Students who have recently graduated from college deep in debt may think of themselves as charity cases, but that is not how the IRS sees them. An organization formed to assist individuals in paying off their student loans was denied 501(c)(3) tax-exempt status by the IRS (PLR 201718036, May 5, 2017). Exemption was denied because the organization furthered the private purposes and interests of individuals with student loans. Under the program, student loan debtors would register with the organization and upload copies of their student loan repayment statements. After the verification of the loan, the organization would provide the debtor with a registration number that could be shared with family, friends, or others interested in helping pay off the loan. When the organization receives donations, it coordinates with the debtor’s lending institution and electronically transfers donated funds to the lender for the debtor’s benefit. Any donated funds in excess of the loan balance will be used by the organization to aid other individuals with their student loans.
To qualify for exemption under Section 501(c)(3) an organization must serve a public interest rather than a private interest. The IRS analogized the loan repayment program to other organizations formed to benefit private individuals. One of those organizations was formed by parents of students who attended a private school for the purpose of providing bus transportation to school for those students. The IRS held that when individuals associate to provide a cooperative service for themselves they are serving private interests. The organization served a private interest because it enabled the parents to fulfill their individual responsibilities of transporting their children to school. Similarly, the organization formed to pay off student loans serves the private interests of the debtors. By allowing donors to select the beneficiaries of their donations, the organization provides a means for individuals to fulfill their loan repayment responsibilities. This is a private interest, rather than a public interest required for tax exemption. Since this loan repayment program was the organization’s sole activity, the organization did not qualify for tax exemption under Section 501(c)(3).
In some cases, assisting those with significant student loan debt could qualify as a charitable purpose. Those desiring to start such a program or organization would be well-advised to seek the advice of experienced legal counsel.
This article is provided for general information and is not intended to be legal advice for any specific situation. If you are in need of specific advice or legal representation, please do not hesitate to contact us.
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