By Heather Garbers
The CARES Act coronavirus relief bill includes a new tool employers can use in their efforts to recruit and retain workers, and that also will help many individuals pay down their student loan debt earlier, avoiding additional interest charges.
The legislation expanded Section 127 of the tax code to now include employer contributions to their employees’ student loan debt as a pre-tax benefit, up to a maximum limit of $5,250 per year.1 Previously, such employer contributions were taxable, which required the employer to pay payroll taxes and withhold income taxes for participating employees.
With the cost of college rising 37% between 2008 and 2018, the impact of college debt on people entering the workforce has been astounding. Student loan debt is the second largest form of debt today, second to only mortgage debt. It even outpaces credit card debt, with a current estimated total of $1.3 trillion.2 It’s caused Americans to wait longer to purchase homes or start a family, and an uptick in “boomerang” children who return home after college to save money and pay off debt.
There are good reasons for employers to help. Studies show that 7 out of 10 recent college grads entering the workforce have more than $37,000 in student loan debt.2 That financial stress affects one’s physical and mental well-being:
- 30% of employees report being distracted by their finances at work; 46% of them spend 3-plus hours weekly dealing with their personal finances.3
- 12% of employees admit to missing work occasionally due to financial worries.3
- Financial stress is linked to sleep deprivation, overeating, substance abuse, anxiety, depression, resulting in conditions such as migraines/headaches high blood pressure, stomach ulcers, heart attacks, or muscle tension/back pain.
That also can directly affect the company’s bottom line in terms of presenteeism, absenteeism, and healthcare costs. In addition, surveys have found that over 80% of employees between the ages of 21 and 36 would commit to an employer for five years in exchange for assistance in paying off their student loans. The appeal to employers of this benefit is obvious.
Among the specifics of this CARES Act benefit: Employees will be able to save up to 30% on state and federal income taxes. This varies based on individual tax rates and whether they would have been able to deduct student loan interest. Employers will save an estimated 10% on FICA/FUTA/SUTA (varies based on state tax rate).
Employer contributions should go directly to the loan’s principal amount because the CARES Act also allows most holders of federal student loans to suspend monthly payments through September 30, 2020 without any interest accruing. This will help employees pay down their loan balance earlier and avoid additional interest from accruing.
Many companies are looking for savings wherever they can find it while still offering attractive benefits to current and prospective employees. This new enhancement in the tax code will encourage more companies to implement student loan programs for their employees.
They should act fast, though, as this provision expires December 31, 2020. Congress will need to extend the order for the tax incentive to apply to employer contributions in 2021 and beyond.
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1 This limit is a combined limit for student loan repayments and other educational assistance under Section 127, such as paying for classes or providing courses directly to employees.
2 Young Workers and Student Debt Survey by the American Student Association, https://file.asa.org/wp-content/uploads/2018/08/14141823/asa_young_worker_and_student_debt_survey_report-1.pdf
3 PWC 2017 Employee Financial Wellness Survey, https://www.pwc.com/us/en/industries/private-company-services/library/financial-well-being-retirement-survey.html