Student Loan Repayment Benefits Are Now Tax-Free: Here’s What You Need To Know

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Student Loan Repayment Benefits Are Now Tax-Free: Here’s What You Need To Know

As part of the CARES Act signed in March 2020 at the beginning of the pandemic, employers were offered an incentive and allowed to contribute up to $5,250 toward student loan repayment assistance for their employees each year. However, the legislation was initially only approved for nine months, making it difficult for employers to jump on board for this temporary employer student loan repayment benefit. 

In the past month, the Consolidated Appropriations Act of 2021 (CAA), extended this provision for five years until December 31, 2025, effectively shifting the employer benefits landscape for years to come. 

At FutureFuel.io, we aim to help employers engage and retain their employees with student loan repayment assistance as well as help student loan borrowers make a difference in their financial lives. We hope that this extension is the start of a permanent shift in employee benefits. Read on to learn how employers can maximize this perk to support financial wellness, inclusivity, and retention in a tax-advantaged way. 

About the employer student loan repayment benefit 

According to this provision that started with the CARES Act — and has been extended with the latest stimulus package — employers can offer an employee up to $5,250 each year in student loan repayment assistance. 

These tax-free contributions help employers offer a much-needed employer benefit, while also not affecting the employee’s gross income. Previously, any student loan repayment assistance was included in an employee’s gross income and was taxable

Under current legislation, these contributions don’t result in any tax consequences for either employers or employees. This makes it more appealing for employers to adopt as part of their financial wellness programs and retention plans, while also benefiting employees. No longer do they have to pay taxes on this employer student loan benefit and can use those funds toward their other financial priorities such as paying off credit cards or building an emergency fund or even just paying day-to-day bills without any added stress of paying more in taxes. 

How this can help attract and retain employees 

The pandemic has hit everyone hard, especially financially. Including an employer student loan repayment benefit can help attract the best talent in your industry while also retaining your top players.

While employers might not have seen the added benefit of this provision given its nine-month time-span before, this extension can make a meaningful difference in the financial wellness of their employees. 

For example, let’s say a company contributes the maximum amount each year for the next five years. In total, the employer student loan repayment benefit would be $26,250. That amount can make a significant difference in an employee’s life and help offset costs of student loan repayment. 

Plus, in the next year, these dollars may go even further. Federal student loan borrowers currently have their payments on pause and interest slashed to zero percent until September 30, 2021

That means any funds put toward student loan repayment will directly go toward the principal balance. Student loan debt can be tough to pay off as the interest accrues daily. Employees with advanced degrees are likely dealing with higher interest rates from Grad PLUS loans. Out of all of the federal student loan options, Grad PLUS loans have the steepest interest rates. 

Utilizing this employee student loan benefit can help retain your current employees but also be a major selling point for talent you’re hoping to recruit and help them pay down debt faster. 

On top of that, student loan debt is an equity issue, with many women and people of color disproportionately affected. As an employer, you can take steps to level the playing field for your employees and also stand out as a company. Currently, only eight percent of employers offer student loan repayment assistance as an employee benefit. 

How to implement this new employer student loan repayment benefit 

If you’re an employer who wants to take advantage of this new legislation and start to implement the new employer student loan repayment benefit, it’s not as hard as you might think. You can partner with companies like FutureFuel.io to help administer this perk for your employees. We do the heavy lifting for you and can get all the documentation streamlined in order to get started. 

We make the process easy for employers and it’s even easier for employees. The employer student loan repayment benefit can be paid directly to the loan servicer or lender, minimizing additional steps for the employee. 

This new legislation, as part of Section 127 of the tax code, provides a win-win situation for employers and employees against student loan debt. It offers an easy and affordable way for employers to support the overall financial wellbeing of their employees, prioritizing paying off student loan debt. Student loan debt is one of the greatest concerns of this generation and as an employer, you can be a trailblazer by implementing this employer student loan repayment benefit.