Bonds

The Education Finance Council is turning up the pressure on the Internal Revenue Service for clarifications on bond rules that have gone unanswered for four years. 

The trade group, which represents state-based and nonprofit higher education finance organizations, is asking the agency via a letter to clarify requirements listed in Section 144(b) of the Internal Revenue Code. 

The EFC specifically is interested in guidance regarding refinancing a loan with bonds that are not considered refunding bonds, confusion over rules governing student loan borrowers versus a parent loan, and what happens when parents who want to refinance live out of state.

“Inflation pressures and high interest rates find too many borrowers trapped in variable-rate private student loans with burdensome monthly payments and limited options for relief,” said Gail daMota, president, EFC.

EFC

Higher interest rates are bringing the long simmering issues to a head. 

“Inflation pressures and high interest rates find too many borrowers trapped in variable-rate private student loans with burdensome monthly payments and limited options for relief,” said Gail daMota, president, EFC.

EFC members issue tax-exempt bonds and use the proceeds to offer low-cost education loans to students. Any revenue that exceeds a 2% yield is returned to the Treasury or rebated back to borrowers.

The questions surrounding Section 144(b) have been percolating since 2015.  The agency escalated the issues by pushing it onto its Priority Guidance Plan for 2019-2020.

Per the letter, “Unfortunately, it has remained on the PGP since that time and notwithstanding EFC’s and congressional requests to expedite its issuance.” 

The questions surrounding refunding stretch back to a 2014 IRS private letter ruling that suggested refinancing an original tax-exempt financed loan may be considered a refunding.

“If this were the case, it would hamstring any refinancing program to use tax-exempt bonds to refinance original loans under federal or state-administered student loan programs, which generally rely on tax-exempt bond financing,” said daMota. 

The rules also offer unclear guidance on refinancing loans that are taken out by a student versus a parent.  

The third bone of contention relates to geography and what happens if parents live in a different state and want to refinance the loans. 

EFC acknowledges that IRS has had its hands full implementing the Inflation Reduction Act and the Chips and Science Act but would still like some answers. “Clarifying guidance in this area could greatly improve the affordability of refinancing, making education more affordable,” said daMota. 

From a big picture point of view, the major credit ratings agencies are showing a mixed bag of outlooks for the higher education sector with online learning still playing a role in how and where students are attending class.

Moody’s Investors Service sees the sector as stable. S&P Global Ratings identifies two separate markets divided by the how selective a college is, with regional schools suffering from attendance drop. Fitch Ratings agrees with the bifurcated assessment and believes that, “the number of college closures and consolidation is also expected to remain elevated.”    

daMota wrote that the guidance, if provided, would support the goals of the Biden Administration.

“The Biden-Harris Administration has made significant progress to reduce debt burdens for federal student loan borrowers,” she wrote. “Such guidance is a natural extension of this work and will provide additional life-changing relief to borrowers with private education debt.”

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