at the Department but they brushed them off. His supervisor, Grover Whitehurst, ordered him to stop pursuing the issue, and instead to focus solely on his responsibilities as a research administrator in the final 18 months before his scheduled retirement.
But Oberg had also reported his findings to the Department's Inspector General, which launched its own investigation into the 9.5 scandal. His work paid off in September 2006 when the Inspector General declared the lenders' loan and bond manipulations to be illegal. In January 2007, Education Secretary Margaret Spelling concurred with the Inspector General's opinion and barred the student loan company Nelnet and other lenders that refused to submit to independent audits from receiving any further 9.5 payments. But she did not require the lenders to return the overpayments they had already received.
Unhappy with this resolution, Oberg (who first revealed himself to be the whistleblower on the 9.5 scandal at an event hosted by the Education Policy program here at the New America Foundation in 2006) decided to file his own false claims lawsuit on behalf of the government, his lawyers stated. The lawsuit has been under government seal for the last two years, as the U.S. Justice Department weighed whether or not to join it. The federal district court lifted the seal last week after DOJ decided against joining the lawsuit. By law, Oberg has to right to continue to pursue recovery on behalf of the United States, with the Justice Department retaining the right to intervene at a later time.
Among the main targets in the case is Nelnet, which was created in 1998 when Nebraska's nonprofit student loan agency converted to for-profit status. The most active participant in the scheme, Nelnet increased the amount of loans for which it sought the 9.5 percent rate from $393 million in 2001 to more than $3.3 billion in 2004. The lawsuit estimates that Nelnet made approximately $407 million in unlawful 9.5 claims.
Other student loan companies named in the suit are the following:
- The Pennsylvania Higher Education Assistance Agency
- The Kentucky Higher Education Student Loan Corporation
- Panhandle Plains Higher Education Authority (Texas)
- Sallie Mae
- Southwest Student Services Corporation (Arizona)
- Vermont Student Assistance Corporation
- Education Loans Inc.(South Dakota)
- Brazos Higher Education Services Corporation (Texas)
- Arkansas Student Loan Authority
Here is a link to the news release that his lawyers distributed yesterday. To read some of our recent coverage of the 9.5 scandal, read here, here, here, and here.
Tomorrow we will provide further analysis of this important lawsuit. Stay tuned.
Lawsuit doesn’t have enough defendants
PHEAA was the first 9.5 scammer. Then Nelnet saw PHEAA making a bundle from the scam and wanted its share. KHESLC saw Nelnet and PHEAA making out like bandits from the scam. Sallie Mae wanted its share, but sly fox that they are, in typical mafia-like fashion scrounged around and found Southwest to front SLM’s scheme to boost their illicit 9.5 profits. And so on and so on and so on. TEN student loan companies, each one as crooked as the next.
I hope HigherEdWatch can help answer these questions: This has been going on for how long and these crooked student loan companies are still allowed to do business with the U.S. government? Why aren’t Rod Paige, Margaret Spellings and Grover Whitehurst (the supervisor who told Dr. Oberg to work on something else), named as defendants in this lawsuit? Why isn’t the Department of Justice helping Dr. Oberg bring these crooks to justice?
God bless Dr. Jon Oberg. Our country needs more brave souls like him and I hope he makes a bundle. He’s earned it.
We need more like Dr. Oberg
I agree with the last commenter. Why is it that only one man seems willing to take a stand against such corruption? I hope the jury sees what both Washington and the student loan industry seem to have become numb to…fraudulent schemes and corporate greed. I commend Dr. Oberg and his efforts. Best of luck in righting these wrongs!
Lincoln Law
I have not read the details of the lawsuit but I suspect this is being brought to court under the old "Lincoln Law" which was enacted to help encourage whistleblowing on fraud during the Civil War. Such a lawsuit entitles the bringer to something like 10% of the recovered monies. Dr. Oberg is going to have a huge legal bill and if he doesn't win this will come out of his pockets unless he has a bright atty willing to do it on contingency. Even after the lawyers get their piece of the pie there is a handsom reward for the good doctor and I think he has earned every dime! You go doc! And shame on the DOJ for walking away from this fraud against the American people.
PS: This may be why the others are not named, this is about recovering the ill gotten money, not criminal prosecution. If Oberg wins then there may yet be criminal charges brought by the DOJ under their "right to intervene at a later time".
College Loan Corp
In the "College Loan Corporation v. Sallie Mae" case, a lower court ruled that there is no private cause of action for enforcing the Higher Education Act; only the Education Dept. can enforce the HEA. While the ruling seemed foolish and ridiculous and inefficient, particularly in light of the long tradition of qui tam recoveries in the DHHS programs, it is down there in black & white as an obstacle to Dr. Oberg.
While it is a lower court ruling and thus not binding precedent, unfortunately Dr. Oberg's law firm chose to litigate his qui tam case in the very same Federal judicial district! Thus, it is considered persuasive, but not binding, precedent.
This Is Just The Beginning...
The tide is turning. The corruption and grotesque, unearned fortunes being made on the backs of middle-class college students and graduates will come to an end. FFEL will be killed off and eventually all servicing and collections will come in house also. No one cares about a few hundred otherwise unemployable SLM Corp. call center drones in Mucie, IN or Panama City, FL. Too many college graduates' lives have been impacted by the unmitigated greed of the student debt cartel for too long -- and we've had enough. G*d bless you Dr. Oberg.
Voice of conscience
Back in the day when I worked for Sen. Bob Stafford on the Senate Education Subcommittee, I worked with Jon Oberg from time to time. He was a gentleman then, and although I have not seen him in years, I presume he is now. It is a lonely fight to take on a bureaucracy and a very lucrative business. Whistleblowers often end up vilified by those whose conduct is threatened and left out by the curb when the status quo rolls merrily along. Most Americans will never hear of Jon Oberg, but they will be better off because men and women such as him are willing to risk their security and comfort to publicize what others prefer to hide.
Bless Jon Oberg
This guy is my personal saint. I light a blue novena candle for him and venerate his massive accounting props. The candle also burns for all the demigods at the GAO who have been complaining for years about the problems with student loan subsidies, and for those working to bring relief to the trapped borrowers.
Bless Jon Oberg!
May you live a healthy, happy long life.
May St. Catherine of Alexandria, who was put on a spiked wheel and later beheaded, watch over you as she is familiar with the torment trapped borrowers feel.
May St. Thomas Aquinas, who persevered in his studies despite many attempts to thwart him, guide you and keep you strong.
...and I'm not even Catholic, but these are sincere petitions.
Thank you for your work. Thank you for persisting. The one thing the government cannot ignore is when corporations sneak around and get away with this grotesque amount of fraud. They must have set some kind of record just in terms of sheer dollar amount. There's plenty of corporate hand-holding going on at all levels of government, and although there was some collusion in the Dept of Ed, it looks like the loan sharks were getting away with much, much more than anyone even suspected.
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