It’s that time of the year when thoughts turn to back-to-school activities. For many, repaying student loan debt may be among these activities. The Federal Reserve says student loan debt is $1.77 trillion. A plan for the federal government to forgive some of this debt was struck down in June by the U.S. Supreme Court. A new student loan relief proposal is on the table but has not been put into effect. Starting October 1, 2023, repayment of student debt must commence after being suspended during the pandemic, with interest accruing as of September 1, 2023. Many employees may be sitting with debt for their own education or for their children’s education. What can employers do to help employees with this debt?
Why should employers help?
With a tight labor market, anything employers can do to gain a competitive edge is a plus. Job applicants saddled with student loan debt may opt for an employer offering some type of assistance.
A financial wellness blog lists 7 ways student loan debt affects employees’ lives:
- Financial strain (especially in inflationary times)
- Delayed milestones, such as buying a home or starting a family
- Career choices (e.g., pursuing one with greater financial rewards because of debt obligations over one that is more fulfilling)
- Retirement plans because wages are going to service student loan debt rather than save for retirement (but see the new option for 2024 explained later)
- Education and training, such as deferring additional education until debt is handled
- Personal relationships with family and friends may suffer due to financial stress
- Mental and physical health issues, such as stress, anxiety, and depression
What this list omitted was employee productivity. If employees are dealing with all of the issues stemming from student loan debt servicing, it’s not a stretch to assume they won’t be performing optimally on the job. If employers want top productivity, they need to care about student loan debt.
Contribute or facilitate payoffs
Employers can anti-up to directly help employees manage student loan debt, including:
Pay off some debt. Employers with an education assistance plan can provide up to $5,250 annually to employees as a direct payment or reimbursement of student loans. This is a tax-free fringe benefit (no taxable compensation to employees; no employment taxes for employers). Other payoff options:
- Direct pay. It’s been reported that 8% of companies offer a student loan benefit, such as direct payments or incentives; this number appears to be growing. For example, Aetna employees can receive a match up to $2,000 annually ($10,000 lifetime) for their loan repayments. If an employer reimburses an employee for student loan payments outside of an education assistance plan, this is taxable compensation to the employee and subject to employment taxes.
- Discretionary pay. Employers can allow employees to use their accrued personal leave time that would otherwise be used for vacation, sick, or personal days to be used for student loan repayments. In other words, if employees have unused benefits, they can cash them in. The same tax treatment for direct pay applies for discretionary pay.
Use retirement plans. Starting in 2024, employers with 401(k)s or SIMPLE IRAs can treat employees’ payment of student loan debt as if it were their salary reduction contribution to the plan. This allows employers to make matching contributions to the retirement plan based on employees’ student loan payments. Decide whether to adopt this option for your plan so it’s set to go on January 1 and employees are given required notice of this option. And look for clarification from the IRS on some particulars (e.g., how employees certify they are making loan repayments).
Employers can furnish information to employees about their options for handling student loan debt, including:
- Choosing repayment plans. Employees may be able to manage student loan debt by choosing a repayment plan, and may even have loan forgiveness after a certain number of years. Those with multiple student loans may consolidate them to simplify monthly payments.
- Deducting student loan interest. Employees with income below a set amount can deduct up to $2,500 in interest payments. This deduction applies whether they itemize or take the standard deduction. If eligible, they may be able to decrease their withholding just a little bit and take home more.
- Use 529 plan funds. If employees are beneficiaries of 529 plans that still have money in them, they can use $10,000 to pay down student loan debt (principal and interest); this is treated as a tax-free distribution. It’s a lifetime limit; it can’t be used annually. And interest that’s tax free can’t be used for purposes of the tax deduction explained earlier.
- Get debt cancellation. There are various ways in which student loan debt can be canceled (e.g., working for certain; if their schools closed). Employees should learn whether their debt cancellation is treated as taxable income. If so, they may want to adjust their wage withholding to cover this tax liability.
In deciding whether and how to help employees with student loan debt, keep fairness in mind. Not all employees have student loan debt and what benefits are they receiving? Work with a benefits professional and a tax adviser to craft solutions that fit your company.
Find more information on employee benefits in earlier blogs here.