The Personal Income Tax Law provides for various exclusions from gross income, including an exclusion for the amount of student loan indebtedness repaid or canceled pursuant to a specified federal law.

This bill would exclude from gross income the amount of student loan indebtedness discharged on or after January 1, 2015, and before January 1, 2020, for an eligible individual who is granted a discharge under specified conditions, as provided.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law provides for various exclusions from gross income, including an exclusion for the amount of student loan indebtedness repaid or canceled pursuant to a specified federal law.

This bill would exclude from gross income the amount of student loan indebtedness discharged on or after January 1, 2015, and before January 1, 2020, for an eligible individual who is granted a discharge under specified conditions, as provided.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law provides for various exclusions from gross income, including an exclusion for the amount of student loan indebtedness repaid or canceled pursuant to a specified federal law.

This bill would exclude from gross income the amount of student loan indebtedness discharged on or after January 1, 2015, and before January 1, 2020, for an eligible individual who is granted a discharge under specified conditions, as provided.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law provides for various exclusions from gross income, including an exclusion for the amount of student loan indebtedness repaid or canceled pursuant to a specified federal law.

This bill would exclude from gross income the amount of student loan indebtedness discharged on or after January 1, 2015, for an eligible individual who is granted a discharge under specified agreements, conditions, as provided.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law provides for various exclusions from gross income, including an exclusion for the amount of student loan indebtedness repaid or canceled pursuant to a specified federal law.

This bill would exclude from gross income the amount of student loan indebtedness discharged on or after January 1, 2015, for an eligible individual who is granted a discharge under specified agreements, as provided.

This bill would take effect immediately as a tax levy.

Existing law requires the governing board of a school district to reduce a certificated school employees salary, pursuant to the employees authorization, to pay the employees dues in a local or statewide professional organization.

This bill would make nonsubstantive changes to this provision.

(Without Reference to File)

SENATE THIRD READING

STR Bill Id:SB 150

Author:(Nguyen and Huff)

As Amended Ver:September 11, 2015

Majority vote. Tax levy

SENATE VOTE: 39-0

SUMMARY: Excludes from gross income loan amounts discharged when the borrower is unable to complete a program of study because the school closes or did something wrong. Specifically, this bill:

1. Modifies Internal Revenue Code (IRC) Section 108(f)(1) to provide that gross income does not include the discharge of any student loan if the individual is an eligible individual for the taxable year.

2. Modifies IRC Section 108(f)(2) to provide that a student loan means a student obligation note or other debt evidencing a loan to any individual for the purpose of attending a for-profit higher education company or for the purpose of consolidating or refinancing a loan used to attend a for-profit higher education company, which is either a guaranteed student loan, an educational loan, or a loan eligible for consolidation or refinancing under Part B of Title IV of the Higher Education Act of 1965, as amended (20 United States Code Section 1071 et seq.).

3. Provides an individual as an "eligible individual for a taxable year" if any of the following apply during the taxable year:

   1. An individual granted a discharge of any student loan pursuant to the discharge agreement. A "discharge agreement" is defined as an agreement between ECMC Group, Inc., Zenith Education Group, and the Consumer Financial Protection Bureau concerning the purchase of certain assets of Corinthian Colleges, Inc., dated February 2, 2015;

   2. The individual attended a Corinthian Colleges, Inc. school on or before May 1, 2015, is granted a discharge of any student loan made in connection with attending that school, and is not covered by any of the above; or,

   3. An individual is granted a discharge of any student loan pursuant to the William D. Ford Federal Direct Loan Program Borrower’s Rights and Responsibilities Statement due to either of the following:

      1. The individual could not complete a program of study because the school closed; or,

      2. The individual successfully asserts that the school did something wrong or failed to do something that it should have done.

4. Applies to discharges of indebtedness occurring on or after January 1, 2015, and before January 1, 2020.

5. Takes effect immediately as a tax levy.

EXISTING LAW:

1. Provides that "gross income" includes all income from whatever source derived, including compensation for services, business income, gains from property, interest, dividends, rents, and royalties, unless specifically excluded.

2. Provides that in the case of an individual, gross income does not include any amount which would be included by reason of discharge of any student debt if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers. IRC Section 108(f).

3. Federal Student Aid, an Office of the United States Department of Education, has a program that forgives student loans in a limited number of circumstances, including what's referred to as a closed school discharge, which means a student loan may be forgiven if a student's school closes while they are enrolled and the student cannot complete their program of study because of the closure, or if a student withdraws from the school within 120 days of the school's closure. There is no specific exclusion from income for such forgiveness, meaning student loans that are forgiven as a result of a school closure are generally includable in the borrower's income. However, individuals may exclude from gross income forgiven student loans to the extent they are insolvent.

FISCAL EFFECT: The Franchise Tax Board estimates an annual General Fund revenue loss of $35 million in fiscal year (FY) 2015-16, $100,000 in FY 2016-17, and $100,000 in FY 2017-18.

COMMENTS:

1. Author’s Statement. The author has provided the following statement in support of this bill:

Following the closure of 107 Corinthian College campuses, many former students are now seeking a partial or full discharge of their student loan debt. Unfortunately, if their debt is cancelled, discharged, or forgiven, that debt may be subject to state (and federal) income tax. To aid these students, Senate Bill 150 removes tax liability on forgiven federal loan debt for students who choose to forgo the credits that they earned.

