February, 2020
Washington – In an earlier post, I noted that while Secretary of Education Betsy DeVos was illegally collecting approximately $20 million from student loan borrowers whose loans had already been cancelled, she was simultaneously considering how to let a student loan lender off the hook for $22.3 million of false claims against taxpayers.
The potential gift to lender Navient has erupted into a public policy imbroglio covered by Forbes, Fox, Yahoo, and others.
Presumably federal magistrate judge Sallie Kim, who is weighing further contempt of court penalties against the Secretary, will not view this favorably.
The $22.3 million at issue needs a closer look.
Navient, as lender, argued last year before an administrative law judge that it should get the same treatment as other lenders, which made similar claims for taxpayer subsidies many years ago and did not have to repay them. Although that is the superficial rationale for Navient's argument, what exactly was it that the others got away with?
In 2007, Secretary Margaret Spellings told the Washington Post that the lender claims in question, involving widespread lender manipulation of loans among tax-exempt bond issues, were indeed illegal, but the Department of Education bore some responsibility for confusion about the claims.* Therefore, she was not going to ask for a return of payments already made, a sum in the hundreds of millions of dollars, but only cut off additional claims prospectively.
A crucial question therefore arises: did the lenders originally think their claims were actually legal? Did they know – or should they have known – that they were making false and reckless claims?
This question needs review so as to put the current Navient argument to rest. Answers are available if anyone wants them.
An extensive public record exists as to what lenders believed about their claims, including documents and depositions from lender Student Loan Finance Corporation (SLFC). In April of 2003, a consulting firm known as Aurora Consulting, led by former managers of lenders Nellie Mae and Sallie Mae, told SLFC that they could increase their government subsidy by moving loans among bond issues and would do so for a 2% share of the extra "take." Tellingly, without benefit of legal opinion, and without asking the Department of Education if such additional subsidies were legal, SLFC claimed over $15 million of additional taxpayer funding.
PHEAA, another lender, started loan transfer manipulations and illegal claims even earlier than SLFC. Internal documents at PHEAA, discovered in 2017, contained the admonition to its employees, "don't ask ED for its opinion – it's likely to be an answer we don't like." PHEAA's additional take was over $116 million.
Even more explosive records exist, should anyone wish to draw back the curtain on what lenders really thought about their claims. It would reveal breathtaking greed, mockery, and violations of the Sarbanes-Oxley Act.
It's more than a coincidence that the managing director of Aurora Consulting, and a beneficiary of the SLFC kick-back, is now the Chief of Staff and head of strategy at Navient and is looking once again for an indulgent Secretary of Education, this time Betsy DeVos, who will not enforce the law and will make yet another gift of taxpayer funds to the student loan industry. If Secretary DeVos goes along with Navient, she will be overturning the findings of the Department's Office of General Counsel, the Office of Inspector General, and an administrative law judge, all of which have concluded that the claims were always false, illegal, and should be paid back.
This is now a showdown as to who really runs the Department of Education. A review of the $22.3 million in question would also be of inestimable value in understanding the background context in which servicers illegally collect from hapless borrowers while the Secretary ponders yet another illegal gift to corrupt players in the student loan industry.
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*Lenders were getting inside help from Department political appointees who were former lender officials. They provided tips to lenders as to when to expect audits and how to prepare for them. Some appointees held stock in the lenders they were regulating. Some violated recusals in order to aid the student loan industry, to which they returned after their government employment.
