by Sam Dillon

WASHINGTON - When Jon Oberg, a Department of Education researcher, warned in 2003 that student lending companies were improperly collecting hundreds of millions in federal subsidies and suggested how to correct the problem, his supervisor told him to work on something else.

The department "does not have an intramural program of research on postsecondary education finance," the supervisor, Grover Whitehurst, a political appointee, wrote in a November 2003 e-mail message to Mr. Oberg, a civil servant who was soon to retire. "In the 18 months you have remaining, I will expect your time and talents to be directed primarily to our business of conceptualizing, competing and monitoring research grants."

[1]For three more years, the vast overpayments continued. Education Secretary Rod Paige and his successor, Margaret Spellings, argued repeatedly that under existing law they were powerless to stop the payments and that it was Congress that needed to act. Then this past January, the department largely shut off the subsidies by sending a simple letter to lenders - the very measure Mr. Oberg had urged in 2003.

The story of Mr. Oberg's effort to stop this hemorrhage of taxpayers' money opens a window, lawmakers say, onto how the Bush administration repeatedly resisted calls to improve oversight of the $85 billion student loan industry. The department failed to halt the payments to lenders who had exploited loopholes to inflate their eligibility for subsidies on the student loans they issued.

Recent investigations by state attorneys general and Congress have highlighted how the department failed to clamp down on gifts and incentives that lenders offered to universities and their financial aid officers to get more student loans. Under this pressure, the department is now seeking to set new rules.

The subsidy payments that Mr. Oberg uncovered are another corner of the lending system on which the department long failed to act, critics say, letting millions of dollars flow from the public treasury to about a dozen lenders.

The department now says it did not fully understand the extent of the maneuvers the loan companies were making to get the subsidies until last September, when its inspector general investigated and issued a report detailing manipulations carried out by a Nebraska lender, Nelnet. The audit recommended that the department recover $278 million from the lender, but education officials instead reached a settlement allowing Nelnet to keep the money but cutting it off from further subsidies that it claimed it was eligible to receive.

Senator Edward M. Kennedy, Democrat of Massachusetts and chairman of the Senate education committee, has asked Ms. Spellings to turn over documents related to the settlement decision. She is likely to come under questioning about the Nelnet settlement on May 10, at a hearing of the House education committee.

Mr. Oberg, now retired, has a master's degree from the University of Nebraska and a doctorate in political science from the Free University of Berlin. He is a former Navy officer, university professor, and aide to Senator J. James Exon, a Nebraska Democrat, from 1979 to 1984. He was an Education Department liaison to Congress under the Clinton administration.

The subsidy payment issue that came to preoccupy Mr. Oberg grew out of decisions Congress made in the 1980s to ensure that low-cost student loans were available at a time when the economy was souring. Lawmakers guaranteed nonprofit lenders a rate of return of 9.5 percent on student loans that were financed by tax-exempt bonds to protect the companies from spiraling costs.

Congress eliminated much of the subsidy program in 1993 because interest rates had dropped, but at that time retained the 9.5 percent return for existing loans. By 2002, lenders had devised ways to inflate the volume of loans for which they received the 9.5 percent subsidies. Congress closed one loophole in 2004, but lenders found others. Congress further restricted the subsidies in 2006.

In 1997, the Clinton administration proposed legislation to eliminate all references to the subsidies from the Higher Education Act in an effort to rein them in. Mr. Oberg took the legislation to Sally Stroup, who was then serving as senior aide to the Republican chairman of the House education committee.

"Sally told me there was no way that language was coming out," Mr. Oberg recalled. "She didn't give a reason - just forget it." Ms. Stroup, who went on to become an assistant secretary of education in the Bush administration, and who is now back as an aide on Capitol Hill, did not return several phone calls and messages left for comment.

In 2000, Mr. Oberg transferred to the department's research operation, and two years into the Bush administration, began to review the government filings of Nelnet and other lenders. He found that not only were payments to lenders rising rapidly, but also that the base amounts of the loans lenders were claiming as eligible for the 9.5 percent subsidies were exploding.

"Several big lending agencies were gaming the system," Mr. Oberg said in a recent interview at his home in Rockville, Md.

He notified the Education Department's inspector general's office. He also told his superiors but felt they were brushing him off. So in November 2003, he wrote a memorandum for general distribution throughout the department warning that lender manipulations could cost the government billions unless stopped, and he recommended that the secretary could end the abuse with a letter to lenders clarifying government rules.

That is when his supervisor, Mr. Whitehurst, director of the department's Institute for Education Sciences, stepped in. Mr. Whitehurst said that he had forwarded Mr. Oberg's memorandum to appropriate senior officials, whom he declined to identify, but acknowledged that he "wasn't real happy" because he considered Mr. Oberg's research to be outside his job description.

