Student debt repayment and the CARES Act: What to know
Employers can now help their employees pay down student debt faster and save a significant amount of money on student loan interest.
Much has been written about provisions in the CARES Act that support student loan borrowers. Particularly, the provision enabling student loan borrowers to pause payments and interest on their student debt for close to 6 months is recognized as an effective way to free up much-needed cash during this period of economic uncertainty.
What has largely been overlooked is part of the CARES Act that allows employers to make tax-free contributions directly to employee student loans. This allows employers to help their employees pay down student debt faster and save a significant amount of money on student loan interest over time. This feature was included in the stimulus package as a temporary form of legislation this readership likely knows a lot about: the Employer Participation in Repayment Act, otherwise known as EPRA.
Related: Student loans still worry borrowers in coronavirus crisis
Why is this relevant now and how does it help those most in need?
To understand its current relevance and importance requires brief historical context. In 1978, a law was passed allowing companies to pay for employees to go back to school and further their education, tax-free. This was done through Internal Revenue Code Section 127 and is generally referred to as “tuition reimbursement.” If this assistance were to be taxable, those who could not afford the additional income tax would be forced to opt out, so Congress made it tax-free. The reasoning was captured in the congressional explanation on the passage of the legislation:
“The tax law has required out-of-pocket tax payments for employer-provided educational assistance from those least able to pay, even though they receive only services, not an increased paycheck.”
Since 1978, much has changed. The cost of college tuition has risen by 1,120%. The number of companies increasing their educational requirements for jobs has jumped 68%. As a result, 7 in 10 individuals in the workforce have taken out student loans to cover educational costs in pursuit of career opportunity.
Yet Section 127 had not changed to reflect this new reality. Employers could still only reimburse employees tax-free for educational expenses currently being incurred. Meaning, if employees took it upon themselves to get the education required to get a job – and in doing so, took out student loans – then they were on their own to pay them back.
This is why more than 55% of all members of Congress (more than 300 in total), from both houses and both parties, co-sponsored EPRA. This bill would update the Section 127 tax-provision to include student loan repayment as a qualified form of educational assistance. Outside of Congress, a wide-ranging group of constituents, from the Society of Human Resource Management (SHRM), to the Association of Young Americans (AYA), to the U.S. Chamber of Commerce, similarly supported the bill.
Before this benefit was recently made tax-free, roughly 8% of employers chose to offer student loan repayment as a benefit. Many of them are our clients. I had the privilege of sharing the news with them over the past few weeks that this benefit is now tax-free – for them and their employees. This means they no longer need to withhold taxes for employees enrolled in the student loan repayment program, and their employees will see their take-home pay increase.
Instead of an employer-sponsored student loan payment of $100 a month costing the employee $30 a month, it is now free for employees to participate. This can have significant implications for those struggling to make ends meet month-to-month. As a point of reference, the additional $30/month in relief equates to $360 for the full year – that’s about one third of the amount of the federal government stimulus on its way to many Americans right now.
Some believe this benefit disproportionately helps those who “don’t need the help” or those with degrees who are able to afford their student loan payments on their own. This argument – that if you have a degree, you aren’t financially challenged due to your student debt – has been disproven in multiple studies. People with student loans put off significant life milestones such as owning a home, getting married and saving for retirement.
Furthermore, student loans aren’t exclusive to those with college degrees. In fact, a disproportionate number of those who would benefit most from employer contribution to student loan payments are individuals who did not complete their degrees, but still came away with student loans. Many of these folks work in industries with high turnover, such as hospitality, food service and retail businesses. The impact of a monthly student loan repayment benefit in these roles is incredibly high. Among our client base, we have a wide range of firms offering student loan assistance, from retail companies to non-profits to tech enterprises. Based on our data, the assumption that this benefit only goes to those most fortunate, is simply not accurate.
Expanding the tax-free eligibility of Section 127 provides meaningful support and relief to individuals with student loans and equips companies with a new tax-free benefit to attract and retain top talent. While some companies may not be in the position to introduce this benefit now, others are. Making student loan repayment a tax-free benefit will increase the take-home pay for participating employees and create further incentive for employers to introduce such programs. That is good for businesses and student loan borrowers alike.
Tara Fung is chief commercial officer at CommonBond, where focuses on providing education benefits to employers.
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