Financial frustration will be at the forefront in the coming months, as workers dig deeper into their paychecks to once again make federal student loan payments when their bills start arriving soon.
Will employers be more willing to step up to cover a bit of that student debt?
Back in March 2020, some rules changed to allow employers who have educational assistance programs the option to use these programs to offer employees tax-free help to pay student loans. Under the current rules, employees could get up to $5,250 per year toward student loan payments as part of their educational assistance benefits at a company. This provision is set to continue until Dec. 31, 2025.
Typically, educational assistance programs are used to pay for things like books, equipment, fees, tuition and other expenses. But now, according to the latest alert from the Internal Revenue Service, such programs also can be used to pay the principal and interest on an employee’s qualified education loans. “Payments made directly to the lender, as well as those made to the employee, qualify,” the IRS stated.
IRS offers webinar on student loan feature
In a somewhat odd twist, the IRS issued an alert to small businesses and other employers in late August about an option that’s now been on the books for more than three years.
“The IRS wants to remind both employers and employees about this special feature that can help with student loans,” IRS Commissioner Danny Werfel said in a statement.
“There is a limited window of time for this educational assistance program, and the IRS wants to make sure employers don’t overlook this option that can help businesses attract and retain workers.”
The IRS is holding a free 75-minute webinar beginning at 2 p.m. Sept. 14 to run through details and answer questions. See the Webinars for Tax Practitioners page or the Webinars for Small Businesses page on IRS.gov.
As part of the rules, such educational assistance programs must be in writing and cannot discriminate in favor of highly compensated employees. By law, tax-free benefits under an educational assistance program are limited to $5,250 per employee per year. Normally, the IRS notes, assistance provided above that level is taxable as wages.
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Some companies offered help for years
Buzz has been building for years on how businesses that benefit from an educated workforce could roll out student loan-related benefits. In the fall of 2018, I wrote about how some companies, including Dearborn-based Carhartt, maker of sturdy jackets for construction workers and the fashion-trendy, tried to help workers pay off their college debt.
Carhartt pays $50 a month — or $600 a year — to eligible part-time and full-time workers to cover some student loan debt. Employees must be with the company for at least 30 days, if nonunion, or 90 days, if in a job represented by a union. The maximum benefit is $10,000 over time.
Even five years ago, companies trying to hire millennials in a tight labor market talked about adding a new perk for workers who were juggling high student loan payments. Until Congress created the special feature in 2020 for student loan debt to be covered as part of educational assistance programs, the benefit often was taxable income for the employee.
New student loan bills trigger new worries
David Amendola, senior director at the global advisory firm WTW in Stamford, Connecticut, said he found it very surprising to see the IRS put out a news release now on how employers can help workers pay student loan bills, given that there’s nothing new in the rules or guidance.
What’s new, of course, is that restarting student loans in October will change the financial picture for tens of millions of households. Federal student loan borrowers have been allowed to skip payments ever since March 2020 and later repeated extensions of the payment pause.
Outstanding student loan debt hit $1.57 trillion in the second quarter, according to The Federal Reserve Bank of New York’s Center for Microeconomic Data report issued in August. Mortgage balances hit $12.01 trillion, with auto loan balances coming in second at $1.58 trillion. Credit card debt ranked fourth at $1.03 billion.
The latest alert from IRS seems to be a backhanded way of encouraging employers to step up and find a way to assist their workers who are burdened by student loans.
When an agency, like the IRS, discusses a benefits option, Amendola said, it gives more credibility to an idea, making employers more willing to explore a program than if they only heard about an option from a consultant.
“We’ve certainly talked to a lot of clients about the advantages doing a program like this, especially trying to take advantage of the tax rules that are set to sunset at the end of 2025,” said Amendola, who serves as intellectual capital leader for Benefits Advisory & Compliance at WTW.
Lawmakers even could move, he said, to extend that special break beyond 2025.
The biggest hurdle for employers, though, could be the cost.
Many employees don’t take advantage of tuition reimbursement programs because they don’t want to sit in a classroom anymore once they’ve started working or they don’t have time when they’re raising families.
But if an employer suddenly started to offer $100 a month or more toward student loan repayments, realistically, Amendola said, any employee with student loan debt would take advantage of it.
“Paying off the debt can be much more expensive,” Amendola said. “So many individuals are heavily burdened by student loan debt.”
A ‘new $400 a month payment’
The pandemic-related payment pause for federal student loans gave millions of borrowers more financial breathing room each month for more than three years. But now it’s time to find extra cash in the budget.
“It’s the new $400-a-month payment,” said Scott Thompson, CEO of Tuition.io, a California-based platform for employee student loan contributions.
Obviously, monthly payments vary dramatically for individual borrowers but you get the picture. On average, he said, student loan bills will be $393 a month at the restart.
Where will people come up with the extra money? Many borrowers will be able sign up for income-driven repayment plans, including the new SAVE plan, to dramatically lower those payments. But, still, many aren’t familiar with the new SAVE option, which Thompson calls a “life-changing benefit” for lower-paid workers who could qualify for $0 a month payments under SAVE.
Thompson’s company works with many employers, including nonprofit health systems and even company in the auto industry, which he declined to name, to help their workers deal with student debt. In some cases, employers offer assistance for how to figure out what’s the best repayment plan for the borrower.
Last year, Thompson said, was Tuition.io’s best year since it was founded in 2012 — even in spite of the payment pause — and 2023 looks equally as good. Employers, he said, are more serious about how the restart of student loan payments will impact workers.
“Most people just assumed the student loan thing went on hold,” Thompson said. “That’s just the furthest thing from the truth. We have just exploded with activity with new clients and new products over the last 3½ years.”
Last September, Starbucks announced a student loan management and savings program that is designed to offer more financial stability for its employees, including parents planning for college bills for their children. As part of that effort, Starbucks turned to Tuition.io to be able to offer Starbucks employees access to tools, resources and individual coaching to manage student loan debt, such as signing up for income-based repayment options and refinancing, based on their personal goals and challenges.
Increasingly, employers are understanding that the financial stress related to student loans. That stress has only built in recent months.
As part of negotiations in Congress in May to raise the nation’s debt ceiling, a deal was struck on ending the payment pause that was part of economic-relief efforts during the pandemic. No more extensions can take place. Dealing with the country’s debt was essential to prevent the United States from defaulting on its debt for the first time ever — and avoid triggering a recession.
On June 30, the U.S. Supreme Court, in a 6-3 majority, ruled that the Biden administration overstepped its power by attempting to forgive more than $400 billion in student loans left lingering during the pandemic. The massive plan would have forgiven up to $10,000 in federal student loans for many borrowers and up to $20,000 in federal student loans for borrowers who had Pell Grants in college.
Some employers, Thompson said, are taking advantage of the special benefit, currently good through 2025, to offer their workers money to cover student loan bills, as part of a tax-free benefit under an educational assistance programs.
Some companies might offer workers $50 or $100 a month for student loan bills. But some employers, Thompson said, actually are going to right up to the $5,250 limit and offering eligible employees the chance to claim up to $437.50 a month to pay student loan bills.
Others don’t provide cash but offer tools for employees to understand the best strategies for them when it comes to repaying that debt, including signing up for income-driven repayment plans, including the new SAVE plan launched in August.
And, Thompson said, more employers continue reviewing their options for creating new programs to help their workers, knowing that further extensions to the payment pause are not in the cards.
“We see more stepping in now because payments are about to turn back on this October,” Thompson said.
“Payments are turning back on. They know it’s a big deal. Their employees haven’t saved for this new expenditure. They’re really going to struggle with it.”
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor.
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