The Pennsylvania Higher Education Assistance Agency disclosed Friday that it is complying with an additional information request from the Internal Revenue Service as part of the IRS’ ongoing review of the agency’s student-loan bonds.
The PHEAA expects to respond by a Nov. 30 due date to a Nov. 10 request for, among other things, a schedule of interest paid to holders of each series of tax-exempt debt sold since Jan. 1, 2007, to determine tax exposure on such bonds, as well as a schedule of “borrower benefits” paid for each issue since that date.
The IRS also is asking for the agency to describe the “callability” of each series of bonds outstanding and provide documents to verify timely compliance with Treasury Department regulations relating to “allocations of comingled funds.”
In the ongoing dispute, which has ramifications for other student loan bond issuers, the IRS has taken the position that student loans should not be reallocated to different bond issues and that consolidation-loan rebate fees should not be considered as qualified expenses for rebate purposes. Market participants have noted that the IRS’ concerns about the PHEAA’s bonds would also apply to many other student-loan bond deals.
As with previous disclosures tied to the IRS audit, the PHEAA disclosed that any settlement would have to cover all of its outstanding debt. The PHEAA filed its notice Friday for 111 bond issues with an original aggregate principal amount of $7.4 billion, only $800 million of which remain outstanding.
However, the agency also stated in the notice that the IRS has taken no adverse position on the audited bonds or made a “formal demand of any particular sum to settle the audit.”
In addition, the agency made clear that it has not offered to pay the IRS as part of any closing agreement to resolve the audit, but said that could be an option in the future, as well as an appeal to the IRS Office of Appeals of any adverse determination.
The IRS audit, which began in May 2008, has focused on $150 million of student loan revenue bonds the PHEAA issued in 2002. Given the concerns that the IRS is scrutinizing common practices in the student-loan bond market, some market participants speculated yesterday that the IRS may be attempting to set a settlement template for future examinations in the sector.
The agency said in the notice that it has complied with three previous information document requests from the IRS. It had previously disclosed that the service is specifically taking issue with how the authority reallocated student loans to and from various bond issues and how the consolidation-loan rebate fees it paid the Treasury Department determined the yields on the student loans.