Nearly 13,000 California students are unable to complete their degrees but are still being held responsible for the student loan debt they incurred.

These students have devoted time, energy, and resources in an effort to improve both their education and overall lives. Already victimized by the closure of the college, they should not be forced to forgo the credits they earned while also being subjected to tax debt. SB 150 helps students whose educational career is in limbo through no fault of their own to continue their education without being penalized financially.

2. Background: Founded in 1995, Corinthian's for-profit colleges once included over 100 campuses across the country, where over 100,000 students were enrolled. A bachelor’s degree from a Corinthian college could cost as much as $75,000. The vast majority of the school's revenue came from federal student loans, but federal loans did not cover all of the tuition, so students often had to take out private loans. The Consumer Financial Protection Bureau alleges that Corinthian kept tuition high in order to force students to borrow from the college at higher rates. The Corinthian loans came with origination fees of 6% and interest rates of around 15% as of 2011, much higher than the 3% and 7% interest on federal student loans. Corinthian was a long-time target for federal and state regulators, with a host of investigations and lawsuits charging falsified placement rates, deceptive marketing, and predatory recruiting, targeting the most vulnerable low-income students.

Since July 2014, the Department of Education (DOE) has forced Corinthian to close or sell off its locations over concerns about its high-interest loans and misleading employment statistics.

In February 2015, Corinthian announced that students would get $480 million in loan forgiveness under an agreement with federal regulators. Under the agreement, Corinthian would sell the majority of their campuses to the nonprofit ECMC Group, and students who attended ECMC Group campuses saw an immediate 40% reduction in the amount they owed on their private Corinthian loans. The DOE also fined Corinthian $30 million for 947 representations of placement rates, findings that Corinthian disputed. Corinthian did not sell its Heald College campuses, located mostly in California; they remained open until April 25, when they closed on one-day's notice, leaving 16,000 students unable to complete their degree.

Under federal law, students have a right to debt relief if they were enrolled at the time their college closed or up to 120 days before the shutdown. The DOE extended that eligibility window for Heald students, allowing them to have their debts discharged if they withdrew any time after June 2014, when the DOE and Corinthian agreed to the sell the colleges. The DOE estimates that about 40,000 Heald students would be eligible for $544 million in debt relief if every student sought relief. In the past, only 6% of students whose colleges closed asked for their debt to be discharged. The DOE also estimates that if all 350,000 former Corinthian students over the last five years applied for and received the debt relief, that cost alone could be as much as $3.5 billion.

3. Rationale of Taxing Forgiven Debt: The practice of taxing debt cancellation reflects sound tax policy because it recognizes the fact that an individual's net worth has increased by the cancellation of debt. According to Commissioner v. Glenshaw, the Court defined "income" as an accession to wealth that is clearly realized and over which the taxpayer has complete dominion. (Commissioner v. Glenshaw Glass Co., 348 United States 426, 431 (1955).) When debt is cancelled, money that would have been used to pay that loan is now free to be used on whatever the taxpayer wants. Therefore, because certain assets have been freed, the taxpayer has experienced an accession to wealth. Additionally, under the rule of symmetry, a loan is not considered income to the borrower nor is it a deduction to the lender. A borrower's increased wealth when the loan is taken out is also offset by the obligation to pay the same amount. If the debt is cancelled, the symmetry is destroyed. The borrower is in a much better position after the debt is cancelled. Additionally, as noted by Debora A. Grier, Professor of Law of Cleveland State University, in her statement before the United States Senate Committee on Finance, without this tax rule, "the borrower will have received permanently tax-free cash in the year of the original receipt," i.e. the year in which the borrower received the loan.

4. Out of Conformity: As noted above, California generally conforms to federal law with respect to the taxability of student loan forgiveness. In general, state conformity with federal law promotes greater simplicity and eases administration of complex tax laws. If this bill were to become law, taxpayers would exclude from income the forgiven loan for state tax purposes, but include it for federal tax purposes, bringing California further out of compliance with federal law.

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098 FN: 0002427

Date of Hearing: September 11, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

SBPCA Bill Id:SB 150

Author:(Nguyen) – As Amended Ver:June 22, 2015

Urgency: Yes State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill provides an exclusion from gross income under the Personal Income Tax Law for income that would otherwise result from a forgiven student loan if:

1) The individual is granted a discharge pursuant to an agreement between ECMC Group, Inc., Zenith Education Group, and the Consumer Financial Protection Bureau concerning the purchase of certain assets of Corinthian Colleges, Inc., dated February 2, 2015;

2) The individual is granted a discharge pursuant to Paragraph 23 of the William D. Ford Federal Direct Loan Program Borrower’s Rights and Responsibilities Statement because of either of the following: (a) the individual could not complete a program of study because the school closed; or (b) the individual successfully asserts that the school did something wrong or failed to do something that it should have done; or

3) The individual attended a Corinthian Colleges, Inc., school on or before May 1, 2015, is granted a discharge of any student loan made in connection with attending that school, and that discharge is not excludable from gross income as a result of the reasons listed above.

FISCAL EFFECT:

1) Insignificant costs to Franchise Tax Board (FTB) to administer changes to forms and systems.

