Inside Higher Ed reports that both the House and Senate versions of the stimulus bill would amend § 265(b)(3) to provide more tax-exempt financing for capital projects at small colleges (Stimulating Boon for Small Colleges, by Doug Lederman):

[A] comparatively little noticed tax provision in both the Senate and House [stimulus] measures could make it significantly easier for small private colleges to raise money to build or renovate facilities, buy equipment, or refinance debt. It would temporarily alter a change made in the 1986 tax reform law that essentially closed one avenue that private nonprofit entities had previously used to finance construction and other projects — a change that state bonding authorities have been fighting to undo for two decades. …

Before 1986, it was common for small colleges, nonprofit hospitals and municipalities, typically working through the facilities financing agencies in their states, to borrow money for facilities and other needs from local banks. The banks — in most cases financial institutions that worked closely with the colleges in their areas and had an incentive to help them — would borrow money from larger financial institutions to make the tax-exempt loans to the colleges or hospitals; the banks were able to deduct from their federal tax bills not only the interest payments they received from the nonprofit borrowers, but also the interest they themselves paid on the money they had borrowed. …

But as part of 1986’s wide-ranging reform of the federal tax code, members of Congress, viewing the deduction of both kinds of of interest as a form of “double dipping,” generally barred banks from deducting interest payments or carrying costs on money they borrowed. There was one exception: Banks could deduct up to 80% of such costs when the loans they made were to an entity that issued less than $10 million in bonds in a year. What that meant was that the state facilities authorities, every one of which issues more than $10 million in bonds to its various constituents, essentially lost access to one common way of raising money for colleges and other entities.

Without that route, colleges and other nonprofit entities have had to depend on the public markets (if their offerings are large enough or attractive enough to appeal to investors), with the attendant insurance underwriting costs, or to pay significantly more to cover the interest costs of the banks they were borrowing from. And with the recent tightening of the credit markets and the availability of loan funds generally, such funds have in many cases become either prohibitively expensive or altogether unavailable for less-wealthy institutions. …

Both the Senate (see page 71 of the bill) and House versions of the stimulus legislation would make two changes in the federal tax code that could greatly increase the availability of bank funds to colleges for building projects. In combination, the annual dollar limit on borrowing would rise to $30 million from $10 million, but more importantly, the dollar limit would apply not to the issuer of the bonds but to the borrower itself. In other words, where banks now cannot deduct interest on funds they borrow to lend money to any state agency that itself issues more than $10 million in bonds a year, they would under this legislation be able to deduct the interest on any funds that flow as long as the ultimate recipient of the money — an individual college, for instance — does not borrow more than $30 million in a year.