While Harbaugh’s split-dollar loan is “interest-free,” it is not “cost-free.” Each year, Harbaugh must pay tax on imputed income equal to the interest that Michigan would have charged him if the loan had borne interest at the minimum IRS rate vs interest free. The arrangement could be paired with a separate retention bonus agreement that would pay Howard an additional bonus each year he had remained with the school, in an amount sufficient to cover both the interest due on the loan and the tax on the bonus—so that the program would truly be cost-free to Howard for as long as he remained with the University.

What's worse: Harbaugh wouldn’t know the full extent of his annual imputed income until all seven advances had been made on the loan—because the imputed interest rate that is applied to each advance is determined by the rate in effect at the time the advance is made.

Had Michigan loaned Harbaugh all $14 million up front in August 2016 (rather than advancing $2 million each year for 7 years), they could have locked in a 1.9% interest rate on the entire amount for the rest of Harbaugh’s life. (Had they gone this route, to be consistent with the other terms of the existing deal, Michigan could have clawed back a pro rata portion of the $14 million in the event that Harbaugh left before year seven.)

Instead, the rates in effect for installments two through 5 were 2.26%, 2.64%, 3.31% and 2.08%, respectively, which amounts to almost $54,000 of additional imputed income that Harbaugh will now have to pay tax on each year (for the rest of his life) over and above the amount he would have recognized had the entire $14 million been advanced up front.

In the interest rate environment of August 2016 vs April of 2020, if they would have advanced Howard all seven premiums up front, they could have locked in an interest rate of only 1.44% for the rest of Howard’s life.