2) Estimated GF revenue decreases of $34 million, $100,000, and $100,000 in FY 2015-16, FY 2016-17, and FY 2017-18, respectively.

COMMENTS:

Purpose. According to the author, many former students of the closed campuses of Corinthian College (including many Heald College campuses in California) are seeking a discharge of some or all of their student loan debt. Pursuant to a federal agreement relating to the forced closure, Corinthian agreed to forgive $480 million in outstanding student loans. In addition, based on estimates from the federal Department of Education, Corinthian students in California may be eligible for as much as $850 million in total federal and private student debt relief. Absent an exclusion, debt that is cancelled, discharged, or forgiven is considered income for tax purposes. The author contends approximately 13,000 California students are unable to complete their degrees as a result of the college closures, and she argues those students should not be responsible for income tax on their forgiven debt.

Analysis Prepared by: Joel Tashjian / APPR. / (916) 319-2081

 UNFINISHED BUSINESS  

Bill No: SB 150

Author: Nguyen (R) and Huff (R), et al.

Amended: 9/11/15

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 7/1/15

AYES: Hertzberg, Nguyen, Beall, Lara, Moorlach, Pavley

NO VOTE RECORDED: Hernandez

SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/27/15

AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen

SENATE FLOOR: 39-0, 9/1/15

AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen, Pan, Pavley, Roth, Runner, Stone, Vidak, Wieckowski, Wolk

NO VOTE RECORDED: Nielsen

ASSEMBLY FLOOR: Not available

SUBJECT: Personal Income Tax Law: exclusion: student loan debt forgiveness

SOURCE: Author

DIGEST: This bill excludes from gross income loan amounts discharged from a for-profit college when the borrower is unable to complete a program of study.

Assembly Amendments add a sunset date of January 1, 2020.

ANALYSIS:

Existing law:

1. Provides that "gross income" includes all income from whatever source derived, including compensation for services, business income, gains from property, interest, dividends, rents, and royalties, unless specifically excluded.

2. Provides that debt that is forgiven or cancelled by a lender is generally treated as income on a tax return, and consequently is taxable.

3. Provides that in the case of an individual, gross income does not include any amount which would be included by reason of discharge of any student debt if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.

4. Excludes loan amounts repaid or canceled by the United States Secretary of Education from gross income under state law.

This bill:

1. Provides an exclusion from California gross income for income that would otherwise result from a forgiven student loan, as defined, of an eligible individual.

2. Provides that the bill shall remain in effect until December 1, 2020.

3. Provides an individual is an eligible individual for a taxable year if any of the following apply during the taxable year:

• The individual is granted a discharge pursuant to the agreement between ECMC Group, Inc., Zenith Education Group, and the Consumer Financial Protection Bureau concerning the purchase of certain assets of Corinthian Colleges, Inc., dated February 2, 2015;

• The individual is granted a discharge pursuant to Paragraph 23 of the William D. Ford Federal Direct Loan Program Borrower’s Rights and Responsibilities Statement because of either of the following:

• The individual could not complete a program of study because the school closed; or

• The individual successfully asserts that the school did something wrong or failed to do something that it should have done; or

• The individual attended a Corinthian Colleges, Inc., school on or before May 1, 2015, is granted a discharge of any student loan made in connection with attending that school, and that discharge is not excludable from gross income as a result of the reasons listed in 1 or 2, above.

Background

Founded in 1995, Corinthian's for-profit colleges once included over 100 campuses across the country, where over 100,000 students were enrolled. A bachelor’s degree from a Corinthian college could cost as much as $75,000. The vast majority of the school’s revenue came from federal student loans, but federal loans are unable to cover all of the tuition, so students often had to take out private loans. The Consumer Financial Protection Bureau alleges that Corinthian kept tuition high in order to force students to borrow from the college at higher rates. The Corinthian loans came with origination fees of 6% and interest rates of around 15%, as of 2011, much higher than the 3% and 7% interest on federal student loans. Corinthian was a longtime target for federal and state regulators, with a host of investigations and lawsuits charging falsified placement rates, deceptive marketing, and predatory recruiting, targeting the most vulnerable low-income students.

Since last July, the Department of Education has forced the company to close or sell off its locations over concerns about its high interest loans and misleading employment statistics. In February of this year, Corinthian announced that students would get $480 million in loan forgiveness under an agreement with federal regulators. Under the agreement, Corinthian would sell the majority of their campuses to the nonprofit ECMC Group, and students who attended ECMC Group campuses saw an immediate 40% reduction in the amount they owed on their private loans provided by Corinthian. The Department of Education also fined Corinthian $30 million for 947 representations of placement rates, findings that Corinthian disputed. Corinthian did not sell its Heald College campuses, located mostly in California, and they remained open until April 25, when they closed on a day’s notice, leaving 16,000 students unable to complete their degree.

Under federal law, students have a right to debt relief if they were enrolled at the time their college closed, or up to 120 days before the shutdown. The Department of Education extended that eligibility window for Heald students, allowing them to have their debts discharged if they withdrew any time after June 2014, when the department and Corinthian agreed to the sell the colleges. The Department of Education estimates that about 40,000 Heald students would be eligible for $544 million in debt relief if every student sought relief. In the past, only 6 percent of students whose colleges closed asked for their debt to be discharged. The Department of Education also estimates that if all 350,000 former Corinthian students over the last five years applied for and received the debt relief, that cost alone could be as much as $3.5 billion.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Assembly Appropriations Committee, the bill results in:

• Insignificant costs to Franchise Tax Board (FTB) to administer changes to forms and systems.

