Student loans are in the news again. Alan Collinge of StudentLoanJustice.org has a piece in The Hill titled “Republicans can seize on a prime opportunity to reform student loans”. Well, I hope that works out because the IRS has nixed an intriguing self-help initiative with Private Letter Ruling 201718036. The ruling is a denial of 501(c)(3) status to an unnamed organization. I did not have any luck penetrating the redaction so I will call the group NATFY. I’ll explain later.
Pay Down That Loan
So here is the deal with NATFY. There is some beleaguered millennial feeling crushed by student debt. You want to help him out. But how do you know he really has student debt? And if you gave him some money to help pay down the student debt what is to prevent him from squandering the money on avocado toast and massaged kale? That where NATFY (No Avocado Toast For You) comes in. Here is the process they put into place.
Recipients register with your website to request assistance. Recipients upload copies of their federal student loan repayment statements in order for your staff to verify the validity of the loans through the lenders prior to funds being distributed.Upon validation of the federal student loans, recipients are given a registration number which they can share with family, friends, and employers, or via social media asking for 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 up to the outstanding amount payoff of each loan (if applicable).If excess funds remain, it will be transferred to the general fund for distribution in a manner determined by the board of directors to other recipient profiles. You transfer collected funds directly to the loan accounts held by recipients registered and vetted through your website.
This is great. You can have your kid take out the maximum amount of loans and pay them off with tax-deductible dollars. Too bad it doesn’t work.
Why It Does Not Work
The ruling explains in some detail why it does not work.
You are not exempt under Section 501(c)(3) of the Code because you are not operated exclusively for charitable or educational purposes; rather, you are operated for the private benefit of individuals. Accordingly, 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 more than an insubstantial part of your activities are devoted to the non-exempt private purpose of providing a funding mechanism for individuals to raise funds to pay their student loan debt. Individuals who register their loans on your website receive a substantial private benefit causing your program to further 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 organization in Old Dominion, you are operating for the benefit of private parties, which constitutes a substantial non-exempt purpose and precludes you from exemption under Section 501(c)(3) of the Code.
Activist Comments
I asked Alan Collinge for help in identifying organizations like NATFY, but he did not come up with any good suggestions. He does not think highly of NATFY but thought that 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 ruling. I would characterize this as a charity. By their reasoning, if you collected donations to pay poor people’s medical bills, or give people free food, or other purpose, this would not be allowable. I see zero difference between paying off peoples loans for them or other type of aid. Still and all, these types of organizations really don’t solve the problems. My gut tells me that they just wanted to build a huge pot of money so they could suck off the top, and pay off their friends and family’s loans first…
Given that the organization allowed donors to direct which student’s debt was paid off, I have to side with the IRS on this one. Paul Streckfus ran the ruling in EO Tax Journal 2017-99. I didn’t find any other coverage.
On Avocado Toast
In order to add an amusing note, I tried to think of things millennials might squander money on. I ran them by my son, a recent college graduate with a degree in Creative Writing from Pratt Institute. He is my primary go-to guy on all matters millenial and hipster. He nixed my suggestions and told me about the avocado toast controversy that is raging. Apparently it traces back to a comment by Tim Gurner, a 35-year-old real estate multi-millionaire, who in an interview was quoted as saying:
When I was trying to buy my first home, I wasn’t buying smashed avocado for $19 and four coffees at $4 each
There was quite a backlash on Twitter with tweets such as:
I don’t drink coffee or eat avocado toast. I’ll take one house please.
I made my fortune flipping avocado toast. I buy rundown avocado toast or avocado toast seized for back taxes and then fix it up.
I have to say that I do have an appreciation for frugality. Somebody from a pretty prosperous family told me a story about being scolded by his father for ordering a medium Coke in a fast food restaurant that had free refills. But I had a lot of sympathy for the old man’s perspective. And I never understood people who came to work with take-out coffee, when we had free coffee in the office. I once went through the exercise of writing down every penny I spent for about a month and did find that eating out was absorbing quite a bit and trimmed back a little. Nonetheless, the backlash Tim Gurner experienced is amusing.