THE SHORT ANSWER
Colleges and universities invest bond proceeds by matching each fund's investment to its draw schedule and horizon, then working inside the private use, conduit yield and arbitrage rules that attach to the sector's financings. Construction funds carry typical horizons of 12 to 36 months under GFOA's ranges, and the product set spans GICs, full-flex repos, structured Treasury portfolios and SLGS.
A college or university invests bond proceeds by matching each fund's investment to its draw schedule and horizon and by keeping the funds inside the arbitrage rules that attach to the issue.
The sector's financing structures bring private use tests and conduit issuer rules into play, and this guide covers those structures, the funds and horizons they create, the products issuers evaluate, the sector's compliance rules and mGIC's representative transactions, alongside mGIC's other sector guides.
What financing structures do colleges and universities use?
College and university capital programs can be financed by the institution on its own account as the issuer or through a conduit financing, which the MSRB glossary describes as a structure in which a governmental issuer issues bonds to finance a project used mainly by a third party, the conduit borrower, who is liable for making debt service payments on the bonds.
MSRB's glossary lists industrial development bonds, multifamily housing revenue bonds and qualified 501(c)(3) bonds among common conduit financing types.
Section 141(e) of the Internal Revenue Code lets a private activity bond remain tax-exempt when it is a qualified bond, a list that includes qualified student loan bonds and qualified 501(c)(3) bonds alongside exempt facility, mortgage, veterans' mortgage, small issue and redevelopment bonds, as long as the issue also meets the applicable volume cap under section 146 and the requirements of section 147.
IRS Publication 4078 notes that qualified private activity bonds generally must use 95 percent or more of net proceeds for the qualified purpose.
The private activity bond guide covers the qualified categories and their tests, and mGIC's conduit issuer sector page covers the issuer side of these structures.
Which funds hold campus bond proceeds, and what horizons do they carry?
A campus issue uses the standard fund types, which include a construction or project fund, a capitalized interest fund, debt service accounts and, on a refunding, an escrow, and GFOA lists typical horizons for them that run from about six months for an interest account to 36 months for a construction fund, with the debt service reserve fund listed as long-term.
The federal arbitrage rules attach to gross proceeds, which Treasury Regulation §1.148-1(b) defines as all proceeds plus all replacement proceeds of an issue.
Within gross proceeds, sale proceeds are the amounts actually or constructively received from selling the issue, including amounts used to pay the underwriters' discount and accrued interest other than pre-issuance accrued interest, and investment proceeds are the amounts received from investing proceeds.
| Fund | Typical investment horizon (GFOA) |
|---|---|
| Construction or project fund | 12-36 months |
| Capitalized interest fund | 6-18 months |
| Interest account | Usually 6 months |
| Principal account | Usually 12 months |
| Refunding escrow | Depends on the redemption date |
| Debt service reserve fund | Long-term |
GFOA presents these figures as typical ranges rather than rules, notes that expectations vary, and directs issuers to their advisory team and investment policy.
A capitalized interest fund holds bond proceeds set aside to pay interest for a specified period, a use the MSRB glossary describes as common during construction of a revenue-producing project, and GFOA lists its typical horizon at 6 to 18 months against 12 to 36 months for the construction fund in the same table.
Campus schedules add their own texture when work on residence halls and academic buildings is planned around the academic year.
Debt service accounts carry a definition of their own: Treasury Regulation §1.148-1(b) treats a fund as a bona fide debt service fund where it is used mainly to match revenues with principal and interest within each bond year and is depleted at least once each bond year, apart from a reasonable carryover not exceeding the greater of the fund's prior-year earnings or one-twelfth of the prior year's principal and interest.
How a spending plan gets built from the draws is the subject of the draw schedule guide.
How do reinvestment products map to campus draw schedules?
The reinvestment products issuers evaluate for campus proceeds come in three families, guaranteed investment contracts, full-flex repurchase agreements and structured portfolios of U.S. Treasury securities, plus Treasury's State and Local Government Series (SLGS) securities for funds that are an eligible source.
Guaranteed investment contracts and full-flex repurchase agreements are contracts with a provider, and mGIC's GIC and full-flex repo guides cover the structures, including how withdrawals work.
Structured Treasury portfolios are owned securities rather than provider contracts, and mGIC evaluates them with a money-market allocation for faster-than-expected spend-down, which the Treasury portfolio guide describes.
31 CFR §344.1 limits SLGS purchases to an eligible source of funds, a term that mainly covers gross proceeds of tax-advantaged bonds, amounts held with such proceeds in refunding or defeasance escrows, parity reserve funds or commingled funds, and other yield-restricted amounts.
Whether a particular campus fund is an eligible source is a question for bond counsel, and the SLGS guide covers the subscription mechanics.
mGIC's ordering of priorities for any of these structures is safety first, then liquidity, then yield, a sequence explained in the priorities guide, and how provider contracts are competitively bid is covered in the bidding guides.
