As student debt mounts nationally, with the $1.4 trillion in U.S. student loans now surpassing credit card debt, it’s critical to ensure New Mexico parents and students are equipped with the information and support they need to successfully manage this debt. A little-known mechanism – tax-exempt Qualified Student Loan Bonds (QSLBs) – ensures struggling New Mexico borrowers have access to the locally based support and counseling they need to manage their student loan debt and reverse the negative consequences of student loan delinquency and default.
But as congressional leaders tackle tax reform this fall, Qualified Student Loan Bonds could be on the chopping block. These bonds are among the types of municipal bonds at risk of losing tax-exempt status to broaden the tax base and make way for lower corporate and individual tax rates. That would take away an important vehicle for helping New Mexico families at a time when student loan debt is one of our nation’s most pressing concerns. Therefore, throughout the tax reform process, New Mexico’s congressional delegation must work to keep this important tool intact.
Defaulted borrowers are the most at-risk of all student loan borrowers – in New Mexico, more than eight out of 10 dropped out of school without finishing, usually in their first two years, and about the same proportion defaulted because they could not afford their monthly payments and failed to enroll in an affordable income-driven repayment program. A majority of these students in New Mexico are also from rural, at-risk, first generation, or otherwise underserved and disadvantaged populations. New Mexico Educational Assistance Foundation (NMEAF), the state’s nonprofit higher education finance organization, uses the proceeds of tax-exempt Qualified Student Loan Bonds to purchase these loans so that they can help these borrowers when they are most in need.
The federal government has established severe consequences for student loan delinquency and default. For example, borrowers who default on their federal student loans are subjected to significant additional fees, damaged credit history, garnishment of wages or Social Security benefits, the offset of federal tax refunds, and the loss of eligibility for federal financial assistance. However, a borrower may rehabilitate their loan by making nine on-time monthly payments. Once rehabilitation is complete, the loan is removed from defaulted status, the borrower is once again eligible for federal student loans and grants, and the default is removed from the borrower’s credit record.
Also, once the rehabilitation process has been completed, the loan may be sold to a lender or nonprofit organization such as NMEAF. QSLBs enable NMEAF to purchase the rehabilitated, previously defaulted loans of New Mexico borrowers and to provide hands-on local support and counseling to these vulnerable borrowers to help them successfully manage and repay their student loan debt. NMEAF reaches a great deal of struggling New Mexico borrowers; their most recent QSLB transaction benefited nearly 3,000 at-risk students.
Qualified Student Loan Bonds are important to New Mexico students since they allow NMEAF to provide these at-risk borrowers with the higher-touch servicing they need to stay on track. If lawmakers fail to preserve this tool, NMEAF will no longer be able purchase these loans and work closely with these borrowers and provide them the personalized service they need to succeed. As lawmakers approach the imminent task of revamping the tax code, they must preserve the tax exemption for Qualified Student Loan Bonds.
The New Mexico Educational Assistance Foundation helps New Mexico’s students and their families save, plan, prepare, and pay for post-secondary education by providing educational resources, community outreach, and low-cost private student loans.