A recent audit by the U.S. Department of Education’s inspector general, John P. Higgins Jr., found that the federal government overpaid about $35 million in loan subsidies to the Pennsylvania Higher Education Assistance Agency.
The report, which came out last week, calls for PHEAA to return the $35 million of payments, which the agency received between July 1, 2003, and June 30, 2006.
The PHEAA is one of several student loan organizations that has been or will be the subject of such audits by the department’s inspector general, though the office of the inspector general spokeswoman Katherine Grant said they do not discuss why they choose which organizations they audit.
The Higher Education Act of 1965, as amended, allows lenders to receive federal subsidies for loans funded by tax-exempt bonds issued before Oct. 1, 1993.
The report on the PHEAA focuses on submissions of quarterly billing statements to the U.S. Department of Education, specifically those related to student loans to which the minimum 9.5% yield provisions apply.
The provision, originally adopted by Congress in 1986 in a high interest rate environment, was intended to apply only to certain loans made or held by nonprofit entities, such as PHEAA.
Recent guidance by the U.S. Department of Education provided final clarification on this issue and curtailed most federal billing on these loans as of Sept. 30, 2006. The IG’s audit found that PHEAA’s billing did not comply with requirements for the 9.5% floor, including loans that the agency refinanced after Sept. 30, 2004, using taxable obligations and ineligible tax-exempt obligations, totaling $14 million.
Additionally, PHEAA purportedly did not comply with the 9.5% floor requirements for loans that were funded by tax-exempt obligations issued on or after Oct. 1, 1993. This alleged non-compliance resulted in special allowance overpayments of about $21 million, according to the audit. “We obviously don’t agree with this report,” PHEAA spokesman Keith New said.
The agency has had “10 years of compliance as documented by the IG.” The PHEAA interim president and CEO James Preston said in a press release, “The report is largely based on the IG’s present-day interpretation of past department regulations and ignores 10 years of our compliance with regulations, as documented by numerous audits that were conducted according to standards published by the IG itself. We believe that the [U.S. Education Secretary Margaret Spellings] will view this report in its proper context and not assess any undue penalties on PHEAA.” The agency sent a letter to Spellings asking that her office conduct a more “open-minded review” of the PHEAA’s stance on the IG’s audit.
New noted that the IG’s office has purported that other student lending programs have also improperly received payments, but to date, Spellings has not sought any return of funds. “It seems to be more of a disagreement of interpretation between the [U.S. Education Department] and [the inspector general’s office], and folks like us seem to be getting in the middle,” New said.
Kenneth B. Roberts, a partner at Hawkins Delafield & Wood LLP, who has worked on a number of higher education bond deals, said “The Department has not at all times provided bright line guidance with respect to the application of higher education requirements in this area.”
The U.S. Department of Education said it is currently reviewing the inspector general’s report.
The PHEAA has issued $11.08 billion of debt over the past decade, according to Thomson Financial.
