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Spring 2024 IRS qualified student loan bond guidance mitigates any guess work from earlier guidance provided by Notice 2015-78 on several fronts. Generally applicable to bonds sold on or after April 15, 2024, Notice 2024-32 offers latitude and refinement of these Notice 2015-78 focal points:[1]

• Tax-exempt bond finance requirements for IRC § l44(b)(1)(B) State Supplemental Loan programs;
• Borrower eligibility and loan size restrictions; and
• Loan types qualifying for SSL program refinancing.

An “eligible borrower” is a student or parent borrower of an original loan; and a parent of a student borrower or a parent of the student borrower of an original loan (or a refinancing loan); and a child of a parent who borrowed an original loan (or a refinancingloan) on the child’s behalf. Hence, either party qualifies as a refinancing loan eligible borrower, regardless of which party was the original borrower.

New guidance separately recognizes that original student loans may be secured through:

• The Federal Family Education Loan Program;
• Another loan program under Title IV of the Higher Education Act;
• A State Supplemental Loan program; or
• Another student loan program that is subject to the Section 144(b)(1)(B) loan size limitation, or to a more stringent loan size limitation.

For refinancing loan purposes, the original loan must have complied with IRC Section 144(b)(1)(B) loan size limitations. The refinancing loan’s stated principal amount is further restricted from exceeding the sum of:

• The refinanced loan’s outstanding stated principal amount, and
• Any accrued, but unpaid, stated interest as of the date of refinancing.

An original loan sourced from any of the aforementioned programs is recognized as compliant with IRC Section 144(b)(1)(B) loan size limitations. Guidance outlines applicable safe harbors.

Refunding issue status does not apply when an actual issuer reasonably expects, as of the issue date, to use the issue’s net proceeds within two years of the issue date to refinance one or more obligations that are qualified student loans. Notice 2024-32 is relevant to original loan repayments by refinancing loan borrowers, followed by the issuer’s use of the funds to redeem the bonds that financed the original loans, potentially casting the bonds as refunding bonds in view of redemption commonly occurring more than 90 days after bonds financing the refinancing loans are issued. In these circumstances, potential treatment as taxable advance refunding bonds would cause issuers to refrain from issuing tax-exempt bonds to refinance the qualified student loans of existing borrowers.

For refunding issue status determination purposes, “proceeds” means any sales proceeds, investments proceeds, or transferred proceeds (all as defined in § 1.148-1(b)), excepting investment proceeds (or transferred proceeds allocable to investment proceeds) received from investing in a qualified student loan or a qualified mortgage loan. Notice 2024-32 guidance pertains to the use of investment proceeds from qualified student loan or qualified mortgage loan repayments allocated to one issue to redeem another issue’s bonds with high interest rates. In these circumstances, bonds of the former issue are treated as taxable advance refunding bonds.

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[1] See Federal Taxation of Municipal Bonds, §6.04[1][E] and Vol. 10.