Over the past few days in Washington, D.C., a bi-partisan group comprising 20 percent of the members of the U.S. Congress introduced the Employer Participation in Repayment Act. If passed, the legislation will save companies approximately 10 percent of the cost of offering Student Loan Repayment, allowing employers to make pre-tax contributions toward student loans by expanding the Section 127 exemption that currently allows companies to make pre-tax tuition payments.
The House bill (H.R. 1043) was introduced with bi-partisan co-sponsorship from over 100 members including several members of the House Ways & Means Committee. The Senate bill (S. 460) was also introduced with bi-partisan co-sponsorship from nearly 20 members including multiple members of the Committee on Finance.
Student loans are now our country’s largest financial asset weighing in north of $1.4 trillion. The student debt load is expected to double in the next decade, and default rates are forecast to expand from 12 percent to as much as 40 percent.
Student loans now affect 45 million Americans and over 70 percent of those who graduate college. Student debt is a drag on the U.S. economy as studies show it is keeping college-educated workers from getting married, starting families, buying cars, buying homes and saving for retirement.
Today, employers are able to differentiate their companies in the competitive market for talent by providing Student Loan Repayment. 49 out of 50 college-educated workers are already employed, yet one in 10 employers helps with student debt. Studies show that offering Student Loan Repayment can create a 13 percent improvement in offer acceptance rates, and employers like Rise Interactive have said it’s “been a boon to our recruiting efforts.”
Pre-tax treatment of Student Loan Repayment would be a win for tax payers, for graduates, for workers, for businesses and for communities. Passing this legislation in 2019 could go a long way in helping elected officials show tangible results to their constituents in advance of 2020 elections.
What does this mean for employers?
Student Loan Repayment is currently considered taxable income — employers pay payroll taxes and employees pay income taxes.
If Congress allows the benefit to be paid pre-tax, employers would shave about 10 percent from their cost, as contributions to student loans would not require a 6.2 percent employer withholding for Social Security, 1.45 percent for Medicare, 0.6 percent for FUTA, or ~1 percent for SUTA (depending on the employer’s rate).
The real change would be on the employee side, shaving around 30 percent from the cost of each dollar that an employer contributes to a student loan, as contributions would not require a ~20 percent federal income tax withholding (depending on the employee’s annual earnings), 6.2 percent employee withholding for Social Security, 1.45 percent for Medicare, and ~5 percent for state income taxes (depending on their state rate).
Employees and job candidates are already asking for Student Loan Assistance, which means the requests are likely to grow exponentially if Congress allows company contributions to become 30 percent more tax efficient for workers.
With unemployment low and job hopping on the rise, employers have a unique opportunity now, to deploy Student Loan Assistance as a competitive advantage in the market for talent.
But, once it’s allowed to be paid pre-tax, employee demand is likely to make this benefit a required part of the total rewards package, and most companies will then be seeking new ways to differentiate.
So if you’re an employer, is a 10 percent savings worth waiting for? We don’t think so.
Peanut Butter is here to make it easy for your company to attract, retain and engage talent today by offering Student Loan Assistance.
In under an hour, your company can stand-out along with other leading employers, providing your team members with the Resources to manage their student debt and contributing to the repayment of their loans.