Stimulus includes tax break for employer-paid student loans, garnering praise and criticism
The $ 2.2 trillion stimulus bill Congress is expected to pass a one-time tax break this year for annual employer contributions of up to $ 5,250 for employee student loan debt. The provision attracts both praise and criticism.
A growing number of large companies, for the most part, have started offering student loan repayments as a benefit to both current employees and new hires.
A investigation conducted Last year, the International Foundation for Employee Benefit Plans found that 4 percent of the 772 responding organizations offer such a plan, of which 2 percent are in the process of creating one. Another 23 percent of employers, however, said they were considering such a benefit.
For example, PricewaterhouseCoopers last year ad he had paid $ 25 million for employee student loan debt. The auditing and professional services firm offers $ 1,200 in loan repayment per year for up to six years for its associates and senior associates.
A bill presented last year by Senator Mark Warner, a Democrat from Virginia, sought to make employer-paid student loan benefits tax-exempt. Companies that help run such plans have said space would explode if the bill passes, with some saying all major employers should offer the benefit.
The 619-page Senate stimulus bill would do just that and appear to mirror Warner’s proposal.
Clause 2206 of the bill would exclude from tax any payment made this year “by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan contracted. by the employee for the education of the employee “. It only appears to be in effect for 2020, although removing a tax break is rarely an easy political decision.
The benefit would likely be lucrative for student loan borrowers and employers, wrote Adam Looney, Principal Investigator in Economic Studies at the Tax Policy Center of the Urban Institute and the Brookings Institution.
“Under the bill, employers could establish education assistance programs, which currently allow employers to provide tuition assistance for courses taken by an employee, to provide up to 5,250 $ per year per worker in tax-free assistance to employees repaying student loans. , “he wrote.” Instead of being treated as wages, these payments would be excluded from taxes on income and wages (both employee and employer share). “
Among those who applauded the provision was Scott Thompson, CEO of Tuition.io, which works with companies on the benefits of employer-paid student loans.
“Providing a tax subsidy for the repayment of student loans from employers not only benefits individual workers, it will help reduce a major drag on the global economy as we recover from the COVID-19 shock,” said he said in a press release. “While only temporary, this groundbreaking legislation will allow businesses large and small to help American workers weather this historic crisis. “
Looney, however, said the benefit will help student loan borrowers who need it the least.
Only borrowers with a job will be able to benefit, of course. And he said most people don’t work for an employer with benefits generous enough to offer student loan repayments, noting that only four in ten people in debt work for an employer who is even willing to set up a 401 (k) plan ( k) corresponding. .
Additionally, employers that offer broad benefits tend to have a higher income workforce. And Looney said the tax break would be more valuable for workers in the highest tax brackets.
“Beyond just being regressive, the bill targets loan relief to those who need it least,” he wrote. “Low-income, unemployed borrowers who can’t make payments and default at high rates don’t get any relief. But borrowers who are already making payments – at the annual level of $ 5,250 or more – benefit fully. “
The proposed tax break is bad policy on many levels, said Jason Delisle, resident member of the American Enterprise Institute. And he said the provision was obviously not intended to address the financial distress people are experiencing due to the coronavirus.
“It rewards employers who pay employees who have student loans more in total compensation than their employees who don’t,” Delisle said in an email. “As a result, it also encourages people to take on student debt even when they don’t need it – otherwise they won’t be able to pay for their education in pre-tax dollars or through an employer-provided benefit. . “
Student debt will increase due to the benefit, he predicted.
“Again, the implicit message from Congress is, unfortunately, that in the eyes of the loan program, it is better to have an expensive graduate degree and be employed than to have a low cost degree and strive for it. pay it off, ”Delisle said. . “The former is loaded with loan cancellations and now tax breaks; the latter is forced to pay back every penny he borrowed.”
A different perspective came from Adrienne L. Way, CEO and owner of Edcor Data Services LLC, one of the most established players in the benefits business. She said a tax-free benefit for student loan assistance payments would be a win for employers and employees.
She said the tax break would help employers of all sizes, in part because it would be easy to implement under the stimulus bill’s provision and be effective in recruiting and retaining employees.
“This benefit allows small employers to compete for top talent who often go to larger organizations with more lucrative benefits,” Way said in a statement.
Student loan repayment programs are a new form of benefit that is rarely offered. Way said many employers are waiting to see what happens in Congress. The stimulus bill was what businesses had been waiting for, she said.
“It’s not just about paying off student loans; employer’s help helps the employee free up income to invest in a 401 (k) or save money for major purchases such as a new home, ”she said. “Overall, this benefit helps anyone with a job pay off student debt, which is ultimately good for the economy. It also becomes an excellent incentive for the unemployed to seek out employers who offer this benefit. “