Nelnet to Pay $55 Million to Settle Suit for Student Loan Fraud

Last Friday, Nelnet announced that it would pay $55 million to settle a False Claims Act suit alleging that the company defrauded the federal government by improperly benefiting from a student loan subsidy program.  The suit, brought by Jon Oberg, alleged that Nelnet exploited a loophole in federal law that allowed Nelnet to guarantee that it would receive 9.5% interest on student loans offered by the company and subsidized by the government.  The program was phased out in the 1990s; however, Nelnet and others managed to continue to receive the subsidy by packaging new loans with older loans that were grandfathered in.  As interest rates fell, the result of Nelnet’s strategy was to obligate the government to pay double the applicable interest rate for subsidized loans.

In all, Oberg alleged that Nelnet received $407 million in improper benefits from the subsidy loophole.  Because damages under the False Claims Act are trebled, Nelnet’s potential liability had it lost the trial that was originally scheduled to begin yesterday, at over $1.2 billion.  Rather than face that potentially ruinous result, Nelnet, which has maintained all along that it did not violate the law, chose to settle.  Due to a 2007 settlement agreement with the Department of Education, Nelnet is no longer employing the subsidy, foregoing nearly $900 million in profits.

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