What sector-specific compliance rules apply to campus issues?
The compliance rules that attach to campus financings are the private activity bond tests in section 141 of the Internal Revenue Code, which decide whether an issue is a private activity bond, together with the conduit loan yield limits that IRS Publication 5005 describes for conduit structures.
Section 141(b) treats the private business use test as met when more than 10 percent of an issue's proceeds are to be used for private business use, applies the same 10 percent threshold to the private security or payment test, and sets a 5 percent threshold for private business use that is unrelated or disproportionate to the governmental use.
| Test | Threshold | Where the rule is |
|---|---|---|
| Private business use test | More than 10% of proceeds | 26 U.S.C. §141(b)(1)-(3) |
| Private security or payment test | Same 10% threshold | 26 U.S.C. §141(b)(1)-(3) |
| Unrelated or disproportionate private business use | 5% | 26 U.S.C. §141(b)(1)-(3) |
Private business use means use in a trade or business by a nongovernmental person, and use as a member of the general public does not count under section 141(b)(6)(A).
Campus facilities raise these questions across facility types, because residence halls, dining, bookstores, parking and research space can all be operated by private businesses.
If the tests are met, the issue is a private activity bond, and it can still be tax-exempt only as a qualified bond meeting the volume cap and section 147 requirements described above.
IRS Publication 4078 notes that arbitrage rules apply to private activity bonds as well, with some differences.
On conduit issues, IRS Publication 5005 notes that fees the conduit issuer charges can raise the effective yield on the conduit loan, and because the loan is a purpose investment, section 148 generally limits purpose investment yield to the bond yield plus a permitted spread, which the conduit issuer must keep the loan yield within.
The general yield restriction and rebate machinery behind those limits is covered in mGIC's arbitrage guides, and final determinations on any of these questions belong to bond counsel and tax counsel.
Which representative transactions involve higher education?
mGIC's representative transactions include the OSU Village F student housing project, part of a record of more than $60 billion in bond proceeds invested and swap notional executed across more than 1,000 transactions for issuers in more than 40 states.
The case studies hub lists the representative transactions by name, including the OSU Village F student housing project.
As an independent municipal advisor, mGIC sells none of the products it evaluates and does not act as principal, and its fee is paid by the winning provider rather than the issuer, at or below the safe-harbor maximum in the Treasury arbitrage regulations and disclosed.
To talk to mGIC about a free, no-obligation reinvestment review of a campus fund or about Bidding Agent services for an upcoming issue, visit the contact page.
Final legal and tax conclusions on anything described here belong to bond counsel and tax counsel.
Frequently asked questions
Do the arbitrage rules apply to qualified 501(c)(3) bonds?
IRS Publication 4078 notes that arbitrage rules apply to private activity bonds as well, with some differences. The publication also notes that qualified bonds generally must use 95 percent or more of net proceeds for the qualified purpose, so conduit issues for campus projects carry use and arbitrage constraints alongside the section 141 tests.
Who is liable for debt service on bonds issued for a nonprofit college?
The conduit borrower. MSRB's glossary states that in a conduit financing the conduit borrower is liable for making debt service payments on the bonds, and it lists qualified 501(c)(3) bonds among common conduit financing types.
What happens when campus space is used by a private business?
Use in a trade or business by a nongovernmental person counts toward the private business use test in section 141(b), which is met when more than 10 percent of proceeds are used for private business use, with the same 10 percent threshold for the private security or payment test and a 5 percent threshold for unrelated or disproportionate use. Use as a member of the general public does not count, and whether a specific use counts is a determination for bond counsel.
Do conduit issuer fees affect the bonds' tax status?
IRS Publication 5005 notes that fees charged by the conduit issuer can raise the effective yield on the conduit loan. Because the loan is a purpose investment, section 148 generally limits purpose investment yield to the bond yield plus a permitted spread, so the conduit issuer must keep the loan yield within that spread.
Which mGIC representative transaction involved student housing?
OSU Village F student housing is the higher education entry in mGIC's representative transactions, named alongside projects for transportation, public power, aviation and water issuers. The case studies page lists the representative transactions by name.
Sources
- MSRB Glossary of Municipal Securities Terms, 3rd ed. (Aug. 2013)
- 26 U.S. Code § 141, Private activity bonds
- IRS Publication 4078, Tax-Exempt Private Activity Bonds (Rev. 1-2026)
- IRS Publication 5005, Your Responsibilities as a Conduit Issuer (Rev. 9-2019)
- GFOA, Investment and Management of Bond Proceeds (approved Mar. 4, 2022)
- 26 CFR 1.148-1, Definitions and elections (eCFR)
- eCFR 31 CFR 344.1, SLGS eligible source of funds
This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.
