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Can Employers Solve America’s Student Loan Problem?

Posted by Tiffany Sanders, J.D.

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Dold Scanlan

UpRight CEO Ed Scanlan and others join Congressman Dold as he announces the HELP for Students and Parents Act

When you think about employer assistance with student loan payments, your mind probably jumps to loan forgiveness type programs offered to teachers, public interest lawyers, physicians in underserved areas and others serving the public good. However, a small but growing number of employers in the private sector have begun to offer student loan repayment assistance as a company benefit.

Why is the number small? In part, it’s because the concept is new and business—particularly big business—can take time to catch up. The traditional core benefits such as medical insurance and 401(k) contributions are well-entrenched. But, there’s another factor that may account for the fact that only about 3% of U.S. employers offer student loan repayment assistance, even though more than ¾ of Millennials say they’d be more likely to accept a job that included this benefit.

 

Standard Employee Benefits and the Law

Some of the most common employee benefits have become standard in part because U.S. law offers incentives to employees and/or employers.

For example, when an employer pays a portion of an employee’s medical insurance premiums:

  • The employer contribution is not taxable as income to the employee
  • The employer contribution is not subject to payroll tax
  • Some or all of the employee’s contribution to the premium is also pre-tax

Similarly, when an employer matches an employee’s retirement account contribution in a qualified, traditional 401(k) plan:

  • Employee contributions up to a ceiling are not subject to income tax at the time of contribution
  • Employer matching contributions up to a ceiling are not subject to income tax at the time of contribution

Though withdrawals from this type of retirement account are taxable as income, they are based on the account holder’s income at the time of withdrawal, and typically come after years of that pre-tax money accruing interest in the account.

This special treatment of medical and retirement benefits incentivizes actions on the part of both employees and employers that help the economy by ensuring that more people have access to privately-funded health care and are prepared to be self-supporting in retirement.

Student Loan Repayment Assistance and the Law

Currently, U.S. law affords no such special treatment to student loan repayment assistance. At first glance, that may not seem like much of an obstacle, but consider the impact.

First, making a $200 monthly contribution to an employee’s student loan payment will cost the employer and the employee both more than making the same contribution to the same employee’s 401(k) or medical insurance premium. For the employee, the difference in cost may be in the hundreds but for an employer making these payments across dozens (or hundreds, or thousands) of employees, the difference will be much larger.

Although the individual cost to the employee is smaller, the employee is now incurring a tax obligation on moneys not actually received. That means a smaller paycheck, a larger tax debt at filing time, or both. Given the large number of Millennials living paycheck to paycheck and struggling to make ends meet, even slightly diminished cash flow can be a significant problem.

The Practicalities of Student Loan Repayment Assistance

Implementing an ongoing employee benefit like student loan repayment assistance can require a significant administrative investment, particularly when it’s a relatively new idea without established systems for implementation. In addition, student loan repayment is far less focused and streamlined than a benefit like medical insurance or retirement contributions.

Typically, an employer will offer a single medical insurance plan, or perhaps a few options. Employees will enroll and the provider will invoice the company for the appropriate number of covered employees and family members. Similarly, retirement account contributions generally go to a single plan administrator, with automated distribution of the contributions by employee.

In contrast, student loan accounts aren’t set up by the employer—they must be verified. And, they aren’t administered by a single company or a couple of companies selected by the employer. One employer may be making payments to several different student loan servicers, and student loan servicers may change. Finally, while medical insurance benefits and 401(k) contributions typically continue across the course of employment unless one party intentionally makes a change, all employees’ student loans will be paid off at different times, some within the period of employment and some not.

In short, there’s a lot to manage.

A handful of companies, including EdAssist and Peanut Butter, have emerged to offer employers technology and support to streamline the process and greatly reduce the administrative burden. Presumably, this type of support will expand as demand grows. The elimination of administrative obstacles by these early providers may also help to increase demand, as employers find it easier to implement repayment assistance programs.

Student Loan Repayment Assistance Legislation

One key development that would help clear the path to employers taking a meaningful role in solving the $1.3 trillion student debt problem would be tax treatment similar to that afforded to core traditional employee benefits. On May 2, Congressman Robert Dold (IL-10) introduced legislation that would do just that.

The HELP (Higher Education Loan Payment) for Students and Parents Act would amend the Internal Revenue Code to change tax treatment of student loan payment assistance by employers in two ways:

  • Exclude the amount that an employer contributes toward and employee’s student loan repayment from taxable income; and
  • Provide a tax credit to employers based on the amount of their contributions.

In addition, Dold’s bill would help parents save for their children’s education by:

  • Excluding employer contributions to a college savings account (529 plan) set up by an employee for his or her child; and
  • Providing a tax credit to employers based on the amount of such contributions.

UpRight CEO Ed Scanlan joined the Congressman at the press conference where the new legislation was announced and followed up with an announcement of his own: a new student loan repayment assistance program that he believes will allow recent graduates who begin their careers with Upright Law to be free of student loan debt by the age of 30.

Dold isn’t the only legislator to recognize the importance of making student loan repayment programs more workable for both employers and debt-burdened employees. Last year, Representative Scott Peters (CA-52) introduced the Student Loan Repayment Assistance Act of 2015. The bill, which also contained provisions excluding employer contributions to student loan repayment from taxable income, was assigned to the House Ways and Means Committee on March 26, 2015. Despite the bill having picked up 12 co-sponsors since that date, there has been no further action on the legislation.

The Future of Employer-Assisted Student Loan Repayment 

The small but growing movement toward offering student loan repayment assistance as an employee benefit is likely to continue with or without more favorable tax treatment. Employers taking the lead range from fast-growing innovators like UpRight to large, established brands such as Pricewaterhouse Coopers and Fidelity. And, Millennials in large numbers are saying that their employment decisions will be influenced by the availability of such relief.

However, if this new and still relatively unusual benefit is to make the transition to a standard benefit comparable to medical insurance or retirement contributions, it must be afforded the same legal consideration. Given that the 2015 4th Quarter Statement of Financial Accounts of the United States revealed that 45% of the U.S. government’s financial assets were in the form of student loan debt, it would seem to be in the best interests of not only students and employers, but also the national economy, to facilitate repayment of those debts.

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Posted on May 6th, 2016


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