• Estimated GF revenue decreases of $34 million, $100,000, and $100,000 in FY 2015-16, FY 2016-17, and FY 2017-18, respectively.

SUPPORT: (Verified 9/11/15)

Board of Governors of the California Community Colleges

Member of the State Board of Equalization, 1st District

OPPOSITION: (Verified 9/11/15)

California Department of Finance

According to the author, “Following the closure of 107 Corinthian College campuses, many former students are now seeking a partial or full discharge of their student loan debt. Unfortunately, if their debt is cancelled, discharged, or forgiven, that debt may be subject to state (and federal) income tax. To aid these students, Senate Bill 150 removes tax liability on forgiven federal loan debt for students who choose to forgo the credits that they earned.

Nearly 13,000 California students are unable to complete their degrees but are still being held responsible for the student loan debt they incurred.

These students have devoted time, energy, and resources in an effort to improve both their education and overall lives. Already victimized by the closure of the college, they should not be forced to forgo the credits they earned while also being subjected to tax debt. SB 150 helps students whose educational career is in limbo through no fault of their own to continue their education without being penalized financially.”ARGUMENTS IN OPPOSITION: The opponent argues this bill will have a negative impact on state revenues.

Prepared by: Myriam Bouaziz / GOV. & F. / (916) 651-4119

9/11/15 20:15:03

**** END ****

Date of Hearing: September 11, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

SBPCA Bill Id:SB 150

Author:(Nguyen) – As Amended Ver:June 22, 2015

Majority vote. Fiscal committee. Tax levy.

SENATE VOTE: 39-0

SUBJECT: Personal Income Tax Law: exclusion: student loan debt forgiveness.

SUMMARY: Excludes from gross income loan amounts discharged when the borrower is unable to complete a program of study because the school closes or did something wrong. Specifically, this bill:

1. Modifies Internal Revenue Code (IRC) Section 108(f)(1) to provide that gross income does not include the discharge of any student loan if the individual is an eligible individual for the taxable year.

2. Modifies IRC Section 108(f)(2) to provide that a student loan means a student obligation note or other debt evidencing a loan to any individual for the purpose of attending a for-profit higher education company or for the purpose of consolidating or refinancing a loan used to attend a for-profit higher education company, which is either a guaranteed student loan, an educational loan, or a loan eligible for consolidation or refinancing under Part B of Title IV of the Higher Education Act of 1965, as amended (20 U.S.C. Sec. 1071 et seq.).

3. Provides an individual as an “eligible individual for a taxable year” if any of the following apply during the taxable year:

1. An individual granted a discharge of any student loan pursuant to the discharge agreement. A “discharge agreement” is defined as an agreement between ECMC Group, Inc., Zenith Education Group, and the Consumer Financial Protection Bureau concerning the purchase of certain assets of Corinthian Colleges, Inc., dated February 2, 2015;

2. The individual attended a Corinthian Colleges, Inc. school on or before May 1, 2015, is granted a discharge of any student loan made in connection with attending that school, and is not covered by any of the above; or,

3. An individual is granted a discharge of any student loan pursuant to the William D. Ford Federal Direct Loan Program Borrower’s Rights and Responsibilities Statement due to either of the following:

1. The individual could not complete a program of study because the school closed; or,

2. The individual successfully asserts that the school did something wrong or failed to do something that it should have done.

4. Applies to discharges of indebtedness occurring on or after January 1, 2015.

5. Takes effect immediately as a tax levy.

EXISTING LAW:

1. Provides that "gross income" includes all income from whatever source derived, including compensation for services, business income, gains from property, interest, dividends, rents, and royalties, unless specifically excluded.

2. Provides that in the case of an individual, gross income does not include any amount which would be included by reason of discharge of any student debt if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers. (IRC) Section 108(f).

3. Federal Student Aid, an Office of the U.S. Department of Education, has a program that forgives student loans in a limited number of circumstances, including what’s referred to as a closed school discharge, which means a student loan may be forgiven if a student’s school closes while they are enrolled and the student cannot complete their program of study because of the closure, or if a student withdraws from the school within 120 days of the school’s closure. There is no specific exclusion from income for such forgiveness, meaning student loans that are forgiven as a result of a school closure are generally includable in the borrower’s income. However, individuals may exclude from gross income forgiven student loans to the extent they are insolvent.

FISCAL EFFECT: The Franchise Tax Board estimates an annual General Fund revenue loss of $35 million in fiscal year (FY) 2015-16, $100,000 in FY 2016-17, and $100,000 in FY 2017-18.

COMMENTS:

1. Author’s Statement. The author has provided the following statement in support of this bill:

Following the closure of 107 Corinthian College campuses, many former students are now seeking a partial or full discharge of their student loan debt. Unfortunately, if their debt is cancelled, discharged, or forgiven, that debt may be subject to state (and federal) income tax. To aid these students, Senate Bill 150 removes tax liability on forgiven federal loan debt for students who choose to forgo the credits that they earned.

