The largest provider of college student loans in Maine, Nelnet, is under fire by Congress for allegations the company is exploiting a loophole to “bilk” taxpayers out of millions of dollars.

Nelnet is based in Nebraska, but the growing controversy has a Maine connection. One of Nelnet’s directors is South Portland resident Richard Pierce, who was involved in a student loan controversy in Maine in 1999.

On its Web page, Nelnet said is has “come under attack in the media,” and said allegations by its loudest critic, Sen. Edward Kennedy, D-Massachusetts, are “unfounded.”

But on Thursday, Maine’s two U.S. House members – along with 412 other members – voted for legislation that begins to close the loophole in question.

“The revelations about Nelnet are very disturbing,” said U.S. Rep. Mike Michaud, D-Maine. “The practice of inappropriately packaging loans in order to bilk the federal government out of subsidies meant to help students with their education is simply wrong.”

It’s important that Congress act “to ensure that scarce education dollars are being used to make college more affordable for students, not to benefit corporate executives,” U.S. Rep. Tom Allen, D-Maine, said Friday.

Both of Maine’s Republican senators, Olympia Snowe and Susan Collins, said they support similar Senate legislation to close the loophole. Snowe said she was “gravely concerned” and that any taxpayer abuse must be aggressively rooted out.

Why taxpayers are subsidizing 6 percent

Years ago, when interest rates were high, the Federal Family Education Loan law was passed to help students afford college by subsidizing their then-high interest loans. Typically interest on loans was running at 9 to 10 percent, with students paying about 3.5 percent and the government – taxpayers – paying the rest through the new law.

When interest rates dropped, the taxpayer subsidy was supposed to be phased out. But in the last 18 months, Nelnet and other lenders have used a loophole to blend new loans with the old loans and get 9.5 percent interest from the government, according to Kennedy, one of the leading critics in Congress.

The 6 percent government subsidy is higher than current mortgage rates, and doesn’t include the 3.5 percent also paid to lenders by students.

“Nelnet is the number one user of the controversial technique, which was first described by the Institute for College Access and Success in a report entitled Money for Nothing,'” Kennedy said. The institute is a nonprofit watchdog.

According to Kennedy’s office, that blending of old and new loans means 40 percent of the nation’s current student loan volume is getting the 9.5 percent rate of return. He said that amounts to nearly $1 billion in excess subsidies paid by taxpayers to lenders this year alone.

What Nelnet is doing goes against the intent of Congress, Kennedy’s office said. “They are flouting the spirit of the law, exploiting the loophole,” said spokesman Jim Manley.

A call to Nelnet was returned by a spokesman who referred questions to statements on its Web page. A statement on the page said the company has reserved its comments “because we see this as politics, and trust” that Congress will take the appropriate steps.

Nelnet supports eliminating the 9.5 percent interest it and other lenders are receiving, the company said, but has used the provision because of a “highly competitive market.”

However, Robert Shireman of the Institute for College Access and Success, has said in the Omaha World Herald that Nelnet’s support of eliminating the subsidy is hypocritical. He said the bill Nelnet is endorsing would actually strengthen its legal claim to future subsidies by grandfathering the loans it has already generated.

Nelnet’s Maine connections

Nelnet is based in Lincoln, Nebraska. It has two co-chief executive officers, one president, one chief financial officer and 11 executive directors. One of those 11 is Richard Pierce of South Portland.

Nelnet, whose “SuperLoan” posters for years hung in high schools across the state, is the largest provider of students loans in Maine, according to the Finance Authority of Maine.

About four years ago Pierce, a former state legislator, ran Maine Education Services, also a student loan provider. MES came under fire in 1999 after legislators became concerned by what some called “generous” salaries to Pierce and other MES executives in the nonprofit company.

Days before a new state law was to take effect providing state oversight of MES, Pierce sold the company’s loan portfolio to Nelnet, frustrating then-Gov. Angus King and then-Maine Attorney General Drew Ketterer.

Last year, as a Nelnet executive, Pierce was compensated $950,515, excluding stock options, according to the Omaha World Herald. His holdings in Nelnet are valued at $10.8 million.

The legislation passed in the House Thursday partially closes the loophole for a year, and uses the savings to increase loan forgiveness to math, science and special education teachers who took out loans between 1998 and Aug. 16, 2005.

As of late Friday afternoon, the Senate bill had not been taken up, said Antonia Ferrier in Sen. Snowe’s office.