The CARES Act Unlocks the Potential of Student Loan Repayment Programs

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May 22, 2020
This article is part of a series called COVID-19 Coverage.

While higher education is typically required for obtaining many forms of employment, employees often struggle for years to repay the astronomically high costs associated with obtaining this education.

Student loan debt is crushing for so many families. The weight of this debt creates stress for employees (and very often, their family members), turnover (to higher-paying jobs), and interferes with the employees’ ability to save for important goals and milestones such as first homes, retirement, and college for their own children. While 46% of millennials say loans are having a significant impact on the ability to meet other financial goals, it’s notable that 37.5% of student loan holders are under 30, and 62.5% are over 30, according to the U.S. Chamber of Commerce. At the other end of the age spectrum, seniors aged 60 to 69 owe $85.4 billion in student debt altogether.  Simply, student loan debt is demonstrably a multigenerational crisis, affecting employees of all ages and income levels.

Which begs the question: Is it essential for employers to help employees save for college and pay down student loan debt?

The answer: Yes.

Only about 8% of employers offered student loan repayment assistance in 2019, which is up from 4% in 2018 and 3% in 2015. It seems like a missed opportunity to not offer student loan assistance as a financial wellness benefit given the number of employees affected and the likely return on investment in terms of employee recruitment, retention, productivity, and satisfaction.

According to American Student Assistance, 86% of employees report that they would commit to a company for five years if the employer offered assistance to help them pay off their student loans.  Additionally, employers providing student loan support observe reduced employee stress, improved employee satisfaction, and increased productivity, according to a recent survey from the Employee Benefit Research Institute.

Historically, many employers have not offered student loan benefits because the tax treatment created a burden for them and their employees. Employer-made student loan contributions were subject to payroll taxes paid by the employer, subject to income tax and payroll taxes for recipient employees, and could not be claimed as a deduction by employers as an ordinary and necessary business expense.

Now, for the first time, a tax incentive has been made available for employer contributions to student loan accounts. The CARES Act, known generally as the Federal stimulus package implemented as a result of the COVID-19 pandemic, offers an expansion of the rules under Educational Assistance Programs (IRC Section 127) to help employers ease student loan debt by creating a tax break for employer-paid student loan benefits of up to $5,250 per employee per calendar year. Between now and December 31, 2020, employer contributions to employees’ student loans are a tax-deductible business expense for the employer and are tax-free to the employee.

The CARES Act removes barriers for companies to enhance their employee financial wellness, recruitment, and retention offerings with non-taxable student loan repayment, which empowers employees to pay down their debt balances faster.

More than half (56%) of employers already have an Educational Assistance Program in place for tuition assistance and could add student loans through a simple program amendment. Alternatively, an employer could create an Educational Assistance Program by following these IRC Section 127 Program requirements:

  • Written Plan: The program must be memorialized by a separate written plan document providing educational assistance for the exclusive benefit of the company’s employees.
  • Nondiscrimination: The program must benefit employees in an employer-designated classification that does not discriminate in favor of highly compensated employees (HCE) (as defined under IRC Section 414(q). An employee is an HCE if the employee:
    • Owns at least 5% of the employer’s stock in the preceding or current calendar year
    • Received compensation from the employer for the preceding year in excess of the IRS determined amount of who is highly compensated (in 2020, it is $130,000)
  • Employee Choice: The program cannot offer employees a choice between educational assistance and other benefits that are includable in income (whether cash or non-cash).
  • Funding: An educational assistance program may be funded or unfunded.
  • Notification: Eligible employees must receive reasonable notice of the program’s availability and benefits.

Once this is done, employers can begin contributing toward employees’ student loans in a tax-advantaged way for both employer and employee.

With student loan debt topping nearly $1.6 trillion in the U.S., stress on employees will only continue to prevail long after the COVID-19 crisis passes. Employers have the opportunity to help right this wrong; however, this provision under the CARES Act is set to expire at the end of the year. We hope it is made permanent to support employers in their quest to provide much-needed relief to their employees who are struggling with the weight of student debt.

This article is part of a series called COVID-19 Coverage.