Nearly 13,000 California students are unable to complete their degrees but are still being held responsible for the student loan debt they incurred.

These students have devoted time, energy, and resources in an effort to improve both their education and overall lives. Already victimized by the closure of the college, they should not be forced to forgo the credits they earned while also being subjected to tax debt. SB 150 helps students whose educational career is in limbo through no fault of their own to continue their education without being penalized financially.

2. Background: Founded in 1995, Corinthian's for-profit colleges once included over 100 campuses across the country, where over 100,000 students were enrolled. A bachelor’s degree from a Corinthian college could cost as much as $75,000. The vast majority of the school’s revenue came from federal student loans, but federal loans did not cover all of the tuition, so students often had to take out private loans. The Consumer Financial Protection Bureau alleges that Corinthian kept tuition high in order to force students to borrow from the college at higher rates. The Corinthian loans came with origination fees of 6% and interest rates of around 15% as of 2011, much higher than the 3% and 7% interest on federal student loans. Corinthian was a long-time target for federal and state regulators, with a host of investigations and lawsuits charging falsified placement rates, deceptive marketing, and predatory recruiting, targeting the most vulnerable low-income students.

Since July 2014, the Department of Education (DOE) has forced Corinthian to close or sell off its locations over concerns about its high-interest loans and misleading employment statistics.

In February 2015, Corinthian announced that students would get $480 million in loan forgiveness under an agreement with federal regulators. Under the agreement, Corinthian would sell the majority of their campuses to the nonprofit ECMC Group, and students who attended ECMC Group campuses saw an immediate 40% reduction in the amount they owed on their private Corinthian loans. The DOE also fined Corinthian $30 million for 947 representations of placement rates, findings that Corinthian disputed. Corinthian did not sell its Heald College campuses, located mostly in California; they remained open until April 25, when they closed on one-day’s notice, leaving 16,000 students unable to complete their degree.

Under federal law, students have a right to debt relief if they were enrolled at the time their college closed or up to 120 days before the shutdown. The DOE extended that eligibility window for Heald students, allowing them to have their debts discharged if they withdrew any time after June 2014, when the DOE and Corinthian agreed to the sell the colleges. The DOE estimates that about 40,000 Heald students would be eligible for $544 million in debt relief if every student sought relief. In the past, only 6% of students whose colleges closed asked for their debt to be discharged. The DOE also estimates that if all 350,000 former Corinthian students over the last five years applied for and received the debt relief, that cost alone could be as much as $3.5 billion.

3. Rationale of Taxing Forgiven Debt: The practice of taxing debt cancellation reflects sound tax policy because it recognizes the fact that an individual's net worth has increased by the cancellation of debt. According to Commissioner v. Glenshaw, the Court defined "income" as an accession to wealth that is clearly realized and over which the taxpayer has complete dominion. (Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).) When debt is cancelled, money that would have been used to pay that loan is now free to be used on whatever the taxpayer wants. Therefore, because certain assets have been freed, the taxpayer has experienced an accession to wealth. Additionally, under the rule of symmetry, a loan is not considered income to the borrower nor is it a deduction to the lender. A borrower's increased wealth when the loan is taken out is also offset by the obligation to pay the same amount. If the debt is cancelled, the symmetry is destroyed. The borrower is in a much better position after the debt is cancelled. Additionally, as noted by Debora A. Grier, Professor of Law of Cleveland State University, in her statement before the United States Senate Committee on Finance, without this tax rule, "the borrower will have received permanently tax-free cash in the year of the original receipt," i.e. the year in which the borrower received the loan.

4. Out of Conformity: As noted above, California generally conforms to federal law with respect to the taxability of student loan forgiveness. In general, state conformity with federal law promotes greater simplicity and eases administration of complex tax laws. If this bill were to become law, taxpayers would exclude from income the forgiven loan for state tax purposes, but include it for federal tax purposes, bringing California further out of compliance with federal law.

5. Limiting the Scope of Exclusion to Corinthian Students: The author has expressed a desire to aid students that may be receiving a discharge of student loan debt due to the closure of Corinthian College campuses. Unfortunately, as currently drafted, the language of this bill could potentially apply to future closures unrelated to Corinthian College. As such, the Committee may wish to add a five-year sunset to ensure that the exclusion only applies to students that have recently received a discharge of student loan debt due to the closure of the Corinthian College.

REGISTERED SUPPORT / OPPOSITION:

Support

Board of Governors of the California Community Colleges

Member of the State Board of Equalization, 1^st District

Opposition

California Department of Finance

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098

 THIRD READING  

Bill No: SB 150

Author: Nguyen (R) and Huff (R)

Amended: 6/22/15

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 7/1/15

AYES: Hertzberg, Nguyen, Beall, Lara, Moorlach, Pavley

NO VOTE RECORDED: Hernandez

SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/27/15

AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen

SUBJECT: Personal Income Tax Law: exclusion: student loan debt forgiveness

SOURCE: Author

DIGEST: This bill excludes from gross income loan amounts discharged from a for-profit college when the borrower is unable to complete a program of study.

ANALYSIS:

Existing Law:

1. Provides that "gross income" includes all income from whatever source derived, including compensation for services, business income, gains from property, interest, dividends, rents, and royalties, unless specifically excluded.

