Kyle McEntee (Law School Transparency), Scholarship Or Loan In Disguise? Law School Policy Has Experts Asking Questions:
For the upcoming school year, Cal Western will award the “Admissions Scholarship” to students as an apparent alternative to conditional scholarships. ... According to the award letter, the Admissions Scholarship is a one-year award that covers a percentage of tuition. The student will receive an additional award in the second and/or third year commensurate with the student’s class standing. However, if the student transfers from Cal Western at any time, the student must repay “the total value of the scholarship awarded up to that point . . . in full within 30 days.”
|Rank of eligible students based on only first year or second year GPA
||Scholarship award for only second year or third year, as applicable
||100% tuition coverage
||70% tuition coverage
||40% tuition coverage
||10% tuition coverage
Jerry Organ, Bakken Professor of Law at the University of St. Thomas School of Law (Minnesota), has studied law school scholarships extensively. He could not find any references to similar policies. “I do recall either reading about or having a conversation with someone a few years back about the possibility of this approach to discouraging transfers. I remember at the time thinking it was problematic, so I am surprised to see it being utilized.”
A student who receives an award for 100% of tuition for the upcoming academic year would pay the school an additional $56,080 more or less immediately if they decide to transfer after the first year under the terms of the award. ...
While Cal Western calls their award a scholarship, it may be a misclassified loan that the school will forgive if the student does not transfer. According to Jennifer Bird-Pollan, the Robert G. Lawson Professor of Law at University of Kentucky J. David Rosenberg College of Law, “if it were a forgivable loan, there would be tax liability associated with the forgiveness.” Canceled debt under the Internal Revenue Code triggers an income event.
The initial question is whether it is actually a scholarship or a loan disguised as a scholarship. ...
Professor Bird-Pollan [says] that the award looks more like a loan than a scholarship from the start. “I think if the government wanted to make the argument, they would have a very compelling case. But given that there are government programs that have similar features, my guess is they’re not going to make that argument.”
She added if she were a judge hearing the argument that this was a loan, she’d say, “Wow, that sounds pretty convincing.” But as a practical matter, “the government doesn’t pursue every tax law that we know ought to be enforced.” She gave the example of “politicking from the pulpit” as a tax law that the “government is totally not interested in enforcing.”
According to Professor Bird-Pollan, the best legal argument for the school is that scholarship money is used to repay the loan. Under this framing, the student would have received a loan, declined to transfer, and subsequently received a scholarship to extinguish the loan. The scholarship would not be subject to income tax under Section 117 of the IRC and the debt would not have been canceled. This may alleviate student fears about taxable income from the award.
Still, Professor Bird-Pollan does not feel good about the program. “It’s kind of skeezy. [The transfer stipulation] feels very underhanded. But does that change the tax analysis?” She didn’t think it changed the outcome, but did say it may change the analysis, in part because it’s coercive. ...
On August 1, 2020, Sean M. Scott will begin her term as president and dean of the law school. According to Ms. Jordan, the school’s spokesperson, the incoming dean “has begun a review of existing policies and prefers we not comment until after she has had a chance to complete her review.”