Pa. Student Lender Pays IRS $12 Million

Wednesday, 07 Dec 2011 04:20 AM

By Sandy Fitzgerald

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Pennsylvania’s state-run student loan provider, the Pennsylvania Higher Education Assistance Agency (PHEAA) will pay more than $12 million to end an IRS investigation over tax law violations, disclosing the settlement in its recent quarterly report.
 
“Once again, PHEAA receives failing grades for fiscal oversight and common sense,” Eric Epstein, founder of the government reform advocacy group Rock the Capitol, told the Pittsburgh Tribune Review. “It is hard to imagine how this settlement makes college education more accessible to students.”
 
PHEAA, created in 1963 by the General Assembly, has been targeted in recent years for lavish travel spending, leading to the firing of president Michael Hershock in 2009, paying the former executive $200,000 to settle his wrongful termination suit.
 
The agency’s IRS woes began in 2008, when the government started investigating $150 million in tax-exempt bonds. Last December, the agency set aside $3 million to prepare for a fine, but this past July, the IRS informed PHEAA that the investigation was expanded to include all the agency’s $205.3 million in bonds.
 
The IRS probe revolved around federal laws preventing nonprofits from making money from their tax-exempt status by selling bonds. According to federal tax laws, the organization can charge students an interest rate only 2 percent higher what it pays bondholders, so if it sold bonds with a 2 percent return, it couldn’t charge more than 4 percent interest on student loans financed by the bonds.

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