Controversial Tax Break for Loan Payments

The $2.2 trillion stimulus bill Congress is set to pass includes a one-time tax break this year for annual employer contributions of up to $5,250 toward their employees’ student loan debt. The provision is drawing both praise and criticism.

A growing number of mostly large companies have begun offering student loan payments as a benefit for both current employees and new hires.

A survey conducted last year by the International Foundation of Employee Benefit Plans found that 4 percent of 772 responding organizations offer such a plan, with 2 percent in the process of creating one. Another 23 percent of employers, however, said they were considering such a benefit.

For example, PricewaterhouseCoopers last year announced it had paid $25 million toward the student loan debt of employees. The auditing and professional services company offers $1,200 in loan repayment per year for up to six years for its associates and senior associates.

A bill introduced last year by Senator Mark Warner, a Virginia Democrat, sought to make employer-paid student loan benefits tax-free. Companies that help manage such plans said the space would explode if the bill passed, with some saying all major employers would have to offer the benefit.

The 619-page draft stimulus bill from the Senate would do just that and appears to mirror the proposal from Warner.

Section 2206 of the bill would exclude from taxation 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 incurred by the employee for education of the employee." It appears to only be in effect for 2020, although pulling back a tax break is rarely an easy political move.

The benefit likely would be lucrative for both student loan borrowers and employers, wrote Adam Looney, a senior fellow of economic studies at the Tax Policy Center from the Urban Institute and the Brookings Institution.

“Under the terms of the bill, employers could establish educational 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 for employees repaying student loans,” he wrote. “Instead of being treated as wages, those payments would be excluded from income and payroll taxes (both the employee and employer portion).”

Among those applauding the provision was Scott Thompson, CEO of Tuition.io, which works with companies on employer-paid student loan benefits.

“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.”

Looney, however, said the perk will help student loan borrowers who need it least.

Only borrowers with jobs will be able to receive it, obviously. And he said most people don’t work for an employer with benefits that are generous enough to offer student loan payments, noting that only four in 10 people with debt work for an employer that is even willing to establish a matching 401(k) plan.

In addition, employers that offer broad benefits tend to have higher-income workforces. And Looney said the tax break will be more valuable for workers in higher tax brackets.

“Beyond simply 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 get no relief. But borrowers who are already making payments -- at or above the $5,250 annual level -- get the full benefit.”

The proposed tax break is bad policy on several levels, said Jason Delisle, a resident fellow at the American Enterprise Institute. And he said the provision obviously is not aimed at addressing the financial distress people are experiencing due to the coronavirus.

“It rewards employers for paying employees who have student loans more in total compensation than their employees who do not,” Delisle said in an email. “As a result, it also encourages people to take on student debt even when they don’t need to -- otherwise they will miss out on being able to pay for the education in pre-tax dollars, or through an employer-provided benefit.”

Student debt will rise as a result of the benefit, he predicted.

"Yet 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 struggle to repay," said Delisle. "The former is showered with loan forgiveness and now tax breaks; the latter is stuck paying back every penny he borrowed."

A different take came from Adrienne L. Way, CEO and owner of Edcor Data Services LLC, one of the more established players in the employer benefits field. She said a nontaxable benefit for student loan assistance benefits payments would be a win for employers and employees.

She said the tax benefit would help employers of all sizes, in part because it would be easy to implement under the stimulus bill’s provision and would be effective in recruiting and retaining employees.

“This benefit allows smaller employers to compete for the top talent that oftentimes goes to larger organizations with more lucrative benefits,” Way said in a statement.

Student loan repayment programs are a new, rarely offered form of benefit. Way said many employers had been waiting to see what would happen in Congress. The stimulus bill was what companies were waiting for, she said.

“This is not just about paying off student loans; assistance from the employer helps the employee free up income to put into a 401(k) or save money for large purchases such as a new home,” she said. “Over all, this benefit helps anyone and everyone who is employed pay down their student debt, which is ultimately good for the economy. It also becomes an excellent incentive for those unemployed to search out employers that offer this benefit.”