BILL ANALYSIS Ó
SB 150
Page 1
(Without Reference to File)
SENATE THIRD READING
SB
150 (Nguyen and Huff)
As Amended September 11, 2015
Majority vote. Tax levy
SENATE VOTE: 39-0
------------------------------------------------------------------
|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Revenue & |7-0 |Ting, Brough, | |
|Taxation | |Dababneh, Gipson, | |
| | |Roger Hernández, | |
| | |Mullin, Patterson | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Appropriations |16-0 |Gomez, Bigelow, | |
| | |Bloom, Bonta, | |
| | |Calderon, Chang, | |
| | |Daly, Gallagher, | |
| | |Eduardo Garcia, | |
SB 150
Page 2
| | |Holden, Jones, Quirk, | |
| | |Rendon, Wagner, | |
| | |Weber, Wood | |
| | | | |
| | | | |
------------------------------------------------------------------
SUMMARY: Excludes from gross income loan amounts discharged
when the borrower is unable to complete a program of study
because the school closes or did something wrong. Specifically,
this bill:
1)Modifies Internal Revenue Code (IRC) Section 108(f)(1) to
provide that gross income does not include the discharge of
any student loan if the individual is an eligible individual
for the taxable year.
2)Modifies IRC Section 108(f)(2) to provide that a student loan
means a student obligation note or other debt evidencing a
loan to any individual for the purpose of attending a
for-profit higher education company or for the purpose of
consolidating or refinancing a loan used to attend a
for-profit higher education company, which is either a
guaranteed student loan, an educational loan, or a loan
eligible for consolidation or refinancing under Part B of
Title IV of the Higher Education Act of 1965, as amended (20
United States Code Section 1071 et seq.).
3)Provides an individual as an "eligible individual for a
taxable year" if any of the following apply during the taxable
year:
a) An individual granted a discharge of any student loan
pursuant to the discharge agreement. A "discharge
SB 150
Page 3
agreement" is defined as 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;
b) The individual attended a Corinthian Colleges, Inc.
school on or before May 1, 2015, is granted a discharge of
any student loan made in connection with attending that
school, and is not covered by any of the above; or,
c) An individual is granted a discharge of any student loan
pursuant to the William D. Ford Federal Direct Loan Program
Borrower's Rights and Responsibilities Statement due to
either of the following:
i) The individual could not complete a program of study
because the school closed; or,
ii) The individual successfully asserts that the school
did something wrong or failed to do something that it
should have done.
4)Applies to discharges of indebtedness occurring on or after
January 1, 2015, and before January 1, 2020.
5)Takes effect immediately as a tax levy.
EXISTING LAW:
1)Provides that "gross income" includes all income from whatever
source derived, including compensation for services, business
SB 150
Page 4
income, gains from property, interest, dividends, rents, and
royalties, unless specifically excluded.
2)Provides that in the case of an individual, gross income does
not include any amount which would be included by reason of
discharge of any student debt if such discharge was pursuant
to a provision of such loan under which all or part of the
indebtedness of the individual would be discharged if the
individual worked for a certain period of time in certain
professions for any of a broad class of employers. IRC
Section 108(f).
3)Federal Student Aid, an Office of the United States Department
of Education, has a program that forgives student loans in a
limited number of circumstances, including what's referred to
as a closed school discharge, which means a student loan may
be forgiven if a student's school closes while they are
enrolled and the student cannot complete their program of
study because of the closure, or if a student withdraws from
the school within 120 days of the school's closure. There is
no specific exclusion from income for such forgiveness,
meaning student loans that are forgiven as a result of a
school closure are generally includable in the borrower's
income. However, individuals may exclude from gross income
forgiven student loans to the extent they are insolvent.
FISCAL EFFECT: The Franchise Tax Board estimates an annual
General Fund revenue loss of $35 million in fiscal year (FY)
2015-16, $100,000 in FY 2016-17, and $100,000 in FY 2017-18.
COMMENTS:
1)Author's Statement. The author has provided the following
statement in support of this bill:
SB 150
Page 5
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)Background: 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 did not 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 loans. Corinthian was a long-time target for federal
and state regulators, with a host of investigations and
SB 150
Page 6
lawsuits charging falsified placement rates, deceptive
marketing, and predatory recruiting, targeting the most
vulnerable low-income students.
Since July 2014, the Department of Education (DOE) has forced
Corinthian 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% reduction in the amount they owed on their
private Corinthian loans. The DOE 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; they remained
open until April 25, when they closed on 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 DOE extended that
eligibility window for Heald students, allowing them to have
their debts discharged if they withdrew any time after June
2014, when the DOE and Corinthian agreed to the sell the
colleges. The DOE 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% of students whose
colleges closed asked for their debt to be discharged. The
DOE 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.
SB 150
Page 7
3)Rationale of Taxing Forgiven Debt: The practice of taxing
debt cancellation reflects sound tax policy because it
recognizes the fact that an individual's net worth has
increased by the cancellation of debt. According to
Commissioner v. Glenshaw, the Court defined "income" as an
accession to wealth that is clearly realized and over which
the taxpayer has complete dominion. (Commissioner v. Glenshaw
Glass Co., 348 United States 426, 431 (1955).) When debt is
cancelled, money that would have been used to pay that loan is
now free to be used on whatever the taxpayer wants.
Therefore, because certain assets have been freed, the
taxpayer has experienced an accession to wealth.
Additionally, under the rule of symmetry, a loan is not
considered income to the borrower nor is it a deduction to the
lender. A borrower's increased wealth when the loan is taken
out is also offset by the obligation to pay the same amount.
If the debt is cancelled, the symmetry is destroyed. The
borrower is in a much better position after the debt is
cancelled. Additionally, as noted by Debora A. Grier,
Professor of Law of Cleveland State University, in her
statement before the United States Senate Committee on
Finance, without this tax rule, "the borrower will have
received permanently tax-free cash in the year of the original
receipt," i.e. the year in which the borrower received the
loan.
4)Out of Conformity: As noted above, California generally
conforms to federal law with respect to the taxability of
student loan forgiveness. In general, state conformity with
federal law promotes greater simplicity and eases
administration of complex tax laws. If this bill were to
become 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.
SB 150
Page 8
Analysis Prepared by:
Carlos Anguiano / REV. & TAX. / (916) 319-2098
FN:
0002427