Big Bank Fraud, This Time with Student Loans

Just when you thought that the dust had settled from the scandals of Wall Street (at least temporarily), details come out of another Ponzi scheme by the titans of banking, this time with student loans. According to recently released court documents, Citigroup, JP Morgan and the education finance company Nelnet are being sued by the federal government for fraud of nearly $280 million from their participation in the Department of Education’s Federal Family Education Loan program (FFEL). FFEL provides billions in annual bank subsidies to private lenders for making student loans –the same subsidies that the student aid bill currently in Congress looks to abolish.

According to court filings:

“Nelnet, JP Morgan Chase and Citigroup caused false certifications, records or other statements to be made and used to get false claims paid and approved.”

“Nelnet’s fraudulent course of conduct consisting of brazenly offering inducements to its employees and schools for loan applicants while keeping the DOEd in the dark by virtue of its implied and express certifications of compliance.”

Moreover, to rope in more borrowers to boost subsidy payouts, Nelnet deliberately misled consumers with false advertising, promising students could save thousands of dollars by consolidating their loans –even though FFEL prohibits private lenders from engaging in such practices.

Meanwhile, legislation that would end the system that Nelnet and other banks are profiting off of is in jeopardy of not passing in the Senate. The Student Aid and Fiscal Responsibility Act (SAFRA) would end the $87 billion worth of bank subsidies and move all student lending to the federal government. And even though the House passed the legislation, centrist Democrats such as Sens. Blanche Lincoln (Ark.), Mark Begich (Alaska) Ben Nelson (Nebraska), Tom Udall (New Mexico) vow to stand in the way, voicing opposition to the bill.

Sen. Ben Nelson is among the most vocal in keeping private lenders in business like Nebraska-based Nelnet, stating, "I just don't think we need to turn it [student loans] all over to the federal government.”

While others in the Senate, such as Sens. Bob Casey (Penn.) and Mark Warner (VA) are on the fence because of jobs —Sallie Mae, the largest lender under FFEL, has extensive operations in both states. For this reason, watch for proposals in the Senate to preserve private lenders' role for the future. And because the private industry has done so well with loans, lets not forget that Sallie Mae was embroiled in a major ‘pay-to-play’ scandal two years ago for bribing college financial aid officers and administrators to pawn loans upon students.

This sure is a system worth saving isn’t? All in all lender subsidies only feed big bank greed, which is why the passage of the student aid bill is so important. Lenders are geared up and have friends in the Senate to keep their profits at the expense of students and taxpayers. Visit our partner, the Campaign for College Affordability, to end this madness and pressure your senator to stop financing banks and start helping students.

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future