Tax Code Updates

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.

EFC is pleased that the Tax Cuts and Jobs Act preserved this important tax exemption.

Funding Low-Cost Education Loans

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. Check out EFC Members’ op-eds urging lawmakers to preserve Qualified Student Loan Bonds here.

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 around 5.00 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.

Funding Low-Cost Refinancing Loans

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.

Savings for Borrowers

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 urges the Treasury Department to clarify three technical tax issues to allow nonprofit and state-based organizations to fully implement valuable refinancing programs.

Treasury Guidance Needed

On November 13, 2015, the U.S. Treasury provided guidance that clarified Section 144(b) of the Internal Revenue Code, allowing state student loan programs to use tax-exempt bonds to fund parent loans for students and to use tax-exempt bonds to refinance loans for state residents or for students who attend a school in their state, regardless of the original lender.

While Notice 2015-78 makes important progress toward allowing more families to refinance high-interest loans at today’s low rates, three technical issues remain that are inhibiting state and nonprofit organizations from fully implementing valuable refinancing programs:

• Clarify in the case of a refinancing of an original loan financed with tax-exempt bonds that the bonds issued for refinancing purposes will not be considered refunding bonds, particularly where the issuer is utilizing a new volume cap allocation to issue the bonds that will refinance the original loans.
• Clarify the guidance to specify that an issuer to rely on self-certification by the borrower at the time of the refinancing along with meeting certain minimum due diligence requirements.
• Clarify (a) that a former student may refinance an original loan that was a parent loan and vice versa; and (b) the student nexus requirement as it relates to a parent refinance loan.

Updating Internal Revenue Code section 150(d) will expand the states and organizations that can offer low-cost, non-federal loans using the proceeds of tax-exempt (private activity) bonds.

Issue Overview

In recent decades, tuition costs have outpaced increases in federal statutory loan limits and the need for nonprofit and state-based education loan borrowing has grown.

Nonprofit and state-based education loan funding providers, with their access to tax-exempt financing, are uniquely qualified to make education loans with the best possible terms and to make refinancing loans at low interest rates.

However, certain non-profit and state student loan funding providers — “qualified scholarship funding corporations” under Section 150(d) of the Internal Revenue Code — are currently ineligible to issue tax-exempt bonds to finance nonprofit and state-based education student loans and refinance education loans.

Section 150(d) allows only qualified scholarship funding corporations to use tax-exempt financing to acquire education loans incurred under the HEA, which was the Federal Family Education Loan Program (FFELP).

An update is needed to the Internal Revenue Code to allow qualified scholarship funding corporations to access tax-exempt financing for nonprofit and state-based education loans and refinancing loans.

In the 115th Congress, Rep. Bill Flores (R-TX) introduced H.R.480, the bipartisan Student Loan Opportunity Act, which would have amended section 150(d) of the IRC to allow qualified scholarship funding corporations to access tax-exempt financing for alternative private student loans. The bill had nine co-sponsors.