2. Provides that debt that is forgiven or cancelled by a lender is generally treated as income on a tax return, and consequently is taxable.

3. Provides that in the case of an individual, gross income does not include any amount which would be included by reason of discharge of any student debt if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.

4. Excludes loan amounts repaid or canceled by the United States Secretary of Education from gross income under state law.

This bill:

1. Provides an exclusion from California gross income for income that would otherwise result from a forgiven student loan, as defined, of an eligible individual.

2. Provides an individual would be an eligible individual for a taxable year if any of the following apply during the taxable year:

• The individual is granted a discharge pursuant to the agreement between ECMC Group, Inc., Zenith Education Group, and the Consumer Financial Protection Bureau concerning the purchase of certain assets of Corinthian Colleges, Inc., dated February 2, 2015;

• The individual is granted a discharge pursuant to Paragraph 23 of the William D. Ford Federal Direct Loan Program Borrower’s Rights and Responsibilities Statement because of either of the following:

• The individual could not complete a program of study because the school closed; or

• The individual successfully asserts that the school did something wrong or failed to do something that it should have done; or

• The individual attended a Corinthian Colleges, Inc., school on or before May 1, 2015, is granted a discharge of any student loan made in connection with attending that school, and that discharge is not excludable from gross income as a result of the reasons listed in 1 or 2, above.

Comments

1. Author’s statement. According to the author, “Following the closure of 107 Corinthian College campuses, many former students are now seeking a partial or full discharge of their student loan debt. Unfortunately, if their debt is cancelled, discharged, or forgiven, that debt may be subject to state (and federal) income tax. To aid these students, Senate Bill 150 removes tax liability on forgiven federal loan debt for students who choose to forgo the credits that they earned. Nearly 13,000 California students are unable to complete their degrees but are still being held responsible for the student loan debt they incurred. These students have devoted time, energy, and resources in an effort to improve both their education and overall lives. Already victimized by the closure of the college, they should not be forced to forgo the credits they earned while also being subjected to tax debt. SB 150 helps students whose educational career is in limbo through no fault of their own to continue their education without being penalized financially.”

2. How did we get here? Founded in 1995, Corinthian's for-profit colleges once included over 100 campuses across the country, where over 100,000 students were enrolled. A bachelor’s degree from a Corinthian college could cost as much as $75,000. The vast majority of the school’s revenue came from federal student loans, but federal loans are unable to cover all of the tuition, so students often had to take out private loans. The Consumer Financial Protection Bureau alleges that Corinthian kept tuition high in order to force students to borrow from the college at higher rates. The Corinthian loans came with origination fees of 6% and interest rates of around 15%, as of 2011, much higher than the 3% and 7% interest on federal student loans. Corinthian was a longtime target for federal and state regulators, with a host of investigations and lawsuits charging falsified placement rates, deceptive marketing, and predatory recruiting, targeting the most vulnerable low-income students.

Since last July, the Department of Education has forced the company to close or sell off its locations over concerns about its high interest loans and misleading employment statistics. In February of this year, Corinthian announced that students would get $480 million in loan forgiveness under an agreement with federal regulators. Under the agreement, Corinthian would sell the majority of their campuses to the nonprofit ECMC Group, and students who attended ECMC Group campuses saw an immediate 40% reduction in the amount they owed on their private loans provided by Corinthian. The Department of Education also fined Corinthian $30 million for 947 representations of placement rates, findings that Corinthian disputed. Corinthian did not sell its Heald College campuses, located mostly in California, and they remained open until April 25, when they closed on a day’s notice, leaving 16,000 students unable to complete their degree.

Under federal law, students have a right to debt relief if they were enrolled at the time their college closed, or up to 120 days before the shutdown. The Department of Education extended that eligibility window for Heald students, allowing them to have their debts discharged if they withdrew any time after June 2014, when the department and Corinthian agreed to the sell the colleges. The Department of Education estimates that about 40,000 Heald students would be eligible for $544 million in debt relief if every student sought relief. In the past, only 6 percent of students whose colleges closed asked for their debt to be discharged. The Department of Education also estimates that if all 350,000 former Corinthian students over the last five years applied for and received the debt relief, that cost alone could be as much as $3.5 billion.

3. Reverse conformity. California law does not automatically conform to changes to federal tax law, except under specified circumstances. Instead, the Legislature must affirmatively conform to federal changes. Generally, when the federal government changes its tax laws, California catches up by enacting its own legislation the following year to reduce differences between the two codes, thereby easing the tax preparation burden on taxpayers, tax preparers, and the Franchise Tax Board. Currently, loans forgiven prior to the completion of a loan repayment program are included as taxable income under state law. If SB 150 becomes law, taxpayers would exclude from income the forgiven loan for state tax purposes, but include it for federal tax purposes, bringing California further out of compliance with federal law.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, the Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $34 million in 2015-16, and $100,000 in both 2016-17 and 2017-18. The bill would not significantly impact the department’s costs.

SUPPORT: (Verified 8/27/15)

California Community Colleges Chancellor’s Office

State Board of Equalization Vice Chair, George Runner

OPPOSITION: (Verified 8/27/15)

None received

ARGUMENTS IN SUPPORT: The supporters of this bill argue that this bill will protect students who would incur a financial hardship from having to pay taxes on phantom income earned as a result of student loan debt forgiveness. Also, supporters argue this bill will help California students affected by the massive closure of Corinthian Colleges by granting relief on the state portion of their tax obligation.

