BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 150 |Hearing |6/24/15 |
| | |Date: | |
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|Author: |Nguyen |Tax Levy: |Yes |
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|Version: |6/4/15 |Fiscal: |Yes |
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|Consultant|Bouaziz |
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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.
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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
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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
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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
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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.
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