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. ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: June 22, 2015 |Policy Vote: GOV. & F. 6 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: Yes |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: July 13, 2015 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- 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 SB 150 (Nguyen) Page 1 of ? 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 SB 150 (Nguyen) Page 2 of ? 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 SB 150 (Nguyen) Page 3 of ? 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. -- END --