Prepared by: Myriam Bouaziz / GOV. & F. / (916) 651-4119

8/31/15 17:00:56

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SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

SB 150 (Nguyen) - Personal Income Tax Law: exclusion: student loan debt forgiveness.

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 150 would exclude from gross income loan amounts discharged from a for-profit college when the borrower is unable to complete a program of study.

Fiscal Impact:

The Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $34 million in 2015-16, and $100,000 in both 2016-17 and 2017-18. The bill would not significantly impact the department’s costs.

Background:

Debt that is forgiven or cancelled by a lender is generally treated as income on a tax return, and consequently is taxable. With respect to student loan forgiveness, the amount forgiven generally represents taxable income the year it is cancelled (with certain exceptions), including loan discharges for closed schools.

Corinthian Colleges was a large for-profit post-secondary education company whose subsidiaries offered career-oriented diploma and degree programs in health care, business, criminal justice, transportation technology and maintenance, construction trades, and information technology. Founded in 1995, Corinthian once included over 100 campuses across the country, enrolling over 100,000 students. A bachelor’s degree from a Corinthian college could cost as much as $75,000. The school’s revenue came disproportionately from federal student loans; however, federal loans often did not completely cover tuition, requiring students to take out private loans as well. Corinthian was a longtime target for federal and state regulators, with a host of investigations and lawsuits charging falsified placement rates, deceptive marketing, and predatory recruiting, targeting the most vulnerable low-income students.

Since July 2014, the Department of Education has forced the company to close or sell off its locations over concerns about its high interest loans and misleading employment statistics. In February 2015, Corinthian announced that students would get $480 million in loan forgiveness under an agreement with federal regulators. Under the agreement, Corinthian would sell the majority of their campuses to the nonprofit ECMC Group, and students who attended ECMC Group campuses saw an immediate 40 percent reduction in the amount they owed on their private loans provided by Corinthian. Corinthian did not sell its Heald College campuses, located mostly in California. Those campuses remained open until April 25, when they closed with one day’s notice, leaving 16,000 students unable to complete their degree.

Under federal law, students have a right to debt relief if they were enrolled at the time their college closed, or up to 120 days before the shutdown. The Department of Education extended that eligibility window for Heald students, allowing them to have their debts discharged if they withdrew any time after June 2014, when the department and Corinthian agreed to the sell the colleges. The Department of Education estimates that about 40,000 Heald students would be eligible for $544 million in debt relief if every student sought relief. In the past, only 6 percent of students whose colleges closed asked for their debt to be discharged. The Department of Education also estimates that if all 350,000 former Corinthian students over the last five years applied for and received the debt relief, the cost could reach $3.5 billion.

Proposed Law:

This bill would provide an exclusion from California gross income for income that would otherwise result from a forgiven student loan, as defined, of an eligible individual.

An individual would be an eligible individual for a taxable year if any of the following apply during the taxable year:

1. The individual is granted a discharge pursuant to the agreement between ECMC Group, Inc., Zenith Education Group, and the Consumer Financial Protection Bureau concerning the purchase of certain assets of Corinthian Colleges, Inc., dated February 2, 2015;

2. The individual is granted a discharge pursuant to Paragraph 23 of the William D. Ford Federal Direct Loan Program Borrower’s Rights and Responsibilities Statement because of either of the following:

   1. The individual could not complete a program of study because the school closed; or

   2. The individual successfully asserts that the school did something wrong or failed to do something that it should have done; or

3. The individual attended a Corinthian Colleges, Inc., school on or before May 1, 2015, is granted a discharge of any student loan made in connection with attending that school, and that discharge is not excludable from gross income as a result of the reasons listed in 1 or 2, above.

Related Legislation:

AB 1055 (Baker, 2015) would provide an exclusion from gross income for student loans that are forgiven when the borrower is blind or disabled. The bill is current in the Assembly Revenue and Taxation Committee.

Staff Comments: The FTB revenue estimate does not assume additional closures of colleges beyond what has already occurred. If there are additional closures of other large schools that impact state borrowers, the revenue loss from this bill could increase substantially.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

PERSONAL INCOME TAX LAW: EXCLUSION: STUDENT LOAN DEBT FORGIVENESS

Excludes from gross income loan amounts discharged from a for-profit college when the borrower is unable to complete a program of study.

Background and Existing Law

When a lender cancels a borrower’s debt, federal and state law generally treats the amount of debt cancelled as income taxable to the borrower. Taxpayers do not include borrowed funds in income in the year he or she receives loan proceeds because of the obligation to repay the loan; the taxpayer is financially no better off because the loan must be repaid. When lenders reduce the repayable amount, the taxpayer realizes a gain in his or her financial situation because a portion of the loan proceeds already received and not previously taxed need not be repaid, thereby increasing the taxpayer’s net worth. The taxpayer’s income has increased by the amount forgiven plus interest.

Specifically, in the case of student loan forgiveness, the amount forgiven generally represents taxable income for income tax purposes in the year it is cancelled with some exceptions. Generally, student loan forgiveness is excluded from income if the forgiveness is contingent upon the student working for a specific number of years in certain professions.

