Two more election cycles, fierce gridlock in Congress in Congress, and a complicated tax code likely means that comprehensive tax reform won’t happen until at least 2017, Mike Nicholas, chief executive officer of Bond Dealers of America, told a group of student loan issuers Thursday.
Speaking on a panel here at the mid-year Education Finance Council membership conference, Nicholas said that despite what tax writing members of Congress say, tax reform is unlikely to happen this year for a number of reasons.
Nicholas joined Michael Marz, vice-chairman of First Southwest Company, and Chuck Sanders, president and chief executive officer of the South Carolina Student Loan Corp. on a panel that discussed the impact tax reform could have on the municipal bond market.
“For anyone outside the beltway looking in, there is complete gridlock, there is no agreement in the House and the Senate,” Nicholas said. “When you start talking about comprehensive tax reform a la 1986, you are talking about so many components of a tax code that is so much more complicated today than it was in 1986, that it seems impossible to get it done in half a year essentially.”
The most optimistic scenario would be for House Ways and Means Committee members to pass a tax reform bill later this year, Nicholas said. It might also be possible that Senate Finance Committee members pass their version of a tax reform bill. However, it is unlikely that the full House and Senate would be able to vote on either bill until 2014, an election year, he said.
“Virtually nothing happens in an election year, even in good times, in Washington,” Nicholas said. “During an election year it’s difficult to imagine really tough decisions being made on so many issues.”
Nicholas said 2015 wouldn’t be a good year to pass tax reform either because it’s the last full year President Obama will be in office and if Republicans still control the House, it is hard to imagine them working with Democrats in the Senate to get something passed. Nicholas predicted that realistically tax reform wouldn’t happen until after the 2016 presidential election.
Sanders emphasized the adverse impact the loss of municipal bonds’ tax exemption would have on the students and parents that his organization tries to assist with student loan bonds. For example, if a student has $25,000 in outstanding debt that was financed with tax-exempt bonds at an interest rate of 6.75% over 10 years, the total interest on the life of the bonds would be $9,447.23. By comparison, if that same debt was financed with taxable bonds at a 7.50% interest rate over 10 years, the total interest on the life of the bonds would be $10,610.53, he said.
“Obviously for a 22 year-old just getting out of school trying to get a car or a mortgage or a place to rent, that can make a big difference,” Sanders said. “That’s what it really means as far as student loan issuance.”
Several weeks ago the South Carolina Student Loan Corp. started a consolidation program to help students find a way to refinance their loans at a lower interest rate.
“We couldn’t do that without the tax-exempt status of our bonds,” Sanders said. “It is a big difference to us as an issuer.”
EFC president Vince Sampson also highlighted the benefits of using tax-exempt bonds for student loans, compared to taxable, direct-pay bonds. Sampson noted the increased use of specialized products in the market such as Build America Bonds and the recent proposal for America Fast Forward bonds.
“One thing that strikes us from the student loan context is that one thing about BABs is we can’t use them because we are student lenders,” Sampson said. “We don’t do infrastructure.”
One of the benefits of the current tax-exempt market is that its so multifaceted so that all different types of issuers can use it, Sampson said, adding that this is a key policy message his group has tried to convey to lawmakers.