BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
           ------------------------------------------------------------------ 
          |Bill No:  |SB 150                           |Hearing    |6/24/15  |
          |          |                                 |Date:      |         |
          |----------+---------------------------------+-----------+---------|
          |Author:   |Nguyen                           |Tax Levy:  |Yes      |
          |----------+---------------------------------+-----------+---------|
          |Version:  |6/4/15                           |Fiscal:    |Yes      |
           ------------------------------------------------------------------ 
           ----------------------------------------------------------------- 
          |Consultant|Bouaziz                                               |
          |:         |                                                      |
           ----------------------------------------------------------------- 

                PERSONAL INCOME TAX LAW:  EXCLUSION:  STUDENT LOAN DEBT  
                                     FORGIVENESS



          Excludes from gross income loan amounts discharged from a  
          for-profit college when the borrower is unable to complete a  
          program of study.


           Background and Existing Law

           When a lender cancels a borrower's debt, federal and state law  
          generally treats the amount of debt cancelled as income taxable  
          to the borrower.  Taxpayers do not include borrowed funds in  
          income in the year he or she receives loan proceeds because of  
          the obligation to repay the loan; the taxpayer is financially no  
          better off because the loan must be repaid.  When lenders reduce  
          the repayable amount, the taxpayer realizes a gain in his or her  
          financial situation because a portion of the loan proceeds  
          already received and not previously taxed need not be repaid,  
          thereby increasing the taxpayer's net worth. The taxpayer's  
          income has increased by the amount forgiven plus interest.

          Specifically, in the case of student loan forgiveness, the  
          amount forgiven generally represents taxable income for income  
          tax purposes in the year it is cancelled with some exceptions.   
          Generally, student loan forgiveness is excluded from income if  
          the forgiveness is contingent upon the student working for a  
          specific number of years in certain professions.







          SB 150 (Nguyen) 6/4/15                                  Page 2  
          of ?
          
          

          When the student participates in public service loan  
          forgiveness, teacher loan forgiveness, law school loan repayment  
          assistance programs and the National Health Service Corps Loan  
          Repayment Program, cancelled debt is excluded from income.   
          However, loan discharges for closed schools, false  
          certification, unpaid refunds, and death and disability is  
          taxable income. The forgiveness of the remaining balance under  
          the federal income based repayment program (IBR) after 25 years,  
          or 20 years for students borrowing on or after January 1, 2014,  
          is considered taxable income under federal law.  However, as of  
          last year, state law excludes from gross income loan amounts  
          repaid or forgiven under the federal 25 or 20 year income based  
          repayment plan (SB 1271, Evans).


           Proposed Law

           Senate Bill 150 excludes from gross income loan amounts  
          discharged when the borrower is unable to complete a program of  
          study.

          Specifically, SB 150 applies to individuals granted discharge  
          under any of the following circumstances:

                 The individual attended a Corinthian College on or  
               before May 1, 2015, and is granted a discharge of any  
               student loan made in connection with attending that school.

                 The individual is granted a discharge of any student  
               loan pursuant to the discharge agreement, which is an  
               agreement between ECMC Group, Inc., Zenith Education Group,  
               and the Consumer Financial Protection Bureau concerning the  
               purchase of certain assets of Corinthian Colleges, Inc.,  
               dated February 2, 2015.

                 The individual could not complete a program of study  
               because the school closed.

                 The individual successfully asserts that the school did  
               something wrong or failed to do something that it should  
               have done.

          As a tax levy, SB 150 goes into effect immediately, and applies  








          SB 150 (Nguyen) 6/4/15                                  Page 3  
          of ?
          
          
          to discharges of indebtedness occurring on or after January 1,  
          2015.


           State Revenue Impact

           The Franchise Tax Board estimates that this bill will reduce  
          General Fund revenue by $34 million in fiscal year 2015-16,  
          $100,000 in 2016-17, and $100,000 in 2017-18.


