Tax Law Changes Could Boost Student Loan Repayment Benefit
For many students, combining scholarships, grants, and student loans creates a clear path for a college degree. However, student loan repayment can become a huge obstacle for young people today. The average graduate from the Class of 2016 owes more than $37,000.
The vast majority of millennials want their employers to help them repay their student loan debt, a survey by IonTuition found. And help may finally be on the horizon in the form of federal tax law changes.
IonTuition polled 2,712 primarily millennial adults who were employed and had taken out loans to pay for college. Of them, 87.8 percent agreed or strongly agreed that employer contributions toward paying off their student loan debt would be a valuable addition to their benefits.
Not many companies offer loan repayment contributions as a benefit, however. According to the 2016 Employee Benefits Survey from the Society for Human Resource Management, just 4 percent of U.S. employers provide any form of loan repayment contributions to their workers. This in line with the IonTuition survey; 4.9 percent of respondents said their employers offer contributions toward repaying student loans.
Why tax law changes matter
The sticking point is how tax law treats repayment contributions for loans incurred before employment compared with other education-related benefits, like reimbursement for tuition costs that employees rack up while at work. Kathleen Coulombe, SHRM’s senior adviser for government relations, says loan repayment contributions currently are treated as income and are taxable. But Section 127 of the U.S. tax code allows employers to provide up to $5,250 per year in tax-free tuition reimbursement for current employees attending school.
SHRM lobbied Congress in 2012 to expand Section 127 to include employer loan repayment contributions for past college debt and is doing so in this new Congress, Coulombe says. The impetus for the effort to secure the tax law changes is finding new ways to recruit and retain millennials, and a loan contribution benefit is one way to achieve it.
Others lobbying for Capitol Hill for the tax law changes regarding loan repayment contributions include Chris Walters, CEO of Gradfin. His company markets an online platform to employers that workers use to manage and reduce student loan debt. Walters himself took 15 years to pay off his student loans.
Earlier this month, the Aspen Institute published a report from the Future of Work Initiative chaired jointly by Sen. Mark Warner, D-Va., and Purdue University president and former Indiana Gov. Mitch Daniels, a Republican. The report includes two legislative recommendations for employment benefits that Gradfin helped shape. The first is lifting the annual income tax exclusion cap past $5,250 on employer provided education assistance to non-highly compensated employees. These are defined under employment law as workers who earn less than $120,000 annually.
The second proposal is to lift the current $2,500 cap on deducting qualified student loan interest per year on taxes for individuals earning less than $80,000 annually or $160,000 for joint tax returns. The cap would be $3,400 for 2017 and be indexed to inflation in following years.
The Aspen Institute also proposes to make employer contributions to repaying workers’ student loans tax free by expanding the existing tax treatments on 401(k) payments to cover student loan repayments as well as retirement contributions. The current tax-exempt maximum is $18,000 in the employee’s 401(k) contribution and $53,000 in total employer/employee contributions.
“Many young workers have difficulty taking advantage of the favorable tax treatment for retirement contributions because they mots also pay down their student loans,” the report notes. “Both are forms of long-term savings, and the tax code should treat them in a similar manner.”
“The key is keeping this bipartisan,” Walters says, predicting a major push in the new Congress to enact these proposals.
Others aren’t waiting on tax law changes
Some companies are not waiting for the tax law changes. At the start of 2016, Nvidia Corp. began offering loan repayment contributions as a benefit to its 10,000 employees worldwide. Nvidia will contribute up to $6,000 a year (up to $500 per month) for as many as five years to help employee pay down student debt. Workers must apply for the benefit within three years of graduation.
Andrea Trudelle, director of worldwide benefits for the Santa Clara, Calif.-based AI computing company, said Nvidia’s current workforce is 20 percent millennials, and the company wants to boost those numbers by offering a benefit especially attractive to this generation. She added that about 20 percent of the workforce has applied for or been approved to receive the contribution.
Nvidia pays the loan servicer directly to make sure the money goes to reducing student debt. Trudelle said that even if the company contribution completely covers the cost of the monthly payment, NVidia encourages employees to pay extra toward the principal every month to shorten the loan duration and reduce the total amount of interest they ultimately pay. “I’m not sure yet if the program is helping recruit more millennials, but I am seeing more millennials in new hire orientations,” she adds.
Student Loan Hero was founded in 2012 to help borrowers manage and pay off their college debt. Max Spiegel, the chief operating officer, says the company wanted to offer student loan repayment contributions from the outset, but it really became an issue when the workforce grew to 30 employees in 2016.
“This is our business,” Spiegel says. “You have to eat your own dog food.”
That year Student Loan Hero began offering up $2,000 in loan repayment contributions to employees who show proof of college debt. The company pays all taxes on workers’ behalf so that they receive the full $2,000. “Our employees love it,” he says, adding that he sees demand for this benefit.