The CARES Act and Student Loans – What Employers Need to Know
The following post comes from Bright Horizons Vice President of Client Relations Kelly Russell
Current events have created major questions for employers – about how to adjust resources to support people, and about what supports will be most impactful during this unprecedented time. Not surprisingly, student debt and financial wellness are at the top of a lot of lists, especially with Millennials exceptionally stressed by the economic downturn.
“Young adults, burdened with debt” wrote the New York Times recently, “are now facing an economic crisis.”
For us at Bright Horizons, it’s translated into conversations with clients about how to help them – and their people -- adjust. Such discussions have multiplied as the CARES Act announced new rules concerning student loan debt.
I sat down with Bright Horizons in-house expert Stacey MacPhetres, our senior director of college finance and finance education, to talk about what the CARES Act provides, what it means to employers, and how to make the most of it for your people.
Kelly Russell: In terms of student debt, what exactly does the CARES Act provide?
Stacey MacPhetres: There are two main provisions that immediately benefit student loan borrowers. One is that federal student loans will not incur interest for six months – through September 30, 2020. The second is an immediate administrative forbearance, which means borrowers can take six months off from paying, interest free, without a penalty or risk of default.
KR: What does this mean for employers?
SM: The CARES Act gives employers a number of ways to use their education assistance programs to support their people.
- They can communicate the act to ensure all employees are aware of these provisions so that those who need them can take full advantage.
- It enables employers to maximize existing student loan repayment programs while also offering incentive for organizations to consider them.
KR: Why the focus on loan repayment?
SM: In addition to forbearance and interest cessation, the CARES Act also made employer contributions to employees’ student loans tax free until December 31, 2020. This is something employers have been requesting for some time. There’s no guarantee it will extend beyond January 1, 2021. And there’s a limit on the tax-free portion of contributions-- $5,250. That limit covers both student loan repayments and education assistance under one umbrella amount. However the two programs must be set up for distinct purposes. In other words, you can’t set up an overarching education budget and allow employees to choose between using the money for tuition or loan repayment. Funds must be allocated specifically for either loan repayment or tuition. Still, the power of employer payments toward loans is magnified at this time.
KR: How so?
SM: Because there’s no interest, once prior accrued interest obligations are met, all loan payments made until September 30, 2020 go directly to principal, paying down the loan faster. Combined with employer payments at this time, it increases the impact.
KR: What if employees can’t make payments? Can employers still contribute?
SM: Yes. Current rules say the employer payments don’t jeopardize the forbearance. And, in that case, the employer payment becomes arguably even more valuable.
KR: Can you give an example?
SM: Suppose an employee with a $20,000 loan suspends their $200/monthly payments for six months, but their employer keeps paying a $200 monthly employer contribution. In October, the loan principal will be $1,200 lower. Plus, because interest accrues as a percentage of the lower balance, there will be an additional savings in interest over the life of the loan.
All of the above is a primer. Stacey says there are other important elements to consider – how payments are made (we recommend employer payments go directly to the loan servicer to pay down principal), how your program is organized, and what kind of platform you need to support it. Just as important, successful debt management is more than just payments. Other critical elements include how employees are managing other expenses; whether they’re able to find any cash flow; and if they are, what they’re doing with it. All will determine long-term financial solvency on the other side of the pandemic. Plus, many people have private loans that aren’t covered under the CARES Act. Collectively it makes financial wellness coaching a must. As SHRM wrote recently, “Another way to help American workers—now and in the future -- is to improve their financial literacy.”
You can read more about the nuts and bolts of the provision, here. We’ll continue to explore financial wellness for employees in the weeks ahead.
April 23, 2020