Lawmakers Press IRS to Allow Tax-Exempt Student Debt Refinancing

A bipartisan group of lawmakers in both the House and Senate are asking the Internal Revenue Service and the Treasury Department to remove the barriers to providing tax-exempt refinancing options for student debt.

Senators Chuck Grassley, R-Iowa, and Jack Reed, D-R.I., and Representatives Todd Young, R-Ind., and John Larson, D-Conn., along with other lawmakers, have written letters to Treasury Secretary Jacob Lew and IRS Commissioner John Koskinen asking them to allow nonprofit lenders to use tax-exempt bonds to refinance student loans, thereby expanding the pool of lenders offering refinancing of student loans. 

The members praised prior agency action in clarifying that such options are available and sought removal of the remaining barriers to make even more students and their families potentially eligible for refinancing student debt at lower interest rates via tax-exempt bonds.

“Expanding the ability of non-profit lenders to refinance student loans will result in more options and a better deal for more Americans working to pay down their student debt,” the lawmakers wrote.

They expressed appreciation for agency guidance clarifying to a greater extent how tax-exempt bonds can be used for refinancing purposes, but asked for more clarification on some of the remaining barriers “to fully allow state-approved programs to take advantage of this guidance and offer refinancing programs to help education loan borrowers across the country.”

Those barriers include clarifying 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.  This is necessary to ease confusion and make sure borrowers are able 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. 

They also asked for clarifying guidance on the facts and circumstances that a refinancing provider can rely on to safely determine that the original loan met the loan size limitation required for the use of tax-exempt financing. They argued that requiring an issuer of a refinancing loan to retroactively self-verify that an original loan is in compliance with the loan size limitation can be a burdensome and time-consuming process that could hamper any refinancing program. 

The lawmakers also asked for clarification that a former student can refinance an original loan that was a parent loan and vice versa; and clarification on the student nexus requirement as it relates to a parent refinance loan.  The current guidance does not address whether a student can refinance a parent’s loan or whether a parent can refinance a student’s loan, they pointed out. 

Given that financing the costs of higher education is a family responsibility, and that financial situations are likely to change between the original loan and the refinancing loan, it would make sense for refinancing loans to be available to either, without regard to original loan borrower status. The current guidance recognizes that students can change their state of residence from the state of residence or school attendance at the time of the original loan. The same recognition should apply to parent borrowers, who are equally mobile, according to the lawmakers.