The U.S. Education Department's Office of Inspector General has accused the National Education Loan Network, a major for-profit student-loan provider based in Nebraska, of overcharging the government for subsidy payments on loans the company made to students.

In a written statement, the company, known as Nelnet, announced on Thursday that it had received a draft audit report from the inspector general's office that "raises issues of a technical nature concerning the company's qualification for the special-allowance payments" from the government. The draft report recommends that the Education Department require the lender to return "overpayments in connection with certain loans."

At issue is Nelnet's use of a loophole in federal student-aid law that allowed it to reap windfall profits from the government (The Chronicle, October 1, 2004). In February, Congress permanently closed the loophole, which had allowed Nelnet and some other lenders to receive from the government guaranteed subsidies far above market interest rates.

In its statement, Nelnet said it disagrees with the report's findings. The company had billed the department for the special subsidies, the statement said, "in accordance with applicable laws, regulations, and Department of Education guidance."

Nelnet did not say how much money the inspector general's office recommended be returned, but in its latest filing with the Securities and Exchange Commission, the company revealed that it had recorded approximately $322.6-million of pre-tax income from subsidies received on those loans.

A spokesman for Nelnet said he couldn't comment on the draft audit report. Education Department officials never speak about audits or investigations until they have been completed.

The controversy involves payments the Education Department made to lenders that had financed new student loans with tax-exempt bonds.

In the 1980s Congress allowed nonprofit lenders -- those that finance their loans with tax-exempt bonds -- a guaranteed return of 9.5 percent to help protect them at a time when the economy was sour and the costs of making loans were soaring. Congress stripped away that advantage in 1993 but grandfathered in loans already made.

However, most nonprofit lenders and Nelnet, which had purchased several nonprofit agencies over the past decade, maintained that the department's regulations allowed them to continue receiving the 9.5-percent return by merely refinancing bonds issued before the cutoff date.

Many lenders profited by using that loophole, but none more so than Nelnet. According to Education Department data, the volume of loans on which Nelnet received a 9.5-percent return grew by 818 percent from January 2003 to June 2004. During that time, students were paying an interest rate on their loans of 3.4-percent, so the government had to make up the difference.

Officials at Nelnet have said they had received approval from the department for the accounting methods the company had used to expand its portfolio of 9.5-percent loans.

Nelnet plans to respond soon to the draft report. After the inspector general's office considers the response, it will publish a final report. The education secretary, Margaret Spellings, can then accept or reject any findings or recommendations that the inspector general makes.

While most student-loan experts expect the inspector general to stand by its recommendation to require Nelnet to return the payments, they do not believe the education secretary will make such a demand.

They point to an earlier case, in which Ms. Spellings shot down findings by the inspector general's office that the New Mexico Educational Assistance Foundation had overcharged the government by exploiting the loophole.

The inspector general's office had recommended that the department collect $36-million in what it called overpayments from the New Mexico foundation (The Chronicle, June 17, 2005). Ms. Spellings rejected the advice, stating that the nonprofit foundation had "complied with applicable laws, regulations, and department guidance" (The Chronicle, July 29, 2005).

(The Chronicle of Higher Education)