When the student participates in public service loan forgiveness, teacher loan forgiveness, law school loan repayment assistance programs and the National Health Service Corps Loan Repayment Program, cancelled debt is excluded from income. However, loan discharges for closed schools, false certification, unpaid refunds, and death and disability is taxable income. The forgiveness of the remaining balance under the federal income based repayment program (IBR) after 25 years, or 20 years for students borrowing on or after January 1, 2014, is considered taxable income under federal law. However, as of last year, state law excludes from gross income loan amounts repaid or forgiven under the federal 25 or 20 year income based repayment plan (SB 1271, Evans).

Proposed Law

Senate Bill 150 excludes from gross income loan amounts discharged when the borrower is unable to complete a program of study.

Specifically, SB 150 applies to individuals granted discharge under any of the following circumstances:

• The individual attended a Corinthian College on or before May 1, 2015, and is granted a discharge of any student loan made in connection with attending that school.

• The individual is granted a discharge of any student loan pursuant to the discharge agreement, which is an agreement between ECMC Group, Inc., Zenith Education Group, and the Consumer Financial Protection Bureau concerning the purchase of certain assets of Corinthian Colleges, Inc., dated February 2, 2015.

• The individual could not complete a program of study because the school closed.

• The individual successfully asserts that the school did something wrong or failed to do something that it should have done.

As a tax levy, SB 150 goes into effect immediately, and applies to discharges of indebtedness occurring on or after January 1, 2015.

State Revenue Impact

The Franchise Tax Board estimates that this bill will reduce General Fund revenue by $34 million in fiscal year 2015-16, $100,000 in 2016-17, and $100,000 in 2017-18.

Comments

1. Purpose of the bill. According to the author, “Following the closure of 107 Corinthian College campuses, many former students are now seeking a partial or full discharge of their student loan debt. Unfortunately, if their debt is cancelled, discharged, or forgiven, that debt may be subject to state (and federal) income tax. To aid these students, Senate Bill 150 removes tax liability on forgiven federal loan debt for students who choose to forgo the credits that they earned. Nearly 13,000 California students are unable to complete their degrees but are still being held responsible for the student loan debt they incurred. These students have devoted time, energy, and resources in an effort to improve both their education and overall lives. Already victimized by the closure of the college, they should not be forced to forgo the credits they earned while also being subjected to tax debt. SB 150 helps students whose educational career is in limbo through no fault of their own to continue their education without being penalized financially.”

2. How did we get here? Founded in 1995, Corinthian's for-profit colleges once included over 100 campuses across the country, where over 100,000 students were enrolled. A bachelor’s degree from a Corinthian college could cost as much as $75,000. The vast majority of the school’s revenue came from federal student loans, but federal loans are unable to cover all of the tuition, so students often had to take out private loans. The Consumer Financial Protection Bureau alleges that Corinthian kept tuition high in order to force students to borrow from the college at higher rates. The Corinthian loans came with origination fees of 6% and interest rates of around 15%, as of 2011, much higher than the 3% and 7% interest on federal student loans. Corinthian was a longtime target for federal and state regulators, with a host of investigations and lawsuits charging falsified placement rates, deceptive marketing, and predatory recruiting, targeting the most vulnerable low-income students.

Since last July, the Department of Education has forced the company to close or sell off its locations over concerns about its high interest loans and misleading employment statistics.

In February of this year, Corinthian announced that students would get $480 million in loan forgiveness under an agreement with federal regulators. Under the agreement, Corinthian would sell the majority of their campuses to the nonprofit ECMC Group, and students who attended ECMC Group campuses saw an immediate 40% reduction in the amount they owed on their private loans provided by Corinthian. The Department of Education also fined Corinthian $30 million for 947 representations of placement rates, findings that Corinthian disputed. Corinthian did not sell its Heald College campuses, located mostly in California, and they remained open until April 25, when they closed on a day’s notice, leaving 16,000 students unable to complete their degree.

Under federal law, students have a right to debt relief if they were enrolled at the time their college closed, or up to 120 days before the shutdown. The Department of Education extended that eligibility window for Heald students, allowing them to have their debts discharged if they withdrew any time after June 2014, when the department and Corinthian agreed to the sell the colleges. The Department of Education estimates that about 40,000 Heald students would be eligible for $544 million in debt relief if every student sought relief. In the past, only 6 percent of students whose colleges closed asked for their debt to be discharged. The Department of Education also estimates that if all 350,000 former Corinthian students over the last five years applied for and received the debt relief, that cost alone could be as much as $3.5 billion.

3. Reverse conformity. California law does not automatically conform to changes to federal tax law, except under specified circumstances. Instead, the Legislature must affirmatively conform to federal changes. Generally, when the federal government changes its tax laws, California catches up by enacting its own legislation the following year to reduce differences between the two codes, thereby easing the tax preparation burden on taxpayers, tax preparers, and the Franchise Tax Board. Currently, loans forgiven prior to the completion of a loan repayment program are included as taxable income under state law. If SB 150 becomes law, taxpayers would exclude from income the forgiven loan for state tax purposes, but include it for federal tax purposes, bringing California further out of compliance with federal law.

Support and Opposition

(6/25/15)

Support: California Community Colleges Chancellor’s Office; State Board of Equalization Vice Chair, George Runner.

Opposition: Unknown.

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