n-15-078.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Qualified Student Loan Bonds

Notice 2015-78

SECTION 1. PURPOSE
This notice provides guidance regarding qualified student loan bonds under
§ 144(b) of the Internal Revenue Code (Code) to clarify certain requirements for tax-
exempt bond financing for loan programs of general application approved by a State
under § 144(b)(1)(B) (State Supplemental Loan programs). (Except as otherwise
expressly provided, section references in this notice are to the Code.) This notice
addresses: (1) eligibility of borrowers of loans through State Supplemental Loan
programs; (2) the application of the requirement under § 144(b)(3) that the student have
a nexus to the State (student nexus requirement) for loans made to refinance student
loans (refinancing loans); (3) the loan size limitation for State Supplemental Loans; and
(4) the types of student loans that may be refinanced with a State Supplemental Loan.
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 of the 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.

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The first type of loan program, described in § 144(b)(1)(A), is the Federal Family
Education Loan Program 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 (FFELP loans). 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 shall not be treated as described in
§ 144(b)(1)(B) if such program is described in § 144(b)(1)(A).
The student nexus requirement applies to both FFELP loans and State
Supplemental Loans financed with proceeds of qualified student loan bonds. Section
144(b)(3) provides that a student loan shall be treated as being made or financed under
a program described in § 144(b)(1) with respect to an issue only if the student is (1) a
resident of the State from which the volume cap under § 146 for such loan was derived,

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or (2) enrolled at an educational institution located in such State.
Several questions have arisen concerning loans made by State Supplemental
Loan programs that are eligible to be financed with the proceeds of qualified student
loan bonds. Specifically, questions have arisen regarding (1) the eligibility of parents to
borrow for their child’s education; (2) how the student nexus requirement applies in the
context of refinancing loans; (3) the loan size limitation; and (4) the types of student
loans that may be refinanced with a State Supplemental Loan.
SECTION 3. SCOPE AND APPLICATION
Section 3.1. Eligible Borrowers. For purposes of § 144(b)(1)(B), 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 for the benefit of a child who is a student. An eligible borrower of
a refinancing loan under § 144(b)(1)(B) is the student or parent borrower of the original
loan.
Section 3.2. The Student Nexus Requirement. The student nexus requirement
applies to the student beneficiary of the loan, even if the borrower is the parent of the
student beneficiary. An original loan meets the student nexus requirement if, at the time
the original loan is originated, the student beneficiary is a resident of the State from
which the volume cap for the qualified student loan bonds that finance the original loan
is derived or is enrolled at an educational institution located in that State. A refinancing
loan meets the student nexus requirement if: (1) at the time the original loan was
originated, the student beneficiary was a resident of the State from which the volume
cap for the qualified student loan bonds that finance the refinancing loan is derived or

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was enrolled at an educational institution located in that State; or (2) at the time the
refinancing loan is originated, the student beneficiary of the original loan resides in the
State from which the volume cap for the qualified student loan bonds that finance the
refinancing loan is derived or is a student enrolled in an educational institution located in
that State. In the case of refunding bonds for which no volume cap is required under
§ 146, the student nexus requirement is applied with respect to the State from which the
volume cap on the refunded bonds (or in a series of refundings, the original bonds) was
derived.
Section 3.3. The Loan Size Limitation. Under § 144(b)(1)(B), the amount of a
State Supplemental Loan may not exceed the difference between the total cost of
attendance and other forms of student assistance for which the student may be eligible.
For this purpose, for an original loan, an issuer may rely on a certification of the
student’s total cost of attendance and other student assistance by the institution of
higher education at which the student is enrolled. Further, for this purpose, certifying
institutions may use the definition of “total cost of attendance” under § 472 of the Higher
Education Act, 20 U.S.C. § 1087ll, and the definition of “estimated financial assistance”
under § 428(a)(2)(C)(ii) of the Higher Education Act, 20 U.S.C. § 1078(a)(2)(C)(ii),
respectively. For a refinancing loan, (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.
Section 3.4. Types of Loans Eligible for Refinancing. Under § 144(b)(1)(B), a
State Supplemental Loan may refinance an original loan that was a State Supplemental

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Loan or another type of original loan, for example, a FFELP loan or a student loan made
by a private lender, provided that the refinancing loan meets all of the requirements for
a State Supplemental Loan.
SECTION 4. APPLICABILITY DATE
This notice applies to loans originated on or after February 11, 2016. Issuers may
apply this notice to loans originated before February 11, 2016.
SECTION 5. DRAFTING INFORMATION
The principal author of this notice is Johanna Som de Cerff of the Office of
Associate Chief Counsel (Financial Institutions & Products). For further information
regarding this notice, contact Johanna Som de Cerff or David White at (202) 317-6980
(not a toll-free call).