Loan

Article Dean Dorton

With the upcoming changes in the political arena, interest on municipal bonds is at risk of becoming subject to federal income taxation. Under the current U.S. tax code, when investors lend money to local or state governments to finance infrastructure — in other words, buy municipal bonds — the investor in-turn receives interest throughout the term of the loan that is exempt from federal income taxation.

However, as President-elect Donald Trump and a Republican-controlled Congress are mapping out their plans to finance massive infrastructure spending, they’re looking more to having governmental infrastructures financed in part by tax credits, private equity investments, and taxable municipal bonds to offset the credits or tax cuts.

Trump economic advisors, private-equity investor Wilbur Ross (Trump’s choice to lead the Department of Commerce), and University of California at Irvine business professor Peter Navarro question why interest should be exempt from federal taxation when the debt was issued by the state and local governments. The advisors additionally argue that municipal bonds aren’t an efficient way to pay for public projects because a percentage of the tax savings goes to the bondholder. Instead, federal tax credits and private investments are considered a more ideal supplement to existing financial programs, along with taxable municipal bonds.

Click the botton below to read the full article from Navarro and Ross discussing the potential changes to the municipal market by the Trump infrastructure plan.

Read the Article

If you would like to discuss this article or learn more, please contact Lashanda Stewart, Specialist in Tax Services, at lstewart@deandorton.com.

Article Dean Dorton

This is the second of our two-part series of emails providing an overview of the rise of student loan debt.

Alternative Financing Options

Student loan dept

Post the Great Recession, many students were able to seek help from their families in various ways. Some popular methods of financing tuition were home equity loans, refinancing home mortgages, and using savings.  However, home value regressions and increased unemployment vastly dampened those financing methods (Norris). This, in return, led to more students seeking out their own financing methods, in particular student loans, in order to attend college.  Likewise, in today’s society a college degree is becoming more of a need instead of an option regardless of the price.

Impact of Default Rates on Schools

As college has become more of a need for students, there have been more and more students taking on debt that are not able to keep up with the payments after school is finished.  With more debt comes more default, and the increasing default rates have consequences for higher education institutions.  “A school with a cohort default rate of less than 15% for each of the three most recent fiscal years for which data are available” does not need to delay the first disbursement of a loan for 30 days (for first-time borrowers who are first-year undergraduates).  If a school’s three most recent official cohort default rates are 30% or greater using the three year calculation, then the school will lose Pell Grant and Direct Loan funding for the remainder of the fiscal year (in which the school is notified) and the following two fiscal years (except in the event of a successful appeal).  When a school’s current official cohort default rate is 40% or more when using the three year calculation, the school will become ineligible for the Direct Loan program for the remainder of the fiscal year (in which the school is notified) and the following two fiscal years (except in the event of a successful appeal).  As such, schools have incentive to monitor their loan portfolios and work to help students stay on track with their payments. (Federal Student Aid)

Conclusion

College has become a necessity in today’s society. Through the increase in student loan debt and tuition cost, students will continue to attend college.  In summary, after the Recession, financing of college educations has somewhat evolved from the families’ responsibility to the students’.  This along with vague standards helped fuel the drastic sweep in student loan debt in such a short amount of time.  As there are negative consequences for high default rates for institutions, schools should work to maintain student success in paying off these loans.

Please contact Crissy Fiscus at cfiscus@deandorton.com or Bryan Bulkley at bbulkley@deandorton.com if you would like to discuss further.

View Crissy Fiscus’ Bio

 

Citations:

Norris, Floyd. “The Hefty Yoke of Student Loan Debt.” 20 February 2014.
http://www.nytimes.com/2014/02/20/business/economy/the-hefty-yoke-of-student-loan-debt.html?_r=0. 02 July 2014.

Federal Student Aid, An Office of the U.S. Department of Education. “2.4 Cohort Default Rate Effects.”
https://ifap.ed.gov/DefaultManagement/guide/attachments/CDRGuideCh2Pt4CDREffects.pdf. 02 July 2014.

Article Dean Dorton

This is the first in a two-part series of emails that will provide an overview of the rise of student loan debt. Many students have the opportunity to attend college, however, many are not so fortunate to leave college as debt free as they came in. “19 percent of US households had student loan debt as of 2010, and 68 percent of 2012 grads left school with more than just a diploma” (Wiersch). The Consumer Financial Protection Bureau (CFPB) recently estimated that there are nearly 40 million students with loans outstanding with a total at around $1.2 trillion.  This amounts to approximately $30,000 of debt on average per student.  More interestingly, the facts show that total student loan debt has quadrupled since 2003 and student loan debt now exceeds all other forms of consumer debt, even credit cards (Wiersch).  These facts are intriguing but lead to the question of what is causing the drastic increase in student loan debt over the past several years?

Like any controversial topic, there are countless explanations for the debt increase coupled by a million different individuals’ perspectives. This article examines a few possible reasons as to the sweeping increase in student loan debt.

Lack of Standards Governing Student Loans

The vast majority of student loans is currently using government money and made by colleges on an individual basis.  Because of this, rules and regulations are vague and there are few limits as to who can borrow and how much can be borrowed (Norris).  With that being said, many problems could possibly be alleviated if student loans had uniform, specific guidelines as to how much can be borrowed, what exactly the money must be used for, and when payments must begin being made across all colleges and universities.  According to a recent New York Times article, “Nearly half the student loans outstanding do not currently require any payment at all, either because the student is still in school or because the student has taken advantage of other ways to defer payment” (Norris).  Without having supporting criteria governing student loans, many students learn to work the system by taking advantage of the student loan offerings.

Recession Aftermath

Many automatically link the drastic increase in student loan debt to the rising cost of tuition.  On the other hand, experts tend to point to the aftermath of the recession as the principal driver in the increase in student debt (Wiersch).  Along with the recession came job cuts, increased unemployment, and rising costs (i.e. tuition).  This caused parents/families to be less likely to provide funding for college educations.

Please contact Crissy Fiscus at cfiscus@deandorton.com or Bryan Bulkley at bbulkley@deandorton.com if you would like to discuss further.

View Crissy Fiscus’ Bio