Student Loan Debt

How to Help Employees with Student Loan Debt

Estimates put the outstanding amount of student loan debt for about 45 million people in the U.S. at over $1.5 trillion. Many of those facing high debt experience stress, delay buying homes, launching businesses, or even starting a family. They also limit or avoid putting money into retirement savings.

Legally, employers have no obligation to assist those on their staff with student loan debt. But as a practical matter, especially in today’s tight job market, employers are well advised to do something to help.

Here are some ideas:

Student Loan DebtProvide information to help employees

Whether employees with student loan debt are recent graduates or parents who’ve taken on student loan debt, information can help them reduce the outstanding balance. Employers can provide information without making recommendations on the course of action.

Tax savings for paying interest on student loan debt

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.

Restructuring

Employees with outstanding student loan debt may be able to consolidate loans and bring down interest rates. There is federal consolidation for federal student loans and private consolidation for other loans. There are a number of lenders offering such consolidation. Consolidation may not bring down interest but can simplify the repayment process.

As an alternative to consolidation, it may be possible to refinance outstanding loans, which can bring down interest rates.

Loan forgiveness

Generally, when debt is canceled, taxable income results. Usually, this includes cancellation of student loan debt. However, there’s no taxable income when forgiveness results on account of the death or total and permanent disability of the student.

Using 529 plan funds

The SECURE Act (see Sec. 302 on the expansion of Section 529 plans), which is part of the massive spending measure signed into law on December 20, 2019, contains a little-advertised provision that could be helpful to some individuals. A beneficiary of a 529 plan can use up to $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. This new rule applies to distributions made after December 31, 2018. Of course, this option only benefits someone who still has funds in a 529 plan.

Pre-debt advice

Employees may have children nearing college age and could use help in making education decisions with loans in mind. Or your employees may be thinking of advancing their own education. Sites such as Edmit can help finding aid and minimizing debt for the future.

Contribute or facilitate payoffs

A small percentage of large corporations (about 4% in 2018) currently offer contribution toward repayment for employees. These corporations pay a set dollar amount each year (the amount varies by company). Small businesses may not have the financial resources to do this, but they can facilitate student loan payoffs with certain practices.

Payroll deductions

Employers can use payroll deduction arrangements to automatic employees’ student loan repayment. For example, Gradifi is a site that enables employees to pay down their debt via employer transfers of withholding amount.

401(k) structuring

It may be possible to let employees use their 401(k) money to make student loan repayments. The IRS ruled privately that employer non-elective contributions to an employee’s 401(k) account could be linked to the employee’s student loan repayment. The ruling addressed making these contributions rather than matching contributions. And the ruling emphasized that participation in a student loan repayment program would have to be voluntary.

Watch for legislation to help

Congress is well aware of the problem of student loan debt and last year proposed a number of measures to address the problem, including:

  • Allowing employers to match employees’ student loan repayment with 401(k) contributions.
  • Allowing employees to treat student loan repayment the same as education assistance. This would mean that employees could receive the benefit tax free up to $5,250 per year, while employers could take a tax deduction for it.

Whether any additional proposals will be considered this year remains to be seen.

Final thought

Aristotle said: “The roots of education are bitter, but the fruit is sweet.”

Those who’ve invested in their higher education may be struggling to address that bitterness.

Can you as an employer help? And how are you going to offer comparable benefits to employees who do not have any student loan debt?

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