"Plus, I didn't understand the issues," Mr. Whitehurst said recently. "In retrospect, it looks like he identified an important issue and came up with a reasonable solution. But it was Greek to me at the time - preferential interest rates on bonds? I didn't know what he was doing, except that he wasn't supposed to be doing it."

He told Mr. Oberg to stop because he wanted him to be monitoring grants, not lending practices. Officials also rewrote Mr. Oberg's job description, documents show, barring him from further research into the subsidies. Although Mr. Oberg was a civil servant, the Bush administration may have seen him as a holdover from the Clinton administration.

Mr. Oberg said he decided to continue his research in his free time because, "If you tell some people they can't do something, they want to do it all the more."

But when he requested from his own department data on payments to lenders, known in the bureaucracy as the 9.5 percent Special Allowance Payments, Donald Conner, an analyst in the department's postsecondary division, e-mailed Mr. Oberg saying, "I'm not permitted to give any 9.5 percent SAP information."

Mr. Whitehurst, in an interview, suggested that Mr. Oberg was viewed by some senior officials as an annoyance. "I was told he was like a dog on a bone, agitating on this issue," Mr. Whitehurst said. Ms. Spellings did not reply to a memorandum Mr. Oberg sent her about waste in the loan program just before his 2005 retirement, Mr. Oberg said.

But Mr. Oberg's warnings prompted a clamor in Congress and a string of reports by government investigators calling for a stop to the giveaways. Senior department officials disputed or declined to follow the recommendations of all of them.

A 2004 report by the Government Accountability Office urged the department to rewrite its regulations to save billions of dollars in future loan subsidy payments. But Ms. Stroup, who had once worked for one of the lending companies that is now under investigation for the subsidies, argued in response that it would be simpler for Congress to clamp down with new legislation. Mr. Paige repeated that argument in a letter to Mr. Kennedy, who was pressing the department to curb the subsidies.

Then, in 2005, the Education Department's inspector general recommended that $36 million be recovered from a New Mexico lender. Ms. Spellings overruled the finding that the payments were improper and declined to recover the payments. And in January 2007, after the inspector general recommended that $278 million in overpayments be recovered from Nelnet, the department instead reached a settlement under which Nelnet could keep the money - if it dropped plans to bill the department for another $800 million in subsidies.

Nelnet was the nation's most generous corporate donor to the National Republican Congressional Committee in 2006, and its top three executives were the largest individual donors to the committee as well, according to the nonprofit Center for Responsive Politics.

Nelnet was also well connected at the department. Don Bouc, Nelnet's president through 2004 and president emeritus thereafter, sat on the department's Advisory Committee on Student Financial Assistance from 2001 through Feb. 1 of this year, even while the department was auditing the company's subsidies and negotiating the settlement. Mr. Bouc resigned from the committee 11 days after the department announced that it would not seek to recover the $278 million.

Ben Kiser, a Nelnet spokesman, said Mr. Bouc's service for the committee was unrelated to the audit.

Robert Shireman, a researcher in Berkeley, Calif., who co-authored a private nonprofit group's 2004 report on the subsidies called "Money for Nothing," said, "There has been an outrageous lack of interest at the Education Department in doing anything to stop the bleeding."

Then this January, turning to a measure Mr. Oberg had recommended in 2003, the department issued a "subregulatory guidance" letter cutting off subsidy payments to all lenders except those who prove their eligibility with an audit.

Kristin D. Conklin, a senior adviser at the department, said the department had been unaware, until its inspector general issued its Nelnet audit last September, that lenders were collecting subsidy payments on loans that were clearly ineligible.

That audit documented how Nelnet had transferred loans repeatedly into and out of tax-exempt bonds issued before 1993 to expand the volume of loans eligible for the subsidies. The audit identified so-called first-generation loans, financed from the pre-1993 bonds, and second-generation loans, financed from the proceeds of the first-generation loans, as eligible for the government subsidies. It said later-generation loans were ineligible.

"It's not like we were sitting on this big problem and didn't address it," Ms. Conklin said. "We didn't know the extent to which these third- and fourth-generation loans were being used. The full scope of this problem first became known to us in September, and we moved seriously to address it in the following months."

Ms. Conklin also said the department had previously lacked the power to cut off overpayments using a simple letter. Only intervening legislation passed by Congress made that possible, she said. Today, with Mr. Oberg's predictions proven accurate, he has become a bit of a celebrity. Mr. Kennedy arranged his testimony before the Senate in February.

"Taxpayers owe a tip of the hat to former Nebraskan Jon Oberg, who blew the whistle on the scheme that allowed companies to grab hundreds of millions in subsidies," the Lincoln Journal Star wrote in October.
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