I wrote in a previous blog that Peanut Butter sat down with Congressman Rodney Davis (R, IL – 13) to discuss a bill he sponsored that would enable companies to make tax-free contributions towards their employees’ student loan repayment. On April 4, 2016, Congressman Bob Dold Jr. (R-IL 10) visited 1871, Chicago’s hub for tech startups and entrepreneurs, to meet with Peanut Butter and share his perspective on solutions for the student loan debt crisis.
Mr. Dold explained his vision for new legislation and his motivation for pursuing solutions to the student loan debt crisis in America. Dold’s vision is to create a 401(k)-esque program for student loan repayment that would enable pre-tax contributions from employers towards employee loans. This is great news for companies that are interested in offering a valuable new benefit to their employees. If Congress allows a similar structure for student loan repayment with pre-tax contributions, many companies will benefit from the potential tax savings.
Student loans are a burden for millions of Americans, and that is true for the constituents of Representative Dold’s district. Plus on a personal level, at age 46, Mr. Dold is still paying off his own student loans incurred as a graduate student at Northwestern’s Kellogg School of Management. We tend to think of student loan debt as a Millennial problem, but the fact of the matter is that plenty of people in their 30’s and 40’s have student loan debt too.
Peanut Butter shared our perspective on making a business case to the Federal Government in support of legislation that would enable companies to contribute to their employees’ student loans with pre-tax dollars. The business case is driven by the fact that involving employers in student loan repayment provides risk mitigation and reduction for the Federal Government because default rates will be lower and loans will be paid off faster. Here are some numbers to illustrate the case:
- In 2012, 5.1 million borrowers began repayment on their student loans
- The average amount of student loan debt owed by 2012 college graduates was $29,400
- Within three years, 11.8 percent or 611,00 borrowers from the 2012 cohort were in default
- Using the average amount owed of $29,000 means that approximately $17.96 Billion in student loans were at risk of not being paid.
But let’s say legislation is passed that spreads this risk to both individual borrowers and the companies that they work for. How would that affect the 611,000 loans in default?
The Davis-sponsored bill allows up to $5,250 in employer contributions per employee, per year. If that maximum amount was contributed by employers on the defaulted loans, that would mean that $3.2 Billion would be shifted from taxable compensation to pre-tax student loan contributions. The cost to the Federal Government would be:
- FICA Social Security tax (6.2 percent) reduced by $199 Million
- FICA Medicare tax (2.35 percent) reduced by $75 Million
- Federal Unemployment tax (six percent) reduced by $192 Million
- Employee Income Tax (25 percent) reduced by $802 Million
Total lost tax revenue for the Federal Government would be $1.27 Billion, but that keeps $17.96 Billion in student loans out of default and on track for early re-payment.
The numbers make sense to us, and they made sense to Congressman Dold as well, who discussed the possibility of even more robust legislation to address the student loan debt crisis. As we look for solutions to this crisis, we encourage Congress to pass win-win legislation that enables companies to offer an extremely valuable benefit to their employees.