Student loans are in the news again. Alan Collinge from StudentLoanJustice.org has a track in The Hill titled “Republicans can seize a privileged opportunity to reform student loans”. Well, hopefully this will work, as the IRS canceled an intriguing self-help initiative with Decision by private letter 201718036. The decision is a denial of 501 (c) (3) status to an anonymous organization. I haven’t had a chance to get into the editorial staff so I’ll call the NATFY group. I will explain later.
Repay this loan
Here is the agreement with NATFY. There are some besieged millennials who feel crushed by student debt. You want to help him. But how do you know he really has student debt? And if you gave him money to help pay off student debt, what will stop him from wasting money on avocado toast and massaged kale ? This is where NATFY (No Avocado Toast For You) comes in. Here is the process they put in place.
Recipients register on your website to request help. Recipients upload copies of their federal student loan repayment statements so that your staff can check the validity of the loans through the lenders before the funds are distributed. When validating federal student loans, recipients are given a registration number that they can share with family, friends, and employers, or through social media by requesting donations to their profile through our website. Upon receipt of funds, you coordinate with the lending institution to apply funds to the recipient’s federal student loan accounts until the outstanding amount of each loan is repaid (if applicable). If any surplus funds remain, they will be transferred to the general fund for distribution. in a manner determined by the board of directors to other recipient profiles. You transfer the collected funds directly to loan accounts held by registered and controlled beneficiaries through your website.
It’s good. You can ask your child to take out the maximum loan amount and repay them with tax-deductible dollars. Too bad it doesn’t work.
Why it does not work
The ruling explains in detail why it doesn’t work.
You are not exempt under section 501 (c) (3) of the Code because you are not being exploited exclusively for charitable or educational purposes; rather, you are being exploited for the private benefit of individuals. As a result, you fail the operational test described in Treas. Reg. Section 1.501 (c) (3) -1 (a) (1).
You are not described in Treas. Reg. Section 1.501 (c) (3) -1 (c) (1) because an insubstantial part of your activities is devoted to the non-exempt private objective of providing a funding mechanism for individuals to raise funds to pay their student loan debt. People who register their loans on your website receive a substantial private benefit, which allows your program to pursue a substantial non-exempt private purpose.
You are not as defined in Treas. Reg. Section 1.501 (c) (3) -1 (d) (1) (ii) because you are operating for the private interests of individuals. Much like the Old Dominion organization, you are acting for the benefit of private parties, which is a substantial non-exempt objective and excludes you from exemption under section 501 (c) (3) of the Code.
Comments from activists
I asked Alan Collinge to help me identify organizations like NKFY, but he didn’t make good suggestions. He doesn’t think highly of NKFY but thinks the IRS should have granted the exemption.
I’m not a big fan of organizations like this. But having said that, I would strongly disagree with the decision. I would call it charity work. According to their reasoning, if you collected donations to pay the medical bills of the poor, or to give free food to people, or for other purposes, it would not be allowed. I don’t see any difference between paying back people’s loans for them or any other kind of help. Yet these types of organizations don’t really solve problems. My gut told me they just wanted to build a huge pot of money so they could get the most out of it and pay off their friends and family loans first …
Since the organization has allowed donors to determine what student debt has been repaid, I have to side with the IRS on this one. Paul Streckfus made the decision in Tax Journal EO 2017-99. I couldn’t find any other cover.
On avocado toast
In order to add a fun note, I tried to think of things that millennials might be wasting money on. I led them by my son, a recent college graduate with a degree in creative writing from the Pratt Institute. He’s my main go-to guy for everything Millennial and hipster-related. He rejected my suggestions and told me about the raging avocado toast controversy. Apparently this goes back to a comment by Tim gurner, a 35-year-old real estate multimillionaire, who said in an interview:
When I was trying to buy my first home, I didn’t buy crushed avocado at $ 19 and four coffees at $ 4 a piece
There was a lot of reaction on twitter with tweets such as:
I don’t drink coffee or eat avocado toast. I’ll take a house please.
I made a fortune flipping avocado toast. I buy dilapidated avocado toast or avocado toast seized for back taxes and then fix it.
I must say that I appreciate the frugality. Someone from a fairly prosperous family told me the story of a reprimand from his father for ordering an average coke from a fast food restaurant that had free refills. But I had great sympathy for the old man’s point of view. And I never understood the people who came to work with take-out coffee, when we had free coffee in the office. Once I did the exercise of writing down every penny I spent for about a month and found that eating out absorbed a bit and cut back a bit. Still, the backlash suffered by Tim Gurner is amusing.