Employer-Sponsored Student Loan Debt Relief Extended Through 2025

Employers can provide up to $5,250 annually in tax-free student loan repayment benefits per employee through 2025. This benefit, originally included in the Coronavirus Aid, Relief and Economic Security (CARES) Act enacted in March 2020, was for the calendar year 2020 only but was extended for an additional five years by the Consolidated Appropriations Act, 2021 (CAA), enacted in December 2020. To qualify for this tax-free treatment, the student loan debt must be for the employee’s own education, not for the education of a spouse or family member.

With the extension of the student loan repayment benefit, employers may wish to consider offering it to help employees alleviate the burden of student loan debt and improve their overall financial wellness.

Quantifying the Burden of Student Loans

Americans collectively have more than $1.4 trillion in student loan debt, making it the second-highest form of consumer debt, trailing only home mortgages.[1] Currently, 43.2 million Americans have student loans averaging about $39,400 each, and more than 35 million of these borrowers may qualify for employer-sponsored relief under the CAA extension.[2]

Many employers and researchers believe that the stress from managing student loan debt can negatively affect employee productivity. In addition to addressing this issue, offering some form of support in paying off student loans can be an effective tool for recruiting employees and building loyalty, especially among young job seekers. In a 2019 study by the American Institute of CPAs, 41% of young adult job seekers indicated that they would like help with student loan debt.[3]

Expanding Educational Assistance Programs

The 2020 laws broadened the definition of eligible education expenses that employers can offer as tax-free benefits for employees and tax-deductible expenses for employers as part of an educational assistance program (EAP) created and operated in accordance with Section 127 of the Internal Revenue Code, beyond current tuition assistance and related expenses. Through 2025, the $5,250 limit per employee applies collectively to the following areas: tuition assistance, related expenses (e.g., books, equipment, supplies, and student fees), and student loan repayment.

While 56% of employers offered tuition assistance, only 8% offered student loan repayment plans in 2019, according to the most recent survey of benefits by the Society for Human Resource Management (SHRM).[4] Employers looking for a competitive edge in attracting and retaining talent should look closely at the new rules and evaluate whether a student loan repayment program may benefit their workforce.

This type of benefit could translate into meaningful savings for employers, as well as employees. For example, an employee in the 22% marginal tax bracket who receives the full $5,250 annual repayment could also see $1,557 in tax savings (across the employee’s federal taxes and the employee’s share of payroll taxes). In addition, employers could save $402 by excluding this benefit from the employer’s share of payroll taxes, in addition to the employer’s $5,250 compensation deduction for providing this benefit to employees.

Key Requirements for Offering Student Loan Repayment Assistance

Employers that would like to offer this benefit will need to have a formal, written EAP as defined under Section 127 of the Internal Revenue Code. Employers that do not have an EAP will need to adopt one, and employers that already have an EAP will need to amend it to reflect the changes. The written plan must include the following:

• It must not discriminate in favor of highly compensated employees or their dependents.
• Not more than 5% of the total amounts paid by the employer can go to shareholders or owners.
• Employees cannot be given a choice between receiving educational assistance or another form of payment.
• Employers must have reasonably communicated the availability and terms of the program to all eligible employees.
• Section 127 allows some flexibility in creating a personalized EAP for your organization; for example, employers can decide on the amount covered, the type of expenses (as permitted by Section 127), and certain eligibility requirements.
  
  

Insight: Offering Student Debt Relief Provides More than Tax Advantages

As we move into what hopefully will be the late stages of the COVID-19 pandemic, the employment market should tighten, and employers will be looking to add valuable recruiting and retention tools. Providing tax-free benefits to help employees pay off their student loans could make overall benefits packages more attractive and give you a competitive advantage.

[1] Experian, “Debt Reaches New Highs in 2019, but Credit Scores Stay Strong,” March 2020, data as of December 31, 2019.
[2] EducationData.org, “Student Loan Debt Statistics,” data as of February 9, 2021.
[3] AICPA, “Health Insurance, Paid Time Off and Student Loan Forgiveness Top List of Millennials’ Desired Workplace Benefits: AICPA Survey,” May 16, 2019.
[4] Source: Society for Human Resource Management, “Survey of Benefits,” December 2019.