What Is a Qualified School Construction Bond?

A construction bond is a debt instrument created by the U.S. government in order to finance construction projects. Qualified school construction bonds (QSCBs) in particular provide funds to allow school districts to build new schools as well as to renovate and rehabilitate existing schools. The funds are generated using a combination of federal funding and funds generated by private lending institutions. In return, private lenders receive federal tax credits, allowing school districts to borrow while paying little to no interest.

School Construction and Qualified School Construction Bonds

When a public school district wants to build a new school or renovate an existing one, it has to raise at least a few thousand dollars. Usually, this means going to a private lender. While the private lender will be able to provide necessary funds, it will also charge interest, which the school district would have to cover using its own funding. The cost of interest payments puts a drain on the district's budget and limits its ability to spend money on other programs. Because of this, many school districts are reluctant to embark on major construction projects.

The qualified school construction bonds were designed to address those issues. Originally launched in 2009 as part of the American Recovery and Reinvestment Act, they were part of the broader federal effort to encourage construction projects and increase jobs in the process.

How Qualified School Construction Bonds Are Funded

Because many lenders have been reluctant to lend in the wake of the collapse of the housing market, the act provided partial federal funding for qualified school construction bonds. The funding is divided up among all U.S states, territories and federally recognized Indian tribes. The funding is then divided up on the local level based on the size of the school districts and the state of their infrastructure. In many states, the schools have to apply for whatever funding isn't divided up. The funding formula is readjusted every year.

The rest of the funding is provided by private lenders. They are usually local banks and lending institutions that (in many cases) have already done business with the school districts. They receive federal tax credits for every month. This allows them to charge little to no interest, saving the school districts quite a bit of money. The tax credit rate is set by the IRS based on the market conditions on each given month, so the value of the tax credits changes over time.

Using Qualified School Construction Bonds

Qualified school bonds are open to all public school districts within the United States territories. The district decides how the funds are allocated. That said, the funding generated through school construction bonds must be used in one of the following ways:

  • Land acquisition--The bonds can be used to buy land necessary for the construction of a new public school.
  • New construction--The bonds can be used to build a new public school building. This can include the main building and/or other buildings on the school's campus.
  • Renovation--The bonds can be used to renovate existing buildings in order to modernize them, make them more energy-efficient, optimize space, add new facilities and otherwise improve the students' educational experience.
  • Rehabilitation--The bonds can be used to repair a school that has fallen into such disrepair that just being in the building is dangerous to the students' health. This can include removing hazardous materials, repairing utilities, replacing deteriorating building fixtures, and so on.
  • Equipment--Finally, the bonds can be used to fund the purchase of equipment that can benefit the students' education. This can include everything from computers for every classroom to new gym equipment. The equipment must be used primarily within the school building itself.