Six Common Misconceptions About the Student Rule

If students want to live in low-income units at your tax credit site, you must make sure you comply with the student rule. This rule says that, generally speaking, households composed entirely of full-time students aren’t eligible to occupy low-income units at any time during the compliance period.

This is because Congress didn’t want low-income tax credit housing to be a substitute for a dormitory or student housing. The General Explanation of the Tax Reform Act of 1986, the law which provided for the Low-Income Housing Tax Credit Program in Section 42 of the Internal Revenue Code, states “no dormitory . . . may be a qualified low income project.”

But many tax credit managers have mistaken beliefs about how the student rule applies. If you’re one of those managers, you may unwittingly put the owner’s tax credits at risk. We’ll discuss six common misconceptions about the student rule that may trip up tax credit managers.

Student Rule Basics

Generally, if all the members of a low-income household are full-time students, that household is ineligible to occupy a low-income unit—even if the household becomes ineligible after its initial certification. But a full-time student household doesn’t violate the student rule if one of the following five exceptions applies:

• Students are married and have filed a joint tax return;
• A student receives assistance under Title IV of the Social Security Act, also known as Temporary Assistance to Needy Families (TANF);
• A student is enrolled in a job training program receiving assistance under the Workforce Investment Act or under a similar federal, state, or local program;
• A student was previously under the care and placement responsibility of the state agency responsible for administering a plan under Title IV of the Social Security Act (Foster Care); or
• A student is a single parent with children, provided that the children are not dependents of another individual other than a parent. In other words, the household qualifies if either parent claims the children as dependents regardless of whether or not the parent claiming the dependents resides in the unit. For example, if the student-mother had her full-time student children living with her but they were dependents of their uncle, then they wouldn’t qualify.

Whether a student is full-time is determined by the educational organization, not by the owner or household member. A person is a “student” if she has been enrolled in an education organization for any part of five months of the calendar year or the 12 months following the effective date of the certification. The five months need not be consecutive or complete. Just one day of the month equals the whole month for student status purposes. For example, a student enrolled from Jan. 21 through May 12 has been enrolled for five months, according to IRS guidance.

SIX COMMON MISCONCEPTIONS

1. Households Eligible Under Rule at Initial Certification Automatically Stay Eligible

If a low-income household violates the student rule at any time during its occupancy, your site will fall into noncompliance. You may mistakenly believe otherwise because the tax credit law lets households that go over-income after move-in stay income-eligible. But this isn’t the case with the student rule.

Unlike income, there’s no grandfathering because the tenant was not a student when he moved in and later became one. It’s important to remember that it’s income that’s grandfathered, not student status. So if you are no longer required to do annual certifications, don’t forget to verify student status annually. For 100 percent LIHTC sites, once a household is income eligible, it’s always income eligible, but this doesn’t apply to student status.

2. Rule Applies Only to College Students

Don’t take only college students into account when determining whether renting to a household violates the student rule. The student rule applies to graduate schools and professional schools as well, including medical school and law school.

Example: John and Jim share a two-bedroom unit at your tax credit site. When initially certifying their household, you learn that John works full-time and Jim is a full-time college student. Because John isn’t a full-time student, the household is eligible under the student rule. A year later, John becomes a full-time law student, working only part-time. Because John and Jim are both full-time students, their household violates the student rule.

3. Rule Has Age Limit

The tax credit law doesn’t exempt full-time students over a certain age from the student rule. So a household of middle-aged or elderly residents who are all full-time students could also be ineligible under the rule.

The 8823 audit guide states that an educational organization includes elementary schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools. As long as a resident is at least 5 years old in kindergarten, she can qualify as a full-time student.

4. Rejecting Households that Violate Rule Is Illegal if Local Law Bans Discrimination Against Students

Although the federal Fair Housing Act doesn’t protect students against housing discrimination, some cities such as Madison, Wisc.; Ann Arbor, Mich.; and Austin, Texas; do include student status as a protected characteristic under local antidiscrimination laws. If your site is located in such a city, you might be afraid to turn away a household comprised of full-time students, in violation of the student rule, fearing you’ll be held liable for illegal discrimination.

But if you determine that a household isn’t eligible to occupy a low-income unit because it would violate the student rule, you shouldn’t be afraid to reject the household. Because accepting the household would violate federal law, you must reject the household. The rejection won’t violate local fair housing law, because the reason for your rejection is that the household doesn’t meet the tax credit program’s eligibility requirements.

Of course, if only some of a household’s members are full-time students, or if the household falls under an exception to the student rule, you’ll violate the local fair housing law if you reject the household. Because renting to households in these situations doesn’t violate the student rule, you don’t need to reject them to comply with the tax credit law.

5. Trade Schools Fall Under Rule’s ‘Job Training Exception’

Some managers think that if a household member is enrolled in a trade school, the household can’t violate the student rule. Under the “job training exception” to the student rule, a household comprised of full-time students won’t violate the rule if at least one household member is enrolled in a federal, state, or local job training program. But trade schools—such as hairdressing, computer, or carpentry schools—don’t count as job training programs.

6. SSI Falls Under Rule’s ‘Welfare Exception’

Some tax credit managers think they won’t violate the student rule if they rent to a low-income household that’s comprised of full-time students who get Supplemental Security Income (SSI). That’s because they mistakenly believe that SSI falls under the “welfare exception” to the student rule. Under this exception, it’s okay to rent to a full-time student household if one or more of its members is receiving assistance under Title IV of the Social Security Act.

However, Social Security benefits and SSI are not part of Title IV. They are authorized under Title XVI of the Act, so the exception doesn’t apply. In addition, work-study, Pell Grants, Medicaid, Medicare, HUD rental assistance, unemployment compensation, workers compensation, and disability benefits are not part of Title IV.