Press Releases

For Release: 1/19/2007

Contact: Ben Kiser, 402.458.3024

LINCOLN, Neb., January 19, 2007 -- Nelnet, Inc. (NYSE: NNI) today announced an agreement with the Department of Education (Department) resolving the audit by the Department's Office of Inspector General (OIG) of the company's portfolio of loans receiving 9.5 percent special allowance payments. Under the terms of the agreement, Nelnet will retain the 9.5 percent special allowance payments the company has received from the Department prior to July 1, 2006, and will effectively eliminate all future 9.5 percent special allowance payments to the company as of July 1, 2006.

"While we disagree with the audit report, we are pleased to have reached a resolution that allows us to avoid costly litigation to demonstrate the merits of our position," said Mike Dunlap, Chairman and co-Chief Executive Officer of Nelnet. "The agreement allows us to put an end to this audit and move forward. Our focus is to help the education-seeking family, and the institutions that serve them, throughout the education life-cycle – planning and paying for their education and preparing for their career."

As a part of the agreement, Nelnet and the Department acknowledge a dispute exists related to guidance previously issued by the Department and the application of the existing laws and regulations related to the company receiving certain 9.5 percent special allowance payments. The new guidance provided to Nelnet in the agreement will effectively eliminate all future 9.5 percent special allowance payments. These loans will receive special allowance payments using the generally applicable special allowance formulas.

At December 31, 2006, Nelnet had approximately $3.1 billion in loans eligible for 9.5 percent special allowance payments based on its interpretation of applicable laws, regulations, and the Department's previous guidance, including an outstanding portfolio of approximately $2.5 billion that was the subject of the audit.

During the third quarter 2006, the company would have received 9.5 percent special allowance payments of approximately $11.7 million related to the $3.1 billion loan portfolio. As previously disclosed, the company deferred recognition of $8.9 million of these payments being withheld by the Department.

In the fourth quarter of 2006, the company will incur charges of $24.7 million as a result of the agreement. Nelnet will reduce premiums paid on loans acquired in 2005 that were previously considered eligible for 9.5 percent special allowance payments by $21.7 million. In addition, the company will charge off approximately $2.8 million in accounts receivable from the Department related to 9.5 percent special allowance payments for the third quarter of 2006 on loans not subject to the audit but covered in the agreement.

During the fourth quarter 2006, Nelnet would have recognized $11.6 million in 9.5 percent special allowance payments of which approximately $9 million was related to loans subject to the audit. The company estimates the 9.5 percent special allowance payments on the loans not subject to the audit would have been approximately $8-10 million in 2007.

In consideration of not receiving the 9.5 percent floor income on a prospective basis, Nelnet has entered into a series of off-setting interest rate swaps that mirror $2.45 billion of pre-existing derivatives which had been utilized to hedge the 9.5 percent floor income against increases in interest rates. The net effect of the new offsetting derivatives is to lock in a series of future income streams on the underlying trades through their respective maturity dates.

The agreement resolves all issues between the parties that arise out of or relate to the contents of the OIG audit report and Department's review of the issues raised therein. The agreement is between Nelnet and the Department and is binding between no other parties.

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