A federal investigative agency has issued a draft report recommending that Lincoln’s Nelnet Inc. repay money it collected from certain student loans and not collect any more money from the type of loan at issue.

Nelnet stock closed down $1.10, 3.5 percent, to $30.25 in heavy trading on the New York Stock Exchange.

The report came from The Department of Education’s Office of the Inspector General on an audit of Nelnet’s portfolio of student loans receiving 9.5 percent special allowance payments.

The special allowance payments are the result of a loophole in  federal policy that allowed Nelnet and other student loan companies to be guaranteed from public funds a 9.5 percent return on student loans made at rates as low as 3.5 percent by bundling the newer, lower-rate loans with older, higher-rate loans.

Officials from both Nelnet and the Education Department said they could not comment on what was in the report, including the amount Nelnet might be asked to repay.

Ben Kiser, a Nelnet spokesman, said that as of June 30, the company had booked $322 million worth of cumulative pre-tax revenue off of the $3.3 billion portfolio of loans it holds that qualify for the special allowance payments.

But Kiser would not say how much of that the report recommended the company repay.

 In a press release, the company said it disagreed with the draft report’s findings and noted that the report is not final.

“Nelnet believes it has qualified and billed for the special allowance payments in accordance with applicable laws, regulations, and Department of Education guidance,” the company said in the press release.

Kiser said Nelnet has 30 days to respond to the draft report and said he did not know how soon after that a final report might be issued.

He also said he couldn’t speculate on what action Nelnet might take if the final report contains the same recommendations.

Katherine McLane, press secretary for the Education Department, also declined to comment on the report because of its preliminary nature.

But she did say the department takes the issue very seriously and would “determine appropriate action” once a final report is issued.

It is not a foregone conclusion that the Education Department would accept the report’s findings.

Last year, the OIG issued a final report criticizing the New Mexico Educational Assistance Foundation’s process, and demanding the return of a portion of the subsidy.  But the Education Department rejected the inspector general’s findings and continued to pay the subsidy to the New Mexico group.

Michael Dannenberg, director of education policy for the New America Foundation and a frequent critic of Nelnet’s use of the special allowance loophole, said it’s his understanding that there are a lot of similarities between the Nelnet and New Mexico cases.

Though that doesn’t necessarily mean the outcome will be the same, Dannenberg said he would be “surprised and pleased” if Nelnet is required to repay the money.

Dannenberg said Nelnet has “a river of dirty money running through it” and should be willing to give that money back to the federal government.

He also said the $322 million of revenue Nelnet has claimed from the special allowance payments is “just the beginning” and the federal government will be on the hook for billions of dollars in future subsidies if they don’t end Nelnet’s and other companies use of the special allowance loophole.

Nelnet has acknowledged that it took advantage of the loophole because competitors were doing so,  but says it has opposed the practice as public policy since early 2003, stopped adding loans that qualified for it when legislation was introduced to forbid it and didn’t book revenue it was collecting from the practice until it consulted federal authorities on its legality.

Despite that, Dannenberg and other critics have said Nelnet was the biggest user of the loophole.

“They’ve been more aggressive than anyone else,” he said.

In addition to the Education Department audit, the company was the target of an informal investigation by the Securities and Exchange Commission in 2004.

No developments ever emerged publicly from that investigation.

Nelnet did not say what possible effect the draft report might have on its financial condition and profitability.    One team of financial analysts at Credit Suisse didn’t seem to be too concerned, even though a report estimated that income from the special allowance payments will make up almost a quarter of the company’s total earnings per share in 2007.

The Credit Suisse report reiterated an “outperform” rating on Nelnet’s stock and listed a 12-month price target of $45, down slightly from $48 in April, but still nearly 50 percent above where the stock is trading.

The analysts  said they were confident that “Nelnet has been in constant dialogue with the Department of Education, to ensure that their processes were in accordance with  … regulations.”

The analysts also said that any negative effects on the stock price caused by the OIG report would likely accelerate Nelnet management’s efforts to repurchase company stock.

The company has repurchased just more than 1 million shares since authorizing a buyback plan in May.

Reach Matt Olberding at 473-2647 or molberding@journalstar.com.