Welcome, but limited, tax-free workplace help in paying down student loans

School is, or soon will be, starting across the United States. That means students, parents, and teachers are hearing about the variety of educational tax breaks that could help them.

But what about all the former students, especially those who took out loans to cover higher education costs?

You and your lots of student loans are not forgotten.

Almost 43 million U.S. borrowers have federal student loan debt, according to data collected by the Education Data Initiative (EDI). That college debt amount totals $1.753 trillion.

But there’s also some good news. Melanie Hanson reports at EducationData.org that the annual tally of student loan debt declined in 2023 for the first time ever.

Some of that decrease might have come from in-debt ex-students who got help from their employers in paying down their student loan amounts.

Educational assistance add-on: Workplace programs to help students meet education goals have been around for years.

Most legacy workplace educational assistance programs are used to pay for books, equipment, supplies, fees, tuition, and other education expenses for the employee.

In 2020, educational assistance benefits got another option. They now also can be used to pay up to $5,250 in principal and interest on an employee’s qualified education loan.

The qualifying payments, which may be made directly to the lender or the employee, are a tax-free benefit to the indebted worker.

But the loan payment option only runs through 2025.

Voluntary, and temporary, employer plan: Who can get this help? Workers whose employers added the student loan payment option to the company's benefits options.

The ability to do that was created as part of the first COVID-19 pandemic relief law, the Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted on March 27, 2020. CARES expanded Internal Revenue Code Section 127, which already allowed employers to provide tax-free educational assistance, to include payments of workers’ student loans.

But that option was available only for the last nine months of 2020.

So Congress extended the loan payment benefit option in the Consolidated Appropriations Act, signed into law on Dec. 27, 2020. This law extended the provision for five years through Dec. 31, 2025.

The extension, however, gave companies more time to set up the loan-payment option.

Benefits of workplace educational assistance: Once a company plan is established or amended to include the student loan payments, the educational benefits are excluded from federal income tax withholding, Social Security tax, Medicare tax, and federal employment (FUTA) tax.

Note, too, that $5,250 tax-free limit is for all qualifying education assistance benefits combined, not just student loan repayment. So, if you offer (or get) other education assistance benefits, you’ll need to account for that.

True, the maximum $5,250 a year in tax-free company loan help may not be that much in relation to a worker’s full student loan, which EDI says on average is $37,853. But every bit paid toward the loan principle can reduce interest accrual.

And you did see tax-free, right?

Ask your boss about the benefit: If you’re unsure as to whether your company offers this loan payment benefit, check with your human resources office.

If they don’t, you and your fellow student loan holders might want to ask the company to make the change. When you do, point out it’s good for all. Fringe benefits, such as educational assistance programs, can help employers attract and retain qualified workers.

Some companies agree. Employer-provided student loan repayment programs remain rare, but they have seen an increase in popularity.

The Society for Human Resource Management (SHRM) reports that the percentage of employers providing student loan repayment assistance doubled from 4 percent to 8 percent in 2020, the first year the benefit was available.

Employers can find out more in IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits. For details on what qualifies as a student loan, check out Chapter 10 of IRS Publication 970, Tax Benefits for Education. Workers and companies also can review IRS.gov’s frequently asked questions about educational assistance programs.

If you and your company find the student loan payment benefit useful, be sure to let your Representatives and Senators know, too. Only Congress can extend the option beyond 2025.

You also might find these items of interest:

• 4 tips to deal with the resumption of student loan payments
• Offers to accelerate or increase student loan relief could be scams
• Options for students in debt: Loan forgiveness for some, loan interest tax deduction for others

 

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