Does your employer offer a student loan repayment assistance program? Congress just handed you big gift… No taxes on this benefit for the next 5 years! A godsend for cash strapped grads with student loans to repay.
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The idea of employer student loan repayment assistance programs (LRAPs) may sound like the greatest thing since sliced bread. But until now, it had a dark side… Taxes.
If you have student loans and your employer offers student loan repayment assistance, Congress just handed you a big windfall. A wonderful gift. No taxes on this benefit for the next five years!
Student loan repayment assistance programs let companies make monthly payments straight to employees’ student loan lenders – whether the loans are federal or private.
LRAPs Now Non-Taxable Up to $5,250 per Year
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, your employer could make nontaxable payments of up to $5,250. But they were only nontaxable from March 2020 through December 31, 2020.
Now, your employer can offer you tax-free student loan repayment assistance for the next five years. In amounts up to $5,250 per year. That’s a grand total of up to $26,250.
The Taxpayer Certainty and Disaster Tax Relief Act was signed by President Trump on December 27, 2020 as part of the Consolidated Appropriations Act, 2021 (CAA). It extended the tax exempt status for employer-paid student loan assistance through 2025.
Before, your employer got hit for taxes for offering the program. And so did you as a participant. Now, the tax landscape looks much brighter.
Student Loan Repayment Help for
This new law gives employers a chance to offer long-term solutions to debt-strapped employees.
Student debt has doubled in the past ten years.[i] One in three Millennials has student debt. But 45 million parents also carry student debt on behalf of their adult children. And seniors are the fastest-growing group of student debt holders.[ii]
According to the Society for Human Resource Management’s 2019 Employee Benefits survey, the number of employers offering direct student loan repayment benefits doubled from 2018 to 2019.[iii] In fact, it’s become a key recruiting and retention tool. Still, companies need profits to be able to offer these types of programs in addition to more “traditional” benefits.
Loan Repayment Plans vs. Employer-Paid Tuition
Student loan repayment assistance programs must meet the requirements of Internal Revenue Code Section 127 for educational assistance programs.
Through 2025, your employer could make a contribution of up to $5,250 per year toward your eligible education expenses. These expenses could include tuition, books and fees, as well as student loan assistance. The $5,250 is a combined maximum for all of these education expenses. And importantly, this does not increase your gross taxable income.
When properly structured, neither employer nor employee will be held responsible for payroll taxes on qualifying payments.
Loan Repayment Tax Savings… More than Meets the Eye
To show how valuable this new tax savings is, if your employer paid the full $5,250 for student loan repayment assistance before 2020, both your employer and you would each owe about $400 in payroll taxes.
Plus, assuming a 22% federal income tax bracket, you would also owe about $1,155 in federal income taxes. This means that your employer would have to pay $5,650, but you only get a net benefit of $3,695.
Under the new law, it costs your employer $5,250. And you actually get a benefit of $5,250 as well.
A Few Caveats… Watch Out For These Loan Repayment Benefit Mistakes
Note that most employers don’t cover nearly $5,250 per year on student loan repayment plans. And most companies also impose restrictions on how you get that repayment assistance – whether it be based on length of employment or other factors.
What’s more, it can be a mistake to choose a job strictly to gain this benefit. Especially if the job is not otherwise a good fit for you. You might get “stuck” in a job that’s a bad fit for years, just to claim one benefit. It could also be a mistake if the pay is significantly lower, in which case you might be better off to pay the taxes on the higher salary and forgo the student loan repayment program benefits.
Still, since it’s increasingly being used as a recruitment and retention tool, and you’ve got student loans to pay, it’s certainly worth a look.
And if you’re comparing two or more jobs side-by-side and one offers a student loan repayment assistance plan and the other does not, it becomes an easy decision to opt for the repayment benefits – all else being equal. Wouldn’t you agree?
[i] Gradifi by E*TRADE, “Separating Fact from Fiction: The Truth About Student Loan Benefits,” July 2019, https://notebook.gradifi.com/workplace-trends/separating-fact-from-fiction-the-truth-about-student-loan-benefits
[ii] Newsweek, “The Truth About Student Debt: 7 Facts No One Is Talking About,” August 2019, https://www.newsweek.com/2019/08/23/student-debt-loans-trut-facts-cover-story-1453057.html