Companies have a new incentive to help their employees pay down their student debt.
The incentive—a new tax break—is thanks to a less-highlighted provision in the CARES Act, which also temporarily pauses payments and interest on most federal student loans as part of the government’s efforts to ease the financial chaos caused by the coronavirus.
Employers can now pay up to $5,250 toward an employee’s student loans tax-free through the end of the year. Traditionally, these payments are treated as wages, but until December 31, 2020, these payments are excluded from income and payroll taxes – benefitting both the employer and those receiving the repayment assistance.
Scott Thompson, who runs a company that manages these programs, says he has no doubt this change will accelerate adoption of loan repayment assistance programs by employers, despite the economic impacts of COVID-19.
“While we certainly are dealing with a growing number of economic uncertainties as a result of the virus, we are expecting the percentage [of participating companies] to increase dramatically over the course of the second half of this year and next,” Thompson, CEO of Tuition.io, says.
Thompson points out that industries that are on the frontlines of dealing with the crisis, such as healthcare, are looking to fortify benefits for employees by adding student loan repayment. He is seeing a growing number of clients who are working to launch new student loan benefits later this quarter and early in the second half of the year.
Although the tax exemption is through the end of this year, Thompson says he is confident it will get adopted as a permanent change to the IRS tax code.
How Employer Student Loan Assistance Works
Approximately 8% of employers currently offer student loan payment benefit, which has doubled from 4% in 2018, according to Society for Human Resource Management.
With outstanding U.S. student debt growing daily and totaling roughly $1.7 trillion, companies offer loan repayment assistance to attract and retain college-educated employers.
“It is clear that we have reached a tipping point and student loans are having secondary impacts on many professionals,” says a spokesperson for accounting firm PwC.
PwC has paid more than $37 million toward student loan debt as a result of their program, one of the first of its kind. The benefit pays $1,200 a year for up to six years to help associates and senior associates pay down their student loans.
Estée Lauder has nearly 1,000 full-time employees registered for its student loan assistance program. The company contributes $100 towards eligible employees’ student loans every month, with a $10,000 lifetime maximum contribution, according to a spokesperson for the company.
Chegg, Fidelity Investments, Penguin Random House and Hulu are some of other companies that offer this benefit.
What You Should Know If Your Employer Repays Your Student Loans
Any amount paid by the employer toward interest on the student loans is not eligible for a deduction on your federal taxes. (Borrowers can subtract up to $2,500 in interest paid on student loans from their taxable income.)
“Employers can work around this restriction by targeting their payments to apply just to principal,” says Mark Kantrowitz, Publisher at Savingforcollege.com. “The borrower's payments will then cover the interest and still qualify for the student loan interest deduction.”
Prior to the CARES Act, any money received toward student loans counted as income for the employee. That means you’d normally pay taxes on the amount, and if you had federal student loans in an income-based repayment plan, your monthly payment could increase due to the resulting higher income. Yet for the rest of 2020 (unless the provision is extended) repayment assistance doesn’t count as taxable income, and so neither of those will happen.
How Much (and Who) Do Student Loan Employee Benefit Programs Help?
Even though the temporary tax-law change helps some borrowers, it has critics who say the policy is regressive.
Adam Looney, a senior fellow of economic studies at the Urban-Brookings Tax Policy Center, points out that this benefit only helps borrowers who are still employed and who work at companies that offer generous benefits.
He estimates that borrowers in the bottom 40% of the income distribution, who earn less than roughly $42,000 get about 5% of the tax benefit. Those with student loans who are in the top 20% of the income distribution will get nearly half the total benefits.
"Rather than providing relief to distressed borrowers," he writes, "the provision instead showers tax cuts on high-income workers with good jobs."
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