HARRISBURG — Pennsylvania's student-loan agency was overpaid $35 million in federal subsidies over a three-year period, according to an audit released Monday.

The audit by the U.S. Education Department's inspector general called for the Pennsylvania Higher Education Assistance Agency to return the payments, which it received between July 1, 2003, and June 30, 2006, because the agency's billings did not comply with federal regulations.

The regulations allow lenders to receive federal subsidies for student loans funded by tax-exempt bonds issued before Oct. 1, 1993. But PHEAA's subsidy billings included loans funded by tax-exempt bonds issued on or after that date, as well as loans that were refinanced after Sept. 30, 2004, with taxable and ineligible tax-exempt bonds, the audit said.

PHEAA, a nonprofit corporation created and largely controlled by the Legislature, received more than $263 million in total subsidies during the period covered by the audit. The agency manages about $100 billion in loans issued by PHEAA and other lenders, including $47 billion in outstanding guaranteed loans, spokesman Keith New said.

James Preston, PHEAA's interim president and chief executive officer, said lenders who seek the subsidies must receive the federal government's approval first, and that previous audits have demonstrated PHEAA's compliance with the rules.

Preston is urging Education Secretary Margaret Spellings to reject the findings.

"We followed all published guidance and regulations ... and clarity that the department gave us," Preston said Monday. "You could say that the department needs to issue more clarity on this, but in some respect, the (inspector general) has taken one position, and the secretary has to take hers."

U.S. Education Department spokeswoman Samara Yudof said the agency was reviewing the report, which also calls for PHEAA to stop seeking federal subsidies for ineligible loans.

Two similar audits focused on how lenders have profited from the government's promise in the 1980s to guarantee a return of 9.5 percent on student loans financed by tax-exempt bonds. The government made that pledge at a time when interest rates were high, and it had to pay lenders the interest not covered by students.

When interest rates dropped, the practice sent billions of dollars in government payments to banks. Congress has more recently enacted legislation intended to phase out the subsidy.