A position the Internal Revenue Service is taking regarding $150 million of student-loan revenue bonds under audit could have ramifications for the entire tax-exempt student loan bond industry, market participants said last week.

The Pennsylvania Higher Education Assistance Agency disclosed late Thursday that the IRS disagreed with its stance regarding its reallocation of student loans to various bond issues, as well as its treatment of consolidation loan rebate fees as a qualified administrative expense. The issues arose in an audit of bonds issued in 2002, according to a material event notice filed with the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system.

But bond lawyers said Friday that the PHEAA’s approach to both issues is relatively common in the industry, and as a result the same dispute could be applied to any number of student loan bond issuers.

If applied to all student loan bond issuers, the IRS’ position could affect billions of dollars of bonds, according to one market participant.

In fact, the dispute could get even broader. A bond attorney said the issues the IRS is raising regarding the reallocation of student loans could also be applied to the reallocation of single family mortgages.

Specifically, the IRS told the PHEAA that it should disregard its reallocations of student loans to other bond issues and has asked if it would be able to reestablish the original loan allocations made when the bonds were issued “for settlement purposes,” according to the notice.

But the swapping of loans among ­various bond issues is “extremely common,” according to the first attorney, who added that it would be very difficult if not impossible for student loan issuers to unwind reallocations and return to the original allocations.

The service also disagreed with the PHEAA’s treatment of consolidation loan rebate fees, which all Federal Family Education Loan lenders are required to submit to the Department of Education whenever student loans are consolidated, as qualified administrative costs. The FFEL program was eliminated in March when a law was enacted requiring all federally guaranteed student loans to be originated by the ­federal government.

Bond lawyers contend it is a relatively common practice for student loan lenders to consider the fees qualified administrative costs, which means they do not have to be included in determining the earnings on the student loans for arbitrage purposes.

Student loan bond issuers typically are permitted to earn on average a 2% spread over the bond yield to cover certain program expenses.

The PHEAA said it is cooperating with the IRS during the examination, and plans to “make every effort to protect the tax-exempt status of the bonds,” according to the notice. But if the IRS ultimately determines the authority violated the tax law, it could declare the bonds taxable.

To prevent that outcome, the agency said it could appeal such a ruling with the IRS Office of Appeals, or enter into a closing agreement with the service, likely ­involving some sort of payment in exchange for the bonds remaining tax-exempt. The notice also said the IRS has asked the agency for an update on the amount of the 2002 bonds that are still outstanding. PHEAA officials could not be reached for comment.

IRS tax-exempt bond office director Clifford Gannett said in 2008 his group was specifically looking into tax-exempt student loan bond issuers.

The TEB office planned to audit five to 10 student loan bond issuers. However, the PHEAA’s notice did not state if the bonds under audit were selected as part of that initiative.

Obermayer, Rebmann, Maxwell & Hippel LLP of Philadelphia served as bond counsel on the deal, according to bond documents. Cozen O’Connor was underwriters’ counsel.

There were five underwriters on the deal: UBS PaineWebber Inc., Wachovia Bank NA, NatCity Investments, Siebert Brandford Shank & Co., and Bear ­Stearns & Co. and RRZ Public Markets, now both part of JPMorgan.

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