Coalition Suggests Changes to Reporting Requirements for Student Loan Interest Payments

Judith Nemerovski Flink and David E. Stocker of the Coalition of Higher Education Assistance Organizations, Washington, have suggested modifications to the reporting requirements for student loan interest payments. Those suggestions include eliminating the requirement to collect or report information about the taxpayer who claims the borrower as a dependent; interpreting the "first person" language in section 6050S(f) as the lender; permitting borrowers to deduct interest that accrues during forbearance or hardship periods, provided the borrower pays it within the 60-month period; permitting borrowers to deduct capitalized interest; and excluding from the 60- month window periods during the pendency of a bankruptcy.

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April 30, 1998

Internal Revenue Service

To Whom It May Concern:

[1] These comments are submitted on behalf of the Coalition of Higher Education Assistance Organizations (COHEAO), in response to the Request for Comments on student loan interest deduction reporting contained in Treasury Notice 98-7. This notice, issued on December 24, 1997, outlines the provisions of the recently enacted Taxpayer Relief Act of 1997 ("TRA" or "the Act"), which allows taxpayers to deduct qualified education loans from their federal income taxes.

[2] COHEAO is an association of over 350 school and commercial entities with a shared interest in fostering access to postsecondary education. Because any regulations developed by the Department of Treasury would have a significant impact on COHEAO members in their capacities as both institutions and third-party servicers involved in the Federal student loan programs, COHEAO would appreciate your consideration of the following comments.

1. Information Reporting Requirements

[3] COHEAO strongly recommends that the information to be reported for tax year 1999 and subsequent years remain the same as the information required for tax year 1998. As such, we believe that entities submitting information pursuant to the Act should not be required to collect or report the taxpayer identification information in 6050S(b)(2)(B).

[4] A borrower who is claimed by another individual is not eligible for the interest deduction, and neither is the individual claiming the borrower. For this reason, we believe information about the individual claiming the borrower is unnecessary and should not be required to be reported for tax year 1999 and subsequent years.

2. Person First Receiving Payment of Interest

[5] Section 6050S(f) provides that "in the case of any amount received by any person on behalf of another person, only the person first receiving such amount shall be required to make the return." For purposes of the student loan interest deduction, COHEAO recommends that the "first person" be interpreted to mean the "lender" -- the entity to whom payments are ultimately owed and that owns the data reported to the IRS. "Lender" includes institutions that lend funds under the Campus-Based Programs, under institutional loan programs, or participate as lenders in the Federal Family Education Loan (FFEL) Program. Thus, in these roles, an institution would be responsible for interest reporting.

[6] Lenders may contract with third parties, such as billing servicers or collection agencies for portions of the administration of their student loan programs, just as they may contract with a third party for the reporting of student loan interest pursuant to TRA. Although third parties may do the work, the payments are ultimately owed to the lender and, thus, the data gathered and maintained for purposes of complying with the student loan interest deduction reporting belongs to the lender. To have different entities other than the lender be responsible for the reporting of data would complicate contractual relationships in a way that is unnecessary and governmentally intrusive.

3. Definition of 60-Month Covered Period.

[7] COHEAO suggests that the 60-month period for which the interest deduction is allowed begin on the date the repayment status begins, as defined by the loan programs' respective regulations or promissory note, and end on the last day of the month that is 60 months later, except as extended by periods of deferment or forbearance.

[8] The FFELP, FDLP, and most private student loan programs each have a defined program-specific repayment status begin date, and program participants capture this date as a data element or calculate it from data in their systems. This recommendation is consistent with the interim guidance provided in IRS Notice 98-7.

4. Interest Accrued During Periods of Forbearance or Hardship

[9] Borrowers under the Campus-Based Programs are not required to pay interest during a period of forbearance or hardship deferment. However, interest accrues during those periods and is required to be paid at the end of the period, although some borrowers may choose to pay this interest as it accrues.

[10] Because the borrower is required to pay the interest, albeit not necessarily during the forbearance or hardship period, we recommend that this interest be allowed to be deducted if paid within the 60-month period if the borrower is otherwise eligible. We believe that if such interest is not reported, and therefore the deduction is not allowed, then borrowers will be discouraged from making payments. Borrowers in hardship deferment or forbearance status who choose to make interest payments will essentially be penalized for making payments that are permitted during forbearance, and are ultimately required at some point in the repayment process. This policy is consistent with the Federal education regulations, which allow borrowers to prepay at any time without penalty.

