Student loan repayment assistance: A benefit that employers and TPAs should take seriously
Benefits administrators have an opportunity to fill a need that is predicted to soar in the coming years.
Across the country, companies of all sizes seek to recruit and retain top talent by offering more than salary – employees want substantial benefits packages. One highly desirable benefit that’s gaining more attention is student loan repayment assistance. In this up-and-coming, underserved market, third-party benefits administrators have an opportunity to fill a need that is predicted to soar in the coming years.
From 2008 to 2018, tuition rates at public colleges and universities increased by an average of 37%. In some states, tuition costs have doubled over that same time period (Louisiana 106.9%; Arizona 92.4%). Part of this is due to demand, but rising costs can also be attributed to increased overhead and cutbacks in state funding for higher education.
Related: Student loans still worry borrowers in coronavirus crisis
Skyrocketing college tuition costs have been met with an equally voracious student loan market. In 2018, 66% of students graduating from public colleges; 75% of students graduating from private non-profit colleges; and 88% of for-profit college graduates held student loan debt, averaging at least $25,000.
Such a large student loan debt burden has a detrimental effect on the economy, as people must prioritize how they will spend their money. It affects their ability to buy a home or a car, or pay for health insurance. With such a widespread impact, employers and third-party administrators can step in to help.
Student loan reimbursement assistance (SLRA) benefits
Offering a student loan repayment assistance plan as part of an employer’s benefit package could be an exceptional recruiting and retention tool. But historically, there has been no way for an employer to provide an SLRA on a nontaxable basis to the employee. As a result, despite the well-documented negative impact of escalating student loan debt, SLRAs have remained a relatively unattractive and underutilized benefit.
In 2018, the IRS did issue a private letter ruling allowing employers to match student loan repayments with contributions to the employer’s retirement plan. Such a program helps employees struggling to adequately save for retirement while paying down student debt; however, it does not provide direct assistance to pay student loans.
More recently, with the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, employers are allowed to assist employees with repayment of their student loans until the end of 2020 through direct, nontaxable payments to employees or their lenders. Though temporary, the CARES Act could provide a model for future legislation designed to help curb the economic drag of student loan debt.
Under the CARES Act, employers can make nontaxable SLRA payments of up to a maximum of $5,250 per employee between March 27, 2020 and December 31, 2020. Payments must be made under an educational assistance program that meets the requirements of IRS Code Section 127. Section 127 qualifying programs allow employers and employees to avoid federal payroll taxes on qualifying payments; employees also save on federal income taxes that would otherwise apply. Another key element of the bill is what types of payments can be made.
Historically, SLRA benefits have been limited to reimbursing employees for expenses, paying expenses on their behalf, or waiving expenses (if the employer is an educational institution) charged for education while employed. The CARES Act also allows payments for principal or interest on a “qualified education loan,” under Code Section 221(d)(1), incurred for the employee’s education.
What does an SLRA look like in practice?
A typical employer SLRA often involves monthly student loan payments of $100 a month with a cumulative limit of $10,000. Some employer SLRAs do not have a specific cumulative limit, continuing until the student loan debt is paid in full.
Most employer SLRAs are limited to student loans for which the employee is directly responsible, not parent loans. Some are limited to federal student loans, while most will repay both federal and private student loans.
The SLRA is usually limited to full-time employees and is only provided for as long as the person continues to work for the employer.
The opportunity for TPAs
According to the 2019 Employee Benefits Survey conducted by the Society for Human Resource Management (SHRM), Student Loan Repayment Assistance is gaining traction. In 2019, 8 percent of employers provided student loan repayment assistance, up from 4 percent in 2018 and 3 percent in 2015. By 2021, SHRM expects a third of all U.S. employers to offer some form of SLRA program.
The expertise of TPAs in administering account-based benefits makes their services highly desirable in this newer market—with or without the benefit being tax-advantaged. Should Congress pass future legislation to allow for further tax-free employer repayment programs, like the one under the CARES Act, most employers and employees would need assistance to make sure the plan and benefits remain compliant. A TPA who already administers HRAs could possibly administer SLRAs without the need to adopt additional technology solutions.
Looking toward the future
While the CARES Act currently allows tax-free repayments under an SLRA through the end of 2020, employers should look at the long term positive effect of what offering an SLRA can do, such as increasing financial wellness and providing additional peace of mind for their employees. Happier, more satisfied employees can result in longer-lasting employment relationships and less turnover – putting a dent in human capital challenges and costs.
Third-party administrators should look now and into the future at SLRAs as another way to expand their services portfolio and find an additional revenue stream. Building plans for employers and providing expert guidance is invaluable, as most employers do not have the time or personnel resources to handle such a program on their own. With projections of a fourfold increase in employers offering an SLRA benefit over the next few years, opportunity is wide open for those who want to pursue it.
Bo Armstrong is a national conference speaker and author of numerous white papers and articles on the health care benefits industry. As DataPath’s Chief Marketing Officer, Bo focuses on identifying emerging market trends within the benefits industry and advocating for customers and their needs within DataPath.
Read more: