As the country continues to emerge from the economic challenges brought on by the pandemic, the impending resumption of federal student loan payments is a development that carries significant implications for businesses and their workforces. For the majority of those individuals holding this debt, the shocking resumption of another monthly payment after a three year pause will likely cause palpable financial stress to household budgets.
Background
- An estimated 45 million Americans are set to be impacted.
- The average borrower owes more than $30,000; totaling approximately $1.75 trillion in debt for U.S. graduates.
- Logistical hurdles and widespread confusion are adding to the anxiety. A number of loan servicers ended their relationship with the Dept. of Education during COVID – meaning 40% of these accounts have since been transferred to different, and unfamiliar, companies.
In the face of the intricacies of this repayment process, employers should be prepared to provide essential resources to help their workforce navigate this period of economic uncertainty. Understanding the change in repayment dynamics and offering guidance and support during this transition can be a powerful tool at their disposal. Below we delve into the significance of repayment assistance and the potential to ease the transition for both employers and employees alike.
Educational Assistance / Student Loan Program
Traditionally, educational assistance programs have been used to pay for books, equipment, supplies, fees, tuition and other education expenses for the employee. These programs can now also be used to pay principal and interest on an employee’s qualified education loans. The Coronavirus Aid, Relief and Economic Security (CARES) Act* included a provision for a payroll benefit that allows employers to contribute up to $5,250 per year toward student debt until 2025. Employees do not get taxed for this benefit, and it is deductible to the employer as well. This benefit follows the standards established by Internal Revenue Code Section 127 (Educational Assistance Programs).
Retirement Match
The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0** introduced an innovative provision that allows employers to provide 401(k) contribution matches based on the employee’s student loan payments. This new policy – set to take effect in 2024 – encourages employees to continue saving for retirement while tackling their student loan debt, presenting an opportunity to make progress on both financial fronts simultaneously.
When evaluating the pros and cons that stem from offering these student debt-related benefits, it’s crucial to recognize the broader potential business outcomes that can arise from such initiatives. This analysis is likely to shed light on how investing in employees’ futures can yield multifaceted and substantial returns for companies of all sizes.
Attracting and Retaining Top Talent: Providing such value-add fringe benefit options can significantly enhance an organization’s appeal to potential hires, while fostering good will among highly skilled and talented individuals for the long term.
Boosting Employee Productivity: A lighter financial load empowers employees to channel their focus and energy more effectively into their daily work tasks, directly bolstering the company’s bottom line.
Competitive Advantage: Offering a comprehensive suite of benefits can set businesses apart by showcasing a commitment towards employee health, wealth and well-being. This not only differentiates an employer from its competitors but also solidifies its position as the preferred choice for potential talent.
Employee Engagement: Cultivating a positive workplace culture where employees feel supported and valued leads to increased engagement and dedication; thus bolstering employee morale and job satisfaction throughout an organization.
For more information, please see Employer’s Tax Guide to Fringe Benefits (Publication 15-B), Tax Benefits for Education (Publication 970 – Chapter 10) and Federal Student Aid (Dept. of Education).
*Public Law 116-136 (CARES Act) **Public Law 117-328 (SECURE Act 2.0)