5. Capitalized Interest

[11] COHEAO recommends that capitalized interest be treated as interest and, when paid within the 60-month window, be claimed as a deduction if the borrower is otherwise eligible. We believe that it is a significant benefit to the borrower to be able to claim interest that has been capitalized.

[12] However, if the interest on existing loans has already been capitalized and the lender is unable to reconstruct the amount of capitalized interest separately, we recommend that this capitalized interest be considered principal, as is consistent with the Higher Education Act of 1965, as amended sections 428A(c)(2)(A)(iii)(II) and 428H(e)(2). So as not to penalize borrowers due to current systems limitations, borrowers who are still within their 60-month period should be allowed to self-report any interest that has been capitalized and paid, if they have documentation to substantiate their claim.

[13] In addition, we suggest that the Department of Treasury, in consultation with higher education industry representatives, develop a transition plan which will enable all reporting entities to move from the current system to one in which the entity can distinguish interest amounts that are subsequently capitalized. Currently when interest is capitalized, it loses its identity as interest when it is added to the principal amount of the loan. Amounts paid by the borrower and applied to the principal balance are considered payments of principal, which reduce the balance. Significant software design modifications would be necessary to consider as interest the payment of amounts which were capitalized. For this reason, we believe that a transition plan will be necessary to ensure that lenders and others have time to change their systems.

6. Loans Reduced to Judgment

[14] We note that loans which have been reduced to judgment in court should be treated separately from other student loans for purposes of interest deductions. In the case of a judgment obtained against a defaulted borrower, the amount capitalized includes not only interest, but also outstanding late charges and collection fees. In addition, these defaulted borrowers lose all benefits associated with the loan program under which the loan was made. For this reason, we recommend that regulations prescribed by the Secretary should exempt from the interest deduction any interest that may have been capitalized as a result of a judgment, and any interest paid on a judgment.

7. Adjustments in Following Tax Year

[15] We recommend that in the event of an error of a de minimus nature, or any other event that would cause a minor adjustment in the allocation of principal and interest as a result of retroactive processing following the end of a tax year, the school or lender is not required to report the adjustment for the previous year. We also recommend that adjustments dictated by compliance with certain provisions of the HEA should be waived from any provision requiring adjustment and re-reporting.

[16] Education loans authorized under the HEA are distinct from other loans made by commercial lenders, such as consumer loans, mortgage loans and revolving credit. Education loans were designed specifically to accommodate a student's academic schedule, and consequently have provisions which delay repayment until such time the borrower has graduated, found gainful employment, and honor his debt.

[17] For example, Federal regulations allow the retroactive application of benefits such as deferment of payments. These transactions are very common and could cause the school, lender, or borrower to bear considerable expense to report these changes and to file amended returns.

8. Loan For Which the Borrower Does Not Provide a Valid Social

[18] In some instances, a borrower does not provide a valid Social Security Number (SSN) to a school or lender or refuses to do so. This information is required for reporting to the IRS on Form 1098-T. In these cases, the Secretary needs to provide schools and lenders with a vehicle for reporting information to the Internal Revenue Service. We therefore recommend that the regulations provide an alternate or amended vehicle for reporting this information, and provide that reporting entities will not be subject to liability for failing to report information on Form 1098-T in these circumstances.

9. Bankruptcy

[19] COHEAO recommends that periods during the pendency of a bankruptcy not be included in the 60-month window for claiming a student loan interest deduction. However, interest that is paid should be eligible for the deduction if the borrower is otherwise eligible.

[20] In some instances, interest accrues during the tendency of a bankruptcy. The school cannot require repayment, but borrowers may be required to make payments to the bankruptcy trustees in the form of liquidating assets in Chapter 7 or pursuant to a plan in Chapter 13.

[21] We also propose this recommendation for "borrower equity" reasons. A borrower who proposes 100% repayment in a Chapter 13 and thus pays the entire debt during the bankruptcy period would receive no benefit, if otherwise eligible. In contrast, the borrower who proposes a 10% Chapter 13 repayment plan whose unpaid balance is not dischargeable and therefore would be repaid after the conclusion of the bankruptcy plan, could be eligible to claim amounts of interest paid after the bankruptcy plan.

[22] COHEAO appreciates your consideration of these suggestions. If you have any questions about this letter or if we can be of any further help to you, please do not hesitate to contact us.

Sincerely,

Judith Nemerovski Flink

David E. Stocker