National Financial Planning Month: Time to help workers pay down student debt
Employer payments of principal or interest on an employee's "qualified education loan" may be eligible for tax-free treatment up to the $5,250 annual maximum, as part of an employer’s “educational assistance program.”
More than 42 million Americans owe more than $1.61 trillion in student loan debt—an average of $38,000 per borrower, according to a new report from WalletHub. Accounting for a fixed interest rate of 6.53% on federal undergraduate loans, it would take 20 years’ worth of $284 monthly payments to pay off that $38,000 debt.
Last week, President Biden introduced a new student loan relief proposal aimed at borrowers facing “hardship,” according to the Department of Education, however, this is his third attempt at debt cancellation, so for now employees will need to continue to keep making payments.
With October being National Financial Planning Month, it’s the perfect time to engage employees with smart money management tips. Employers should consider these tips to help employees pay down student loan debt faster and begin investing in a long-term financial plan, suggests the Illinois CPA Society (ICPAS):
1: Make employee payments – and savings – automatic. If employees have their paycheck directly deposited, they could elect to have portions of their paycheck automatically diverted toward loan repayments and savings and retirement accounts. This is a great budgeting practice that will help them repay their loans on time (and faster if they elect to pay more than the premium payment due) while also setting aside money for their future without having to think about it, according to the ICPAS.
“Up to December 31, 2025, an employer can directly pay up to $5,250 in employee student loan payments per year,” said Brian Kearns, CPA/CFP, Founder, Haddam Road Advisors, who co-chairs the ICPAS Society Personal Financial Planning Member Forum Group.
Under Section 127 of the Internal Revenue Code, employees are not taxed on the first $5,250 of payments made by employers each year as part of an employer’s qualifying “educational assistance program.”
2: Encourage employees to take advantage of the 401(k) student loan match program: “Recent IRS guidance allows employers to match an employee monthly Qualified Student Loan Payments … with a contribution to their 401(k),” said Kearns.
“If the student pays $300 a month on their loan, the employer contributes $300 to their 401(k). This can create a real positive for employees as the employee watches their loan balance go down as their retirement assets go up. For employers, this program must be instituted by the end of 2025. The employer needs to talk with their plan administrator to set this up.”
Related: Biden’s new student loan forgiveness plan: A 3rd attempt at debt cancellation for 8M
It is so important for employees to formulate a long-term financial plan, even while saddled with student debt “because things change and you will probably be on this planet for decades,” said Kearns. “A series of small incremental changes to financial discipline can generate truly meaningful changes in net worth over the long term, and your net worth is the thing that will generate income for you many decades in the future.
“A CPA is one of the most valuable advisors an employer can have, they can help plan cash flows, examine financial health, and optimize tax liabilities for any organization.
The CPA can work hand-in-hand with a plan administrator to formulate a beneficial lineup of programs to improve employee retention and overall well-being.”