Members of Congress Push for Tax-Free, Employer-Led Student Loan Assistance
Posted By Donna Fuscaldo on April 4, 2016 at 11:09 am
With unemployment hovering at an eight-year low, employers are looking at different ways to recruit and retain millennial workers. A growing trend is offering to help pay down a portion of their employees’ student loans. But there’s one catch with this new company-backed benefit. Unlike the 401(k) match, employees have to pay taxes on the money that goes to their student loans. That means if a company pays $1,200 a year, that’s added to their annual income.
It may not seem like a lot but it can increase the taxable income enough where employees would owe a bigger tax bill, not to mention their benefit is reduced because of the tax hit. Take a $200 a month benefit for people in the 25 percent tax bracket as an example. That would increase the taxable income by $2,400, which means they would owe an additional $600 in taxes. That means only $1,800 is actually going to the student loan debt as a result.
Student Tax Affordability and Relief Act one of many bills
Enter the “Student Tax Affordability and Relief Act,” or H.R. 4363, a bill introduced earlier this year by Congressman Austin Scott. He’s calling for a gross income exclusion for the money employers pay on student loans for their employees. The idea behind this bill and previous ones is whether employer-led student loan repayment assistance should be treated as employee income if it is going directly to the student loan. Under current federal law, employees can get up to $5,250 a year in education assistance that isn’t taxed. Typically, it is for tuition to attend college, not to help pay down student loans.
“The bill is an acknowledgement that student loans are at crisis level and the acknowledgement of the role employers can play in helping people,” says Phil DeGisi, chief marketing officer at CommonBond, the online lender that funds and refinances student loans and launched a student loan assistance program at the end of 2015 in which employees get $100 a month to go toward their student loan repayment or up to $1,200 a year.
Passage of bills could spur more employers to offer a similar benefit
Student loan debt is currently at crisis level impacting everything from the rate at which people purchase homes to when they start a family. It’s also preventing people from saving for retirement, all of which will have a far-reaching impact on the economy. Student loan debt is on the minds of millions of millennials and companies know that. It’s the reason more and more employers are announcing a student loan benefit in which they will pay down a portion of the debt for a specified amount of years. Making it tax-free could help to push this benefit more into the mainstream.
“H.R. 4363 is an opportunity for Congress to help 43 million Americans with student debt. If H.R. 4363 is approved, I expect that we will see more employers offer student loan repayment benefits to employees,” says Nate Matherson, the co-founder of LendEDU, which gives employees $200 a month toward student loans. “While the IRS may lose out on income tax revenue, I believe that there will be a long-term positive impact on the economy. The bill will pay for itself.”
While Representative Scott is the latest to float a bill to make an employer-led student loan repayment benefit tax-free, he isn’t alone. Currently, there are six bills making the rounds including one, H.R. 3861, that would exclude up to $5,250 per year in employer-provided assistance. Another bill raises the amount excluded to $6,000 per year and Rep. Scott’s bill calls for $10,000 a year to be excluded.
Less tax revenue could hold the bills up
Bills aiming to make the student loan employer assistance tax-free can help graduates stuck with huge student loan bills but it isn’t clear if any of the proposals will pass. A lot of lip service is being given to the student debt problem because it’s an election year but whether politicians are willing to approve legislation that will lower the government’s tax revenue is another question entirely. “Anytime you are talking about tax law, there’s going to be an issue because there will be some less income tax collected,” if it gets passed, says DeGisi of CommonBond.
Still, DeGisi says the hit isn’t going to be too much and the good it can cause outweighs any lost revenue. “Employers are recognizing this is a top concern for millennials so this notion of offering student debt release as an employee benefit makes sense.