Nelnet Goes to Trial Over Education Fraud Allegations

Nelnet, a student lending company based in Lincoln, Nebraska, is scheduled to go to trial on a False Claims Act case next week.  The lawsuit alleges that the company defrauded the U.S. Department of Education, which subsidizes many student loans to make them more affordable to students.  The lawsuit seeks over $300 million from Nelnet.  Under the FCA’s treble damages provision, this education fraud case could result in a recovery approaching $1 billion.

The lawsuit specifically alleges that the company basically invented a loophole in the DOE’s student loan program to increase the amount of subsidies it received. At a time of high interest rates in the early 1990’s, Congress started a program which guaranteed lenders a 9.5% rate of return on student loans.  Approximately 10 years ago, Congress banned any new loans under that program.  Despite this ban, the lawsuit claims that Nelnet created a complex system of packaging new loans with older loans so that the new loan would qualify for the now defunct 9.5% program.  Nelnet insiders allegedly referred to their repackaging scheme as “Project 950.”

The case was originally filed under the FCA’s qui tam provision by Jon Oberg, a researcher who worked for the DOE in 2003.  Oberg noticed the deceptive practice being employed by Nelnet and ultimately had lawyers file a claim under the FCA.  Last year the government decided not to intervene in the case.  While some experts have claimed that this decision by the government demonstrates a weak case, the DOJ has repeatedly emphasized that a decision not to intervene does not in any way reflect an opinion on the merits of the case.  In fact, the DOJ submitted a helpful brief in support of the lawsuit and opposes the dismissal of the case.  Since Oberg has pursued the case on his own without the help of the government, he will be entitled to 25% to 30% of any settlement recovered on behalf of the government.

Update: Nelnet announced on August 13 that it had agreed to settle these claims for $55 million.

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