HOTMA Final Rule – Educational Assistance

The Department of Housing & Urban Development (HUD) has released a Final Rule implementing the Housing Opportunity Through Modernization Act of 2016 (HOTMA). This final rule was published in the Federal Register on February 14, 2023. With the exception of changes relating to Non-Public Housing Over Income families (which take effect on March 16, 2023), this final rule takes effect on January 1, 2024.

 The Housing Opportunity Through Modernization Act (HOTMA) was signed into law on July 29, 2016, amending many aspects of Multifamily Housing programs (as well as programs administered through the Offices of Public and Indian Housing and Community Planning and Development). HOTMA was intended to streamline processes and reduce burdens on housing providers. On September 17, 2019, HUD issued a proposed rule to update its regulations according to HOTMA’s statutory mandate. The final rule, published on January 9, 2023, considers public comment received on the proposed rule and provides additional guidance for implementing Sections 102, 103, and 104 of HOTMA.

Which Programs will be Affected by the Final Rule?

 The Section 8 PBRA (including RAD), Section 202/811 PRAC, 202/8, 202/162 PAC, Senior Preservation Rental Assistance Contract (SPRAC), and Section 811 Project Rental Assistance (811 PRA) programs will see changes due to HOTMA.

This is the fourth in a series of articles I am writing on the sweeping changes that will be made to HUD affordable housing programs. This article will focus on the revised rules regarding student financial assistance.

HOTMA mandates the exclusion of certain earned income for full-time dependent students and grant-in-aid or scholarship amounts for such students. The HUD proposed rule regarding HOTMA implementation was unclear regarding what constitutes financial assistance, so HUD is hoping that the final rule achieves clarity. One thing HUD has concluded is that it cannot codify through rulemaking the Section 8 student financial assistance limitations provided annually as part of HUD appropriations. While these limitations will continue to apply to funds from any year in which the limitations are enacted in an appropriations act, it will be a year-to-year determination as to what portion – if any – of educational assistance will be counted as income for students receiving Section 8 assistance.

The final rule is clear that any income specifically excluded by the Higher Education Act (HEA) is excluded income for all HUD programs. The rule also excludes student financial assistance for tuition, books and supplies, room and board, and other fees required and charged to a student by an institution of higher education. Note the difference from the current rule where money for books, supplies, and room and board are not excluded.

The confusion with regard to educational assistance is the result of HUD appropriations bills which for more than a decade have included a provision making an exception to the HEA exclusion of all assistance provided to students – including assistance in excess of tuition and required fees and charges. For example, the FY2022 Appropriations Act states that “for purposes of determining the eligibility of a person to receive assistance under Section 8 of the United States Housing Act of 1937, any financial assistance (in excess of amounts received for tuition and any other required fees and charges) that an individual receives under the Higher Education Act of 1965, from private sources, or from an institution of higher education, shall be considered income to that individual, except for a person over the age of 23 with dependent children.” So, for any year that this language appears in HUD appropriations, it requires that certain assistance, including assistance under Title IV of the HEA, in excess of tuition and other required fees and charges, be included in income calculations for Section 8 students who are age 23 and under or without dependent children. HUD has interpreted this limitation as applying when the student is the head of household or spouse, but not when the student resides with parents in a Section 8 unit.

The result of all this is that for any funds from a year where HUD’s appropriations acts include Section 8 student financial assistance limitations similar to those in FY2022, those limitations will still apply with respect to Section 8 participants, even if the appropriations contradict the HEA. This requirement is going to create significant difficulty for owners and PHAs who are likely to be unaware of the provisions of any particular annual appropriations act. For this reason, HUD plans to issue guidance regarding how to treat student financial assistance in income calculations.

Adding to the complexity of this issue is the fact that student financial assistance can take a variety of forms and come from a variety of sources to both full and part-time students. For example, not all assistance provided to students is assistance covered by the HEA or through the Bureau of Indian Affairs. So, the final rule provides that student financial assistance means a grant or scholarship received from the federal government, a State, Tribal, or local government, a private foundation registered as a Section 501(c)(3) nonprofit, a business entity (such as a corporation, general partnership, limited liability company, limited partnership, joint venture, business trust, a public benefit corporation, or nonprofit entity), or an institution of higher education. A grant would include a qualified tuition payment, reduction, waiver, or reimbursement (i.e., amounts received as reimbursement for the student’s paid costs of tuition, books, and fees, etc.) by the educational institution, such as for an employee of the institution or an eligible family member of that employee. A grant would also include assistance provided by an employer as part of an employee educational assistance program or tuition reimbursement program. The final rule makes clear that assistance provided under the HEA or Bureau of Indian Affairs student assistance programs is automatically excluded.

The final rule clarifies that student financial assistance that is excluded from income must be for educational expenses and does not include payments obtained through work-study, money from friends or family, or funds that exceed the actual education expenses to the student. Amounts received under work study may still be excluded if provided under Title IV of the HEA or if the work-study is being performed by a dependent full-time student. Student loans are not considered student financial assistance.

In the final rule, amounts in excess of actual educational assistance will no longer be excluded from income – even for persons over age 23 with dependent children. This means that such income will now be counted for everyone – regardless of whether the household receives Section 8. In other words, this income will now be counted for non-Section 8 households (such as LIHTC). Keep in mind – all assistance under the HEA is excluded from income, regardless of whether those amounts exceed actual educational costs. This new rule is so cumbersome, examples are warranted.

Example #1

  • Assume a student received $26,000 in assistance, all of which was excluded under the HEA, and another $5,000 from a scholarship that is not excluded under the HEA.
  • If the student’s actual educational expenses were $25,000, the entire $26,000 in assistance excluded under the HEA would still be excluded from income.
  • However, the $5,000 from the other scholarship would not be considered student financial assistance because it is assistance in excess of actual covered costs and would not be excluded from income.

Example #2

  • Assume the same facts as example #1, but the assistance excluded due to the HEA is less than the student’s actual covered costs.
  • In this case, some or all of the other scholarships and grants would be excluded from income.

Bottom Line – clearly this is a complex and intricate rule. Since the rule does not go into effect until January 1, 2024, owners and managers should continue to exclude all educational assistance for any student other than students receiving Section 8 assistance. When Section 8 assistance is received unless the student is (1) a dependent of the household, or (2) over 23 with dependent children, the educational assistance in excess of tuition and mandatory fees should be counted as income. Hopefully, between now and 2024, HUD will publish an update to Handbook 4350.3 and provide additional clarity on this issue.