Last week, the Federal Reserve reported that American owed $1.76 trillion in student loan debt. For the class of 2021/2022, which is the most recent data available, 53% of students graduated with student loan debt, and the average loan debt was $22,600.
According to popular consumer finance site, NerdWallet, the average U.S. household with student debt owes $58,238. For households with a law degree, the average debt is $130,000; for households with an MBA, the average debt is $66,300; for households with a medical degree, the average debt is $203,062; for households with a dental degree, the average is $301,583.
Against this backdrop, and in the current labor market where employers across all sectors are complaining that they can’t find or keep good workers, this much is obvious – offering student loan repayment assistance as an employee benefit would be a hugely valuable recruiting and retention tool for employers, if that benefit existed.
Well, there’s good news– it does exist. Employers of every size can offer up to $5,250 per year per employee, tax free, in student loan assistance. Employers get to deduct the expense and avoid paying payroll taxes on it, and employee gets the funds tax-free. It’s the proverbial “win/win.” But no one seems to know that this benefit exists.
The CARES Act
Flashback to the depressing days of pandemic madness…masks, quarantines, stay-home orders, and daily hospitalization updates. Back then, Congress passed the CARES Act in 2020 to get fast aid to Americans to help them ride out the COVID storm. The CARES Act included stimulus checks, “free” PPP money, and “economic impact” emergency loans, not to mention billions for cities and states to use in the COVID fight.
But there was one section of the CARES Act that did not get much attention – Section 2206, which allowed employers to contribute up to $5,250 per year, per employee, in tax-free payments directly to their employees’ federal student loans. This benefit was supposed to last only through 2020; however, it was extended until December 31, 2025 in the 2021 Consolidated Appropriations Act.
Although there is a lobbying effort underway in Congress to make student loan repayment assistance a permanent employee benefit, as of this writing legislation accomplishing that has not been passed. So, as of now, the December 31, 2025 deadline remains.
What Must An Employer Do to Setup this Benefit?
According to Internal Revenue Code Section 127 (the statue that was amended by the CARES Act to allow for this benefit), the requirements to establish this benefit program are:
- The benefit program must be contained in a separate written plan of the employer for the exclusive benefit of its employees by providing educational assistance.
- The benefit program must benefit employees in a way that is not discriminatory in favor of highly compensated employees.
- No more than 5% of the amounts paid by the employer for educational assistance during the year can be provided for individuals who own more than 5% of the stock or capital profits interest in the employer entity.
- This benefit program cannot offer employees a choice between educational assistance and other remuneration (like cash).
- The employer must make reasonable efforts to notify employees of this new benefit program once established.
If these requirements seem doable, employers should reach out to their tax professionals and/or their employment lawyers for more information and for assistance setting up this benefit.
What Employees Should Do Now
If you’re an employee who is interested in this employee benefit, talk to your employer. Be open and honest. Tell your employer that you have student loan debt and that there’s a federal benefit program that allows employers to offer tax-free student loan assistance to employees. Encourage your employer to talk to their accountant and their employment lawyers about how the 2020 CARES Act and the 2021 Consolidated Appropriations Act amended Section 127 of the Internal Revenue Code to allow for these tax-free benefits. And tell them not to delay, because as of now employers can enjoy this tax-free benefit only through December 31, 2025.
Given that Candidly reports that 75% of employees say that having student loan assistance as a benefit at work would increase their commitment to their employer…and 86% say that they would commit to their employer for 5 or more years if their employer offered the benefit…and 80% of professionals with student loans say that their debt load was a “significant” or “very significant” source of stress in their lives…your employer should be interested.
You can find the Federal Reserve’s consumer credit report here.
You can find the College Board’s 2022 student loan debt report here.
You can find NerdWallet’s 2022 household debt study here.
You can find Candidly’s employee survey results (and supporting citations) here.