Monday, June 20, 2005

Lay down Sallie 

Here's an interesting tidbit from this morning's financial news.
Nelnet Inc. (NNI: news, chart, profile) said it will schedule an audit of a portion of its student loan portfolio after being contacted by the Department of Education's Office of the Inspector General. The audit will focus on the portion of Nelnet's student loan portfolio that receives a 9.5% special allowance. It also said the Department of Education is conducting a review of lenders related to tax-exempt bonds that are eligible for the special allowance.
A fuller story in the Chronicle of Higher Education this AM (subscriber link) points out that this comes from a loophole that Congress thought it had closed 12 years ago, but apparently not yet.
The loophole at issue dates from 1993, when Congress rewrote student-loan laws to rescind a guarantee that assured a return of 9.5 percent on loans backed by tax-exempt bonds issued by nonprofit lenders. The 9.5-percent guarantee, established during a period of high interest rates, had previously been necessary to attract lenders into the loan program. Loan providers maintain that the department's regulations allowed them to continuing receiving the 9.5-percent return by merely refinancing bonds issued before the cutoff date. Some of those bonds are now held by large, for-profit companies like Nelnet that have purchased nonprofit agencies.

The loophole, which Congress voted in October to close for at least a year, is believed to have been worth billions of dollars to some lenders. Budget analysts estimated that closing the loophole for just one year would save the government $270-million. Students currently pay interest of about 3.4 percent on loans, leaving the government to make up the balance of the 9.5-percent guarantee.
So understand: The loan program is just to roll over debt on student loans made before 1993. It generates no new money. It is simply an incentive to keep those bonds rolling over, and to guarantee lenders a fat profit. Nelnet has been a huge player in this, having its portfolio of loans on which the 9.5% interest paid grow 818% between 1/03 and 6/04. That's what's triggered the audit.

Interested readers should visit Student Loan Watch fmi, including some possible conflicts of interest at Sallie Mae, the government backer of student loans. Given all the attention given to Fannie and Freddie, why Sallie gets ignored is a good question to ask.