           Comments

           1.  Purpose of the bill.   According to the author, "Following the  
          closure of 107 Corinthian College campuses, many former students  
          are now seeking a partial or full discharge of their student  
          loan debt.  Unfortunately, if their debt is cancelled,  
          discharged, or forgiven, that debt may be subject to state (and  
          federal) income tax.  To aid these students, Senate Bill 150  
          removes tax liability on forgiven federal loan debt for students  
          who choose to forgo the credits that they earned.  Nearly 13,000  
          California students are unable to complete their degrees but are  
          still being held responsible for the student loan debt they  
          incurred.  These students have devoted time, energy, and  
          resources in an effort to improve both their education and  
          overall lives.  Already victimized by the closure of the  
          college, they should not be forced to forgo the credits they  
          earned while also being subjected to tax debt.  SB 150 helps  
          students whose educational career is in limbo through no fault  
          of their own to continue their education without being penalized  
          financially."

          2.  How did we get here?   Founded in 1995, Corinthian's  
          for-profit colleges once included over 100 campuses across the  
          country, where over 100,000 students were enrolled. A bachelor's  
          degree from a Corinthian college could cost as much as $75,000.   
          The vast majority of the school's revenue came from federal  
          student loans, but federal loans are unable to cover all of the  
          tuition, so students often had to take out private loans.  The  
          Consumer Financial Protection Bureau alleges that Corinthian  
          kept tuition high in order to force students to borrow from the  
          college at higher rates.  The Corinthian loans came with  
          origination fees of 6% and interest rates of around 15%, as of  
          2011, much higher than the 3% and 7% interest on federal student  








          SB 150 (Nguyen) 6/4/15                                  Page 4  
          of ?
          
          
          loans.  Corinthian was a longtime target for federal and state  
          regulators, with a host of investigations and lawsuits charging  
          falsified placement rates, deceptive marketing, and predatory  
          recruiting, targeting the most vulnerable low-income students.

          Since last July, the Department of Education has forced the  
          company to close or sell off its locations over concerns about  
          its high interest loans and misleading employment statistics.

          In February of this year, Corinthian announced that students  
          would get $480 million in loan forgiveness under an agreement  
          with federal regulators.  Under the agreement, Corinthian would  
          sell the majority of their campuses to the nonprofit ECMC Group,  
          and students who attended ECMC Group campuses saw an immediate  
          40% reduction in the amount they owed on their private loans  
          provided by Corinthian.  The Department of Education also fined  
          Corinthian $30 million for 947 representations of placement  
          rates, findings that Corinthian disputed.  Corinthian did not  
          sell its Heald College campuses, located mostly in California,  
          and they remained open until April 25, when they closed on a  
          day's notice, leaving 16,000 students unable to complete their  
          degree.  

          Under federal law, students have a right to debt relief if they  
          were enrolled at the time their college closed, or up to 120  
          days before the shutdown.  The Department of Education extended  
          that eligibility window for Heald students, allowing them to  
          have their debts discharged if they withdrew any time after June  
          2014, when the department and Corinthian agreed to the sell the  
          colleges.  The Department of Education estimates that about  
          40,000 Heald students would be eligible for $544 million in debt  
          relief if every student sought relief.  In the past, only 6  
          percent of students whose colleges closed asked for their debt  
          to be discharged.  The Department of Education also estimates  
          that if all 350,000 former Corinthian students over the last  
          five years applied for and received the debt relief, that cost  
          alone could be as much as $3.5 billion.

          3.  Reverse conformity  .  California law does not automatically  
          conform to changes to federal tax law, except under specified  
          circumstances.  Instead, the Legislature must affirmatively  
          conform to federal changes.  Generally, when the federal  
          government changes its tax laws, California catches up by  
          enacting its own legislation the following year to reduce  








          SB 150 (Nguyen) 6/4/15                                  Page 5  
          of ?
          
          
          differences between the two codes, thereby easing the tax  
          preparation burden on taxpayers, tax preparers, and the  
          Franchise Tax Board.  Currently, loans forgiven prior to the  
          completion of a loan repayment program are included as taxable  
          income under state law.  If SB 150 becomes law, taxpayers would  
          exclude from income the forgiven loan for state tax purposes,  
          but include it for federal tax purposes, bringing California  
          further out of compliance with federal law.   


          Support and  
          Opposition   (6/25/15)


           Support  :  California Community Colleges Chancellor's Office;  
          State Board of Equalization Vice Chair, George Runner.

           Opposition  :  Unknown.



                                      -- END --