As part of the more than $2 trillion stimulus package passed last month to provide relief amid the pandemic caused by the novel coronavirus, a provision was included to allow a tax break for annual employer contributions toward their employees’ student loan debt.
The provision in the Coronavirus Aid, Relief, and Economic Security (CARES) Act — perhaps overlooked amid the news of immediate relief through the temporary suspension of monthly student loan payments — allows an employer to contribute up to $5,250 annually toward an employee’s student loans, and the payments would be excluded from the employee’s income. The $5,250 limit applies cumulatively to both the new student loan repayment benefit as well as other educational assistance, such as tuition reimbursement or money for books and materials.
The provision has generated both criticism and applause for allowing employers to take advantage of the tax break, with critics arguing the provision will only help high-income workers who already have jobs and are already able to pay off their student loans, while doing little for those who most need help.
While it expires at the end of the year, the provision largely mirrors a piece of bipartisan legislation previously introduced by Sens. Mark Warner (D-Va.) and John Thune (R-S.D.), which gives companies the ability to pay up to $5,250 tax-free each year toward their employees’ student loans and deduct the contribution from their taxes. A companion bill was also introduced in the House.
In recent years, several prominent companies have begun offering the employee perk, from streaming service Hulu to health insurance giant Aetna, although most companies contribute much less than the annual limit of $5,250 included in the CARES Act.
Additionally, there has been an increase in the amount of employers offering the benefit to their employees, rising from just 4% in 2018 to 8% in 2019, according to a study from the Society for Human Resource Management (SHRM). The survey also showed that another 25% of companies polled said they were waiting to offer the benefit until it received tax-free status through federal legislation — a statistic Mark Kantrowitz, publisher of savingforcollege.com and a financial aid expert, points to as evidence for this benefit to gain popularity.
Adam Looney, a senior fellow at the Urban-Brookings Tax Policy Center, contends that the CARES Act provision only helps the most privileged of borrowers.
“Very few employers actually provide things like a 401(k) or match for a 401(k). McDonald's doesn't provide those things for most workers, but if you're a Wall Street firm, I'm sure you provide those because most of your employees are in a high tax bracket and because the tax savings to pay your employees in this form is more lucrative,” Looney said, noting that only about 4 in 10 people with debt work for an employer willing to establish a matching 401(k) plan. “This is something that's basically targeted at lawyers and MBAs.”
Looney added that the provision benefits the employer more than the borrower.
“I think it's incorrect to believe that this is something that increases ... the amount that employers pay their workers,” he said. “There's now simply a way to pay them in a tax-free way.”
Looney argues companies could instead raise employees' overall pay, giving them higher base salaries that would allow them to pay their student loans or make contributions to their 401(k).
Meanwhile, proponents of the provision say including this option in the stimulus package could open the door for it to be more widely implemented among companies. Many expect the provision to become permanent after it expires, noting that it is often politically difficult to pull back a tax break once it is already in place.
Scott Thompson, CEO of Tuition.io, which works with companies to create and manage employer-paid student loan benefits, praised the inclusion of the provision following passage of the stimulus bill.
"Providing a tax subsidy for employer student loan repayment doesn't just benefit individual workers, it will help reduce a major drag on the overall economy as we recover from the COVID-19 shock,” he said in a statement. “Even if only temporary, this groundbreaking legislation will enable companies large and small to help America's working people make it through this historical crisis."
In a commentary published by Fortune following passage of the CARES Act, Thompson writes that the provision should be made permanent after it expires at the end of the year.
“While the positive impact of student-loan assistance will be felt right away by individuals, the broader boost to our economy will likely take longer to manifest, as more companies help reduce workers’ debt over time,” he writes. “This is why there is only one thing wrong with the recent congressional legislation: It is temporary.”
Thompson notes the criticism of the provision, but writes that the onus is on the government to fix any lingering problems others have raised, such as the lack of inclusion of unemployed people with student loan debt.
Kantrowitz said the provision is a step in the right direction and could “be enough to get some employers off the fence.” He added that the cost to the federal government to include this provision is relatively small.
Should the 25% of employers that said they would offer the benefit if it was tax-free move to implement a program, about a third of employers would have this benefit, Kantrowitz said.
Having already seen an increase in companies looking to offer this benefit since the passage of the stimulus package, Thompson predicted that more will implement an employer-paid contribution program, as many companies have been waiting to see what Congress would do before they moved forward with implementing a program of their own.
While Kantrowitz is hopeful the provision will become permanent, he described it more as a band-aid than a wholesale fix for those struggling with student loan debt.
“Let's not look the gift horse in the mouth,” he said. “Overall, this is not going to be a cure to the college affordability crisis, but it helps.”
Publication Date: 4/14/2020