Preserve Tax-Exempt Qualified Student Loan Bonds for Education Loans
Nonprofit and state-based student loan providers utilize tax-exempt bond financing (in the form of Qualified Student Loan Bonds) to fund low-cost education and refinancing loans and extensive free college access, student success, and financial literacy programs.
As the price tag of postsecondary education continues to rise, existing federal loan options, such as the Federal Direct Stafford Loan and institutional and state grants, often fall short of fully covering the cost of a degree. Middle-income families, in particular, need support to help fill the gap.
There are currently twenty-one states with nonprofit and state-based student loan organizations, many of whom use tax-exempt Qualified Student Loan Bonds to help families manage the cost of college in a way that is transparent, responsible, and focused on students’ and families’ specific needs.
The Internal Revenue Code rules that allow nonprofit and state-based student loan organizations to use the proceeds of Qualified Student Loan Bonds to fund education loans require that the yield on these education loans be no greater than the yield on the bonds plus two percent; this keeps interest rates low.
Because of their tax-exempt status, Qualified Student Loan Bonds, in many cases, allow the nonprofit lenders that use them to offer lower interest rates, lower origination fees, and lower monthly payments than many commercial lenders provide and lower than the Federal Direct Parent PLUS loan program. That helps families save money and students avoid onerous debt loads that they too often carry with them for years following graduation.
Currently, nonprofit and state-based education loans have an average fixed rate of 5.17 percent, compared to for-profit loan programs’ average fixed interest rate of 9.66 percent and the Federal Direct PLUS Loan’s fixed interest rate of 7.00 percent. Choosing a nonprofit and state-based education loan can save families an average of $2,900 compared to for-profit loans and $1,600 compared to the Federal Direct PLUS Loan.
QSLBs also allow organizations to offer low-cost refinancing loans, making education debt more manageable for borrowers by providing a refinancing tool that consolidates high-interest rate education loans into a single loan, reducing overall debt burden and in many cases, reducing monthly payments by as much as $200 or $300 per month — saving borrowers anywhere from $3,000 to $5,000 over a ten-year repayment term.
Nonprofit and state-based programs — both in-school and refinancing — also cater to families and borrowers that most private loan organizations will not serve. Across programs with credit requirements, the eligible credit scores in some states can be as low as 620 with a co-signer; the average eligible credit score among EFC member programs is 670.
More than $12.5 billion in education loans have been funded from the proceeds of tax-exempt Qualified Student Loan Bonds. Over the life of their individual programs, state-based, nonprofit organizations have issued these tax-exempt bonds, resulting in collective savings for borrowers of more than $815 million compared to if the loans had been funded using the proceeds of taxable bonds. For example, a student borrowing $40,000 over four years could have saved more than $2,100 through the use of tax-exempt Qualified Student Loan Bonds compared to taxable bonds.
EFC additionally supports the proposed elimination of the Alternative Minimum Tax (AMT), which would minimize costs to education loan borrowers. Congress’ previous temporary elimination of the AMT on income earned from Private Activity Bonds resulted in lower borrowing rates for student loan issuers, with those savings passed directly to student loan borrowers. For example, a student borrowing $20,000 could save $500 or more in lower interest payments on a ten-year loan with the elimination of the AMT.