Lawmakers Seek Clarification on Student Loan Refinancing Rules

1. Clarify in the case of a refinancing of an original loan financed with tax-exempt bonds that the bonds issued for refinancing purposes will not be considered refunding bonds, particularly where the issuer is utilizing a new volume cap allocation to issue the bonds that will refinance the original loans. Confusion in this area has resulted due to an IRS private letter ruling (PLR-133996-13) issued in November of 2014 that suggests refinancing of an original tax-exempt financed loan may be considered a refunding. If this were the case, it would greatly hamstring any refinancing program to use tax-exempt bonds to refinance original loans under federal or state administered student loan programs, which generally rely on tax-exempt bond financing. Notice 2015-78 is silent on this issue and additional guidance is necessary to settle this issue once and for all.

2. Clarify guidance as to facts and/or circumstances that an issuer for refinancing purposes may rely on to safely determine the original loan met the loan size limitation required for the use of-tax-exempt financing. Requiring an issuer in the case of a refinancing loan to retroactively self-verify that an original loan was in compliance with the loan size limitation would be a highly burdensome and time consuming process that could hamper any refinancing program. This could be avoided through safe harbor rules that would provide certainty to all parties involved that the refinancing bond's tax-exempt status will not be questioned, provided reasonable due diligence requirements are met. For example, when it comes to original loans made under any federal Title IV loan program, under a state administered student loan program, or under other acceptable programs that required school certification of loan amounts, it would make sense to permit issuers to assume that the original loan complied with the rules for these programs as an appropriate part of a financial aid package that met the loan size limitation requirement and could be refinanced. For other loans, under current law an issuer could rely on self-certification by the borrower at the time of the refinancing along with meeting certain minimum due diligence requirements.

3. Clarify (a) that a former student may refinance an original loan that was a parent loan and vice versa; and (b) the student nexus requirement as it relates to a parent refinance loan.