Student loan repayment benefits: Everyone wins

Public policymakers have taken up the cause of the financially backbreaking level of student loan debt in the U.S., creating a good news/not-so good news scenario for everyone with a stake in the situation.

One development: the pause on student loan payments ordered by the U.S. Department of Education in March, 2020 has been extended through August 31, 2022. For eligible loans, this means:

• a suspension of loan payments;
• a 0% interest rate;
• Suspended collections on defaulted loans.

This has benefitted 37 million Americans. Unfortunately, 83% of them have been unable to pay down much, if any, of that debt during the pause. And between inflation and general financial ill-health of Americans even before the pandemic, many will find it difficult to shift the money they’ve re-allocated to other debts back to their student loans when the freeze is over.

For employers, the entire student loan issue is an opportunity to step up and stand out in today’s hugely competitive job market. They’ll also be helping themselves by taking advantage of tax exemptions that came into play with the CARES Act and the coronavirus relief bill of late 2020.

Student loan debt, now sitting at $1.7 trillion, has been a long-standing burden and societal concern. Two recent provisions have offered relief: Under the 2020 CARES Act, employers now can help pay down employee student debt tax free, up to $5,250 annually. 

This expansion of Section 127 of the Internal Revenue Code amended what formerly was a strictly post-tax benefit to now allow employer contributions towards student loan debt as a qualified education expense. As a deductible expense for the employer, without the employee incurring taxable income, this provides tax advantages to both parties. This provision was extended to December 31, 2025.

More changes in the offing?

The changes represent a good start, and they are long overdue. Section 127 was added as a temporary change to the IRC in 1978, making it possible for employers to provide educational assistance to employees, a tax deductible expense for the company with no tax penalty to the employee. Section 127 was made permanent in 2012. 

Until 2020’s CARES Act, Section 127 did not apply to past educational pursuits – or tax exclusion benefits for the repayment of existing student loans. The CARES Act put a one-year time limit on the provision, which was subsequently pushed back to Jan. 1, 2026.

Today, a bipartisan team of legislators has introduced the Upskilling and Retraining and Assistance Act to make the provisions under Section 127 permanent. It also would expand the allowable tax exclusion to $12,000 for two years. (It has remained at $5,250 since 1978.) It also would allow the cost of education related tools and technology to be covered.

A benefit in high demand

Employers would do well to study the ins and outs of Section 127 changes. They are complicated, but the benefit can pay off on numerous fronts. Student loan debt assistance is offered by nearly half of employers currently, compared to 32% in 2018. Studies suggest this benefit may keep workers aged 22 to 33 committed to their employer for at least five years. 

It’s projected that the changes will save employees up to 30% on state and federal income taxes, with variations based on individual tax rates and whether student loan interest was deductible. Employers may save up to 10% in FICA/FUTA/SUTA, varying according to state tax rates.

Employers can incorporate student loan repayment programs into their roster of voluntary benefits by adopting a written Section 127 plan or amending their existing plan to reflect the employer contribution. Any qualified education loan under the federal tax code incurred by the employee for education of the employee is eligible. Third party student loan vendors are well-positioned to facilitate the contributions. 

Employers should be mindful of compliance considerations as they proceed:

• Structuring contributions can be handled differently based on employee class or tenure. But the benefit can’t be offered only to highly compensated employees (as defined by Internal Revenue Service (IRS) rules) or those with more than 5% ownership in the company, under Section 127 provisions.
• Each class should be nondiscriminatory, as set out by IRS rules; qualified administrators of Section 127 plans should be consulted for guidance.

Taking advantage of the expanded enhancements to student loan programs will pay off for everyone.  There’s a correlation between employees’ reduced financial burden and lower rates of presenteeism, absenteeism and reduced healthcare costs.

Companies are looking for savings wherever they can be found while still offering attractive benefits to current and prospective employees. Enhancements to the tax code create an added impetus for student loan programs.

Heather Garbers, CVBS, is Vice President of Voluntary Benefits and Technology for Hub International, where she is responsible for driving voluntary benefits sales and strategy.  She is also responsible for partnering with clients to build optimal enrollment and communications solutions that enhance employee understanding of and engagement in voluntary plan options. Heather earned a Certified Voluntary Benefit Specialist (CVBS) designation from the Voluntary Benefits Association, and is a member of its National Advisory Board.  She also is a recipient of Employee Benefit News’ 2015 Voluntary Advisor of the Year award, and was named one of the “15 Women in Insurance You Need to Know” by LifeHealthPro in 2016.