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Justice probes overpayments to student loan firm

May 10th, 2007 9:57 pm by Associated Press



WASHINGTON - The Justice Department is reviewing an audit that found hundreds of millions of dollars have been improperly paid to a student loan company, House Education Committee Chairman George Miller said Thursday.


Miller, D-Calif., made the review public during a hearing in which he pressed Education Secretary Margaret Spellings on her decision to ignore a recommendation by her department's inspector general, John Higgins, to recover an estimated $278 million. It's the IG's audit that Justice is reviewing.


A Justice Department spokesman declined comment Thursday.


Spellings defended her decision not to recover the improper payments to the lender, Nebraska-based Nelnet, saying it was prudent to simply extract a promise from Nelnet that it would halt the practice, avoiding a costly lawsuit.


Some lawmakers were skeptical.


"Do you not have confidence in your inspector general?" asked Rep. John Tierney, D-Mass. "I'm extremely uncomfortable with this."


Spellings also traded barbs with Miller over allegations that the department's oversight of the student loan industry has been lax.


Miller said the department failed to do its job when it came to uncovering improper relationships between student lenders and colleges or student loan officials at those colleges. He pointed to a 2003 notice from Higgins' office urging the department to curb inducements made by lenders to colleges or their staffs.


Miller said the department promised it would keep an eye on such activities, a response he called inadequate. Spellings countered that the department has done what it could under existing law. "We monitor these programs vigorously," she said.


"Who is monitoring? Do they have blinders on?" Miller asked.


New York Attorney General Andrew Cuomo has been leading an investigation into the $85 billion-a-year student loan industry. He has found evidence that some colleges received a percentage of loan proceeds from lenders given preferred status by the schools and found college loan officers got gifts from lenders to encourage them to steer borrowers their way.


Cuomo said Thursday he had reached a $3 million settlement with Student Loan Xpress, Inc. and its parent company CIT Group Inc. Student Loan Xpress also agreed to cooperate with the investigation into potentially improper stock transactions.


Cuomo's investigation revealed that the former CEO of Student Loan Xpress, Fabrizio Balestri, sold or transferred securities to financial aid officers at several colleges and to Matteo Fontana, a senior Education Department official who was recently placed on leave due to the disclosure of his stock holdings.


Cuomo previously reached similar agreements with Citibank, Sallie Mae, JP Morgan Chase, Bank of America and Education Finance Partners.


The congressional hearing came a day after the House overwhelmingly passed a bipartisan bill that would ban gifts from lenders to schools and impose strict controls on schools that publish approved lender lists to guide students to certain loan companies.


Spellings called the vote "an important first step in this process."


But she also noted that she was pushing through new regulations to protect against conflicts of interest. She said proposed regulations would be completed this month and would include a requirement of at least three lenders on any school's preferred-lender list, together with an explanation of how and why they were chosen. The rules also will spell out what is allowed and what is prohibited with regard to inducements from lenders to schools, she said.


Spellings said her department has oversight only for loans made through the federal student loan programs in which the government guarantees the loans. She said she has no authority over the growing private student loan industry, in which the government doesn't make or guarantee the loans.


She announced at the hearing that she was convening the chairs of other federal agencies that deal with banking and lending issues to help her examine the problems in this sector of the student loan industry.


California Rep. Buck McKeon, the top Republican on the House Education and Labor Committee, came to Spellings' defense, saying she couldn't be "expected to be the ethics police for the nation's colleges."


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