Why New Laws About Employer Educational Assistance Matter to You
What does that mean?
It means creative employers may soon have an even more effective way to appeal to employees by helping to pay off student loans.
Changing What Qualifies as Employer Education AssistanceTake H.R. 3861. Current law (Section 127) allows employers to offer up to $5,250 in annual tuition assistance that can be excluded from taxable income. In short, to encourage employers to invest in their employees' education, the federal government forgoes the amount of tax revenue it would normally be owed.
But right now, this law only pertains to future education. In other words, it does not allow employees to contribute pre-tax dollars for student loans incurred previously for undergraduate or graduate degrees or other education. H.R. 3861 would change this by treating student loan payments for previously earned degrees just like tuition assistance for future education. That means it will allow employers to subsidize student loan payments for their employees without added taxes. When you consider the $1.3 trillion Americans are currently shouldering in student debt, this is a big deal.
And there's more. The second bill, titled the Partnership Act S. 2191, takes it a step further. Not only does it expand Section 127 to permit employers to help their employees repay student loans, but it also doubles the cap to $10,500 and expands Section 127 to include employee's spouses and dependents.
Laying the Groundwork for Corporate Education StrategiesSo what does employer educational assistance mean for you? From our perspective, it should create a sense of excitement and urgency around student loan repayment. Why? With the economy strengthening and talent wars heating up, employers are looking for effective ways to differentiate themselves. And those first out of the gate are likely to realize the most benefit.
We believe that those employers who start internal conversations now about what this benefit could look like at their organization will be those who will have an edge over other employers in their area. From our experience helping to create employee loan policies that meet an employer's strategic talent goals, we know forming the program can take time and energy. It is important to start the dialogue now.
Creative Approaches to Recruitment and RetentionThe fact is, nearly three quarters of recent graduates are carrying an average debt of $28.4K - almost a third are 90 plus days delinquent. The three-year default rate is around 13%. There have been a significant number of reports indicating the consequences of this issue. This past summer the president of Purdue University and the former republican Governor of Indiana said these graduates "are postponing marriage, childbearing and home purchases." They are also unable to save for retirement.
By offering to help with these payments, the private sector can help relieve the burden of student loans for employees and, at the same time, provide a new tool to help recruit and retain employees. We are seeing this concept take-off with many of our clients - even without legislation providing a tax incentive. Knowing what may come next on Capitol Hill makes the idea of student loan repayment even more compelling.
Assuming that the federal government does include student loan repayment under the tax code in some way, the early adopters of employer educational assistance programs will also be well-positioned for further financial benefit as soon as possible.
April 15, 2020