How employers are helping employees reduce student loan debt
Thursday, July 02, 2020
U.S. student loan debt reached a record $1.6 trillion in 2020, according to an article in Forbes from February. This accounts for 45 million borrowers, making student loan debt the second highest consumer debt in the U.S. — topped only by mortgage debt.
Though millennials are reportedly the biggest carriers (75%) of student loan debt, there appears to be a rising number of baby boomers with student loans as well. Many of these baby boomers took out student loans for their children or grandchildren and are having to draw from their retirement funds (or other financial sources) to pay off the debt.
Student loan debt has been climbing for many years, and employers are taking notice. To attract and retain talented workers, a small but growing number of employers are offering student loan repayment plans (SLRPs).
How Student Loan Repayment Plans Work
This benefit enables employers to make monthly contributions to employees’ student loan debts, usually through a third-party servicer. The employer chooses the amount they want to contribute to the employee’s debt. The contribution goes straight toward the loan principal, thereby lowering the principal and, potentially, interest charges. Meanwhile, the employee/debtor continues to make their regular monthly payments to the student loan servicer.
For example, PricewaterhouseCoopers (PwC) has reportedly paid nearly $26 million toward its employees’ student loan debt, since implementing the benefit in 2016. The company provides $1,200 in student loan repayments annually to each eligible employee, for up to six years.
According to the PwC website, the benefit may, over time, may help “reduce student loan principal and interest obligations by as much as $10,000, and shorten loan payoff by up to three years.”
As noted, the employer selects the amount they want to contribute. Therefore, less profitable businesses wishing to help paydown their employees’ student loan debt can do so on a smaller scale (than larger companies like PwC).
The Bureau of Labor Statistics’ employee benefits survey for June 2019 reveals that 3% of civilian and private sector employees have access to student loan repayment plans. Access increases according to company size, meaning larger companies (with 500 or more employees) are more likely to offer SLRPs.
Although student loan repayment plans remain largely uncommon, utilization rates are accelerating. Per SHRM’s 2019 employee benefits survey, SLRPs doubled since 2018, with 8% of employers offering the benefit in 2019, jumping from 4% in 2018.
Primary Drawback of SLRPs
One of the main complaints about student loan repayment plans is that the employer’s contribution is currently taxable to employees who receive the benefit. This obstacle has hindered the growth of SLRPs, leading industry observers to presume that adoption will soar if the benefit becomes tax-free.
The CARES Act to the Rescue
Section 127 of the Internal Revenue Code allows employers to provide employees up to $5,250 in qualified educational assistance on a tax-free basis, for graduate and undergraduate courses. Qualified educational assistance includes tuition, fees, books, and supplies.
Section 2206 of the CARES Act — signed into law on March 27, 2020 — temporarily expands the educational assistance tax-free benefit to student loan repayments. Under this provision, employer-paid student loan repayments are tax-free to employees until the end of 2020.
In addition, Section 3513 of the CARES Act lets certain federal student loan borrowers defer payments until September 30, 2020. Collection activities, such as wage garnishment, on delinquent student loans are also suspended until that time. The deferral/suspension applies only to loans held by the U.S. Department of Education. It does not cover private student loans.
401(k) Match as a Student Loan Repayment
Following a now-famous Private Letter Ruling (PLR) by the IRS in August 2018, some employers have shown interest in amending their 401(k) plans to provide student loan repayment assistance. Based on the PLR, employees who contribute 2% of their pay toward their student loan via payroll deduction will receive an employer 401(k) match of 5%.
However, the PLR is specific to the company that made the request to the IRS. Until the IRS releases universal guidance, employers wishing to implement a student loan repayment program that involves 401(k) matching should seek legal advice to evaluate potential benefits and risks.
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