BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          SB 150 (Nguyen) - Personal Income Tax Law: exclusion: student  
          loan debt forgiveness.
          
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          |Version: June 22, 2015          |Policy Vote: GOV. & F. 6 - 0    |
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          |Urgency: Yes                    |Mandate: No                     |
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          |Hearing Date: July 13, 2015     |Consultant: Robert Ingenito     |
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          This bill meets the criteria for referral to the Suspense File.







          Bill  
          Summary: SB 150 would exclude from gross income loan amounts  
          discharged from a for-profit college when the borrower is unable  
          to complete a program of study.


          Fiscal  
          Impact: The Franchise Tax Board (FTB) estimates that the bill  
          would result in General Fund revenue losses of $34 million in  
          2015-16, and $100,000 in both 2016-17 and 2017-18. The bill  
          would not significantly impact the department's costs.


          Background: Debt that is forgiven or cancelled by a lender is generally  







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          treated as income on a tax return, and consequently is taxable.  
          With respect to student loan forgiveness, the amount forgiven  
          generally represents taxable income the year it is cancelled  
          (with certain exceptions), including loan discharges for closed  
          schools.
          Corinthian Colleges was a large for-profit post-secondary  
          education company whose subsidiaries offered career-oriented  
          diploma and degree programs in health care, business, criminal  
          justice, transportation technology and maintenance, construction  
          trades, and information technology. Founded in 1995, Corinthian  
          once included over 100 campuses across the country, enrolling  
          over 100,000 students. A bachelor's degree from a Corinthian  
          college could cost as much as $75,000. The school's revenue came  
          disproportionately from federal student loans; however, federal  
          loans often did not completely cover tuition, requiring students  
          to take out private loans as well.  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 July 2014, 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 2015, 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  
          percent reduction in the amount they owed on their private loans  
          provided by Corinthian. Corinthian did not sell its Heald  
          College campuses, located mostly in California. Those campuses  
          remained open until April 25, when they closed with one 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  








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          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, the cost  
          could reach $3.5 billion.




          Proposed Law:  
           This bill would provide an exclusion from California gross  
          income for income that would otherwise result from a forgiven  
          student loan, as defined, of an eligible individual.
          An individual would be an eligible individual for a taxable year  
          if any of the following apply during the taxable year:


             1)   The individual is granted a discharge pursuant to the  
               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;


             2)   The individual is granted a discharge pursuant to  
               Paragraph 23 of the William D. Ford Federal Direct Loan  
               Program Borrower's Rights and Responsibilities Statement  
               because of either of the following:


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


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


             3)   The individual attended a Corinthian Colleges, Inc.,  
               school on or before May 1, 2015, is granted a discharge of  








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               any student loan made in connection with attending that  
               school, and that discharge is not excludable from gross  
               income as a result of the reasons listed in 1 or 2, above.




          



          Related  
          Legislation: AB 1055 (Baker, 2015) would provide an exclusion  
          from gross income for student loans that are forgiven when the  
          borrower is blind or disabled. The bill is current in the  
          Assembly Revenue and Taxation Committee.
          Staff Comments: The FTB revenue estimate does not assume  
          additional closures of colleges beyond what has already  
          occurred. If there are additional closures of other large  
          schools that impact state borrowers, the revenue loss from this  
          bill could increase substantially.




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