PHEAA is being sued, along with other student loan agencies, for taking advantage of a federal government loophole allowing them to wrongfully collect $92 million. In the 1980’s, the federal government enacted a subsidy program guaranteeing a 9.5% return on a limited class of student loans. By reusing older loans and packaging them with new ones, PHEAA reaped millions in profits at the taxpayer’s expense.
When confronted with this serious case of fraud, the Department of Education didn’t even attempt to recover the funds. A 2007 settlement with Nelnet–the worst abuser of the scheme receiving more than $400 million in over payments–did not require the loan company to repay the federal government. It was left to a DOE researcher, Jon Oberg, to bring the suit on behalf of the federal government.
PHEAA was among the first agencies to employ the scheme–clearing the path for other agencies to follow. The lawsuit implies PHEAA relied on the authority of the Education Finance Council to justify their practices; this is disconcerting since the group has close ties with the Department of Education and Republican staff on the House Education Committee.
It’s amazing that such flagrant abuse of the system was disregarded for so long. This is a perfect example of why state and federal governments should not be in the student loan business.