SECTION 2. BACKGROUND

Section 144(b)(1) defines a “qualified student loan bond” for which tax-exempt private activity bonds may be issued to mean any bond issued as part of an issue the applicable percentage or more of the net proceeds of which are to be used directly or indirectly to make or finance student loans (that is, loans to pay the costs of postsecondary education) under two types of loan programs.

The first type of loan program, described in § 144(b)(1)(A), is the Federal Family Education Loan Program (FFELP) under the Higher Education Act of 1965, Pub. L. No. 89-329, 79 Stat. 1219 (Higher Education Act), under which education loans are indirectly Federally guaranteed. The FFELP loans that are eligible for tax-exempt bond financing under § 144(b)(1)(A) include, among other types of loans, loans made to parents of undergraduate students under the program known as the “PLUS” loan program. H.R.

Conf. Rep. No. 99-841, at II-712 (1986); Sen. Rep. No. 99-313, at 842 (1986). The FFELP guarantee authority extends only to loans originated before July 1, 2010, and was discontinued for loans originated on or after that date. Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, § 2201, 124 Stat. 1029, 1074 (2010).

The second type of loan program, described in § 144(b)(1)(B), is for State Supplemental Loans. Section 144(b)(1) (B) describes a State Supplemental Loan program as a program of general application approved by the State if no loan under such program exceeds the difference between (1) the total cost of attendance and (2) subject to certain stated exceptions, the other forms of student assistance for which the student borrower may be eligible. A program is not treated as described in § 144(b)(1)(B) if such program is described in § 144(b)(1)(A).

.01 Eligible borrower . Notice 2015-78, 2015-48 I.R.B. 690, provides guidance regarding qualified student loan bonds, including the use of the proceeds of these bonds to make loans that refinance qualified student loans (refinancing loans). Section 3.1 of Notice 2015-78 provides that an eligible borrower of an original loan under a State Supplemental Loan program is a student (with or without a co-obligor or guarantor) or a parent (with or without a co-obligor or guarantor) borrowing on behalf of a child who is a student. Section 3.1 of Notice 2015-78 further provides that an eligible borrower of a refinancing loan under a State Supplemental Loan program is the student or parent borrower of the original loan.

The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) are aware of questions that have arisen as to whether, if the student was the original borrower, the parent of that student is an eligible borrower of a refinancing loan, and similarly, if the parent was the original borrower, whether the student on whose behalf the original loan was made is an eligible borrower of a refinancing loan. Section 4.01 of this notice

clarifies that an eligible borrower of a refinancing loan includes either of these parties, regardless of which was the original borrower.

.02 Loan size limitation . Notice 2015-78 also addresses the loan size limitation for a State Supplemental Loan. The amount of an original State Supplemental Loan must not exceed the difference between the total cost of attendance and other forms of student assistance for which the student may be eligible. Section 3.3 of Notice 2015-78 provides, for an original loan, that an issuer may rely on a certification of these amounts by the higher education institution at which the student is enrolled. For a refinancing loan, section 3.3 of Notice 2015-78 provides that (1) the original loan must have met the loan size limitation under § 144(b)(1)(B) and (2) the stated principal amount of the refinancing loan may not exceed the sum of the refinanced loan’s outstanding stated principal amount and any accrued but unpaid stated interest as of the date of the refinancing.

The Treasury Department and IRS are aware of issuers’ questions about how to establish, for purposes of a refinancing loan, that the original loan met the loan size limitation under § 144(b)(1)(B) and issuers’ concerns regarding the attendant administrative burden. Refinancing loans generally are sought after the students have finished their educations, and several years may have passed since the higher education institutions provided the information needed to determine the original loan amounts. Often, however, the original loans were made under the FFELP, another loan program under Title IV of the Higher Education Act, a State Supplemental Loan program, or other student loan program subject to the same loan size limitation as in § 144(b)(1)(B) or a stricter one. Section 4.02 of this notice provides that original loans made under these programs will be treated as meeting the loan size limitation under § 144(b)(1)(B). Section 4.02 of this notice also provides issuers with sources that can be used to ascertain the amounts of (1) the original loan, (2) the student’s total cost of attendance,

1 Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1).

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and (3) other forms of student assistance for this purpose.

.03 Refunding bonds . Section 1.150-1 provides definitions for all purposes of §§ 103 and 141 through 150, which are applicable to tax-exempt bonds. Section 1.150-1(d) (1) defines a “refunding issue” generally to mean an issue of obligations the proceeds of which are used to pay principal, interest, or redemption price on another issue, provided the obligor on both issues is the same person or a related party (as defined in § 1.150-1(b)). For this purpose, if proceeds are used to finance a purpose investment (as defined in § 1.148-1(b)), the obligor means the conduit borrower of the purpose investment rather than the actual issuer of the bonds, except that, for qualified mortgage loans, qualified student loans, and similar program investments (as defined in § 1.148-1(b)), the obligor does not include the ultimate recipients of the loans (for example, the homeowner or the student). Section 1.150-1(d)(2)(iii) provides, with one exception, that the actual issuer’s use of the proceeds of an issue that refunds a purpose investment determines whether that issue is also a refunding of the issue that originally financed the purpose investment. Section 1.150-1 does not provide a definition of “proceeds” for this purpose.

Questions have arisen regarding the determination of whether an issue that is used to refinance qualified student loans is a refunding issue. Issuers are concerned that if the borrowers of the refinancing loans repay their original loans and the issuer then uses the funds to redeem the bonds that financed the original loans, the bonds might be treated as refunding bonds and, given that this redemption would frequently occur more than 90 days after the issuance of the bonds financing the refinancing loans, potentially treated as taxable advance refunding bonds. If this were the case, issuers would be prevented from issuing tax-exempt bonds to refinance the qualified student loans of their existing borrowers. Another question concerns whether the use of investment proceeds from the repayments of qualified student loans or qualified mortgage loans allocated to one issue to redeem bonds of another issue, a practice sometimes referred to as “cross-calling,” results in

bonds of the former issue being treated as taxable advance refunding bonds. An issuer engaged in cross-calling first uses proceeds of the issue to make qualified student loans or qualified mortgage loans and then uses the repayments of the loans to redeem bonds, generally selecting bonds with the highest interest rates. Section 4.03 of this notice addresses these questions.