Stimulus Legislation Incentivizes Employers to Assist Employees with Student Loans

Tucked in the Stimulus Legislation is a tax break that incentivizes employers to pay down their employees student loans. Here is what you need to know to set up this plan.

From 2009 to 2019, total student loan debt in the U.S. increased 113% from $658 billion to $1.5 trillion. More than half of all Americans go into debt to finance their undergraduate education with average student loan debt topping $37,500 in 2020. Obtaining a degree requires a much bigger financial sacrifice today than it did a generation or two ago as tuition rates typically increase at twice the general inflation rate. Housing, food, transportation, and books can also add thousands of additional dollars to indirect college expenses. The average tuition and fees at private universities have jumped 144%, and out-of-state tuition and fees at public universities have risen 165%, while in-state tuition and fees at public universities have grown the most – increasing 212%.

Congress officially approved a new $900 billion coronavirus relief package alongside a $1.4 trillion government spending bill, just days before the CARES Act relief measures were set to expire. In an attempt to help Americans during the current global pandemic, new legislation stands to battle small businesses closings, food insecurity, and eviction worries.

In addition, the new provision allows companies to help employees pay down their student loans. The new legislation includes an extension through 2025 of the Employer Participation in Repayment Act (EPRA) and communicates support of employers’ commitment to the financial well-being of their employees. In essence – it provides a tax exclusion for the next five years, allowing for tax free money towards employees’ student loans. The stimulus bill provides an annual tax exclusion of $5,250 per employee per year to cover their student loan payments. The provision applies to any student loan payment made on behalf of the employee by the employer before January 1, 2026. This new provision is an additional benefit for employees and can be used as a successful retention tool.

GradFin CEO, Chris Walters, believes programs that provide employer-provided education benefits are more important now than ever before. “GradFin believes that the best way to help the 43 million Americans saddled with more than $1.5 trillion in student debt is to incentivize companies to get involved in the student loan payoff process,” says Walters.

Employers have offered education assistance benefits for decades. Prior to the pandemic, there were signs that use of these plans was gaining interest. More than 60% of U.S. companies were recently estimated to be offering financial assistance to employees to further their education, a trend that’s picked up steam the past five years following a lull during the financial crisis of 2008-2009.

Paying for employees to attend college is popular largely because of its favorable treatment under IRS section 127, which allows employers to deduct tuition payments as a business expense and permits employees to exclude from taxable income up to $5,250 annually in eligible education reimbursement. Chris Walters has experience with taxes and how they impact student-loans. Walters says, “This new tax-free benefit, in addition to our multi-lender bank marketplace and access to student loan consultants, allows GradFin to comprehensively help student loan borrowers tackle their student loan debt.”

These initiatives help ensure workers are prepared to emerge from the pandemic with the knowledge and skills that the post-pandemic economy will demand.

How can companies qualify and set up these educational assistance plans? Section 127 of the Internal Revenue Code provides an exclusion of up to $5,250 per calendar year from an employee’s gross income for amounts received by the employee, provided that certain requirements are met.

To qualify under §127, a program must:

• Have a written plan document detailing the benefit.
• Not provide more than 5% of its total annual benefits to individuals who own more than 5% of the company’s stock.
• Not provide eligible employees with a choice between educational assistance benefits and any other taxable compensation (whether cash or noncash).
• Provide eligible employees with reasonable notification of the availability and terms of the program.
• Benefit employees in an employer-designated classification that does not discriminate in favor of highly compensated employees. An employee is a highly compensated employee, for purposes of §127, if the employee meets either of the following criteria:
  • Owned at least 5 percent of the employer’s stock in the preceding or current calendar year.
  • Received compensation from the employer in the preceding year in excess of a specified amount determined annually by the IRS.
  • If the program meets these criteria, an employer can pay an employee up to $5,250 in educational assistance benefits each year on a nontaxable basis. The exclusion applies whether or not the courses taken are related to the employee’s current job responsibilities or are part of a degree program.

Contact GradFin today to learn more about setting up this plan at your corporation and also providing our consultation services to your employees. Click here to get started.