BY MATT OLBERDING / Lincoln Journal Star | Posted: Monday, August 31, 2009 10:00 pm
A former Department of Education researcher who brought to light the loophole that allowed student loan companies, including Lincoln's Nelnet, to reap hundreds of millions in profits at taxpayers' expense, has filed a whistleblower lawsuit against those same companies.
Jon Oberg, a University of Nebraska-Lincoln graduate and former aide to former U.S. Sen. Jim Exon, filed the suit in U.S. District Court for the Eastern District of Virginia.
Nelnet is the lead defendant, but since the Lincoln student loan company settled its differences with the federal government more than two years ago, its spokesman said Nelnet considers the matter closed.
"Without having seen the litigation there's nothing to comment upon," said Nelnet spokesman Ben Kiser.
The suit seeks the return of about $1 billion in "special allowance" payments wrongfully obtained under a federal subsidy program.
The subsidy guaranteed a 9.5 percent return on a limited class of student loans. It was created in the 1980s to ensure low-cost student loans at a time when the economy was souring and interest rates were high.
It was largely phased out in 1993, but companies found a loophole that allowed them to actually expand the amount of loans receiving the subsidy by recycling older loans and packaging them with newer ones.
Nelnet acknowledged using the loophole, and the department's inspector general recommended the company repay the federal government $278 million.
Instead, Nelnet and the Department of Education reached a settlement in January 2007 that allowed the lender to keep the $278 million. Nelnet agreed to stop using the subsidy, giving up as much as $882 million in future profits.
In his whistleblower suit, Oberg is seeking to recover the money on behalf of the federal government under what's called a "qui tam" remedy.
Qui tam identifies a provision of the Federal Civil False Claims Act allowing private citizens to file suit in the name of the U.S. government, charging fraud by government contractors and others who receive or use government funds, and share in any money recovered.
Bert Rein, an attorney for Oberg, said Oberg brought the suit because he was dissatisfied over the way the government has handled the situation, especially the settlement with Nelnet, which Rein said Oberg considered outrageous.
The settlement was akin to "catching the bank robber on the steps of the bank with a bag of money and saying 'you can keep the money if you don't rob any more banks,'" Rein said.
The suit seeks triple damages - or $3 billion - plus civil penalties of $11,000 for each violation.
Rein said that under the Civil False Claims Act, Oberg, as whistleblower, is entitled to up to 30 percent of any judgment - potentially $900 million.
Rein said the government can intervene in the suit at any time but so far has chosen not to do so.
Also named as defendants in the suit are: Sallie Mae; Southwest Student Services Corp., a Sallie Mae subsidiary; the Kentucky Higher Education Student Loan Corp.; the Pennsylvania Higher Education Assistance Agency; the Vermont Student Assistance Corp.; the Panhandle Plains Higher Education Authority; Brazos Higher Education Services Corp.; the Arkansas Student Loan Authority; and Education Loans Inc. of South Dakota.
Rein said he expects the matter to go to trial early next year.
Earlier this summer, Nelnet was chosen by the U.S. Department of Education to be one of four student loan companies that will service federal student loans.
The company employed 800 people in Lincoln, as of June.
Journal Star Business Editor Richard Piersol contributed to this story. Reach Matt Olberding at 473-2647 or at molberding@journalstar.com.