CARES Act 2020 Student Loan Legislation
The COVID-19 stimulus package included some good news for employees with student debt and for companies focused on helping support their employees’ education.Student loan borrowers are now eligible for an interest waiver for Federal loans and an immediate forbearance (suspension of payments) upon request, both available until September 30th, 2020.
In addition the bill now enables employers to provide student loan repayments to employees on a tax-free basis for loan payments made by the end of this year. Employers may contribute up to $5,250 annually towards any combination of student loan and continuing education assistance.
- The Federal student loan interest rate has been reduced to 0% through September 30, 2020. Borrowers will not accrue interest on their loans during this period.
- Federal student loan borrower payments have been placed in an immediate “administrative forbearance” (borrowers obligations to make payments are suspended) through September 30, 2020.
- Automatic collection of defaulted federal loans has been paused.
- Employers may provide a student loan repayment benefit to employees on a tax-free basis:
- Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment will be excluded from the employee’s income.
- However, the $5,250 limit is inclusive of both payments toward an employee’s student loans and other educational assistance payments provided to the employee, typically referred to as “tuition assistance” (e.g., tuition, fees, books) provided by the employer under current law and IRS section 127.
- The provision applies to any student loan payments made by an employer on behalf of an employee between March 27, 2020 and December 31, 2020.
If we have an education assistance program but do not yet offer student loan repayment, can employees simply make a claim for a student loan repayment through our education assistance program?
No, as these are distinct payment types with different approval and compliance processes. Broadly speaking, education assistance payments require pre-approval from a supervisor and are made once the course is complete, while student loan payments are made immediately once paperwork is submitted and with no supervisor approval. With the student loan repayment component added, our administration platform can manage both payment types and track them against the combined annual maximum to ensure tax compliance.
Can we require that employees only participate in either the student loan or educational assistance program at one time?
Yes. Employers can choose whether they wish to allow employees access to only one program at a time or to permit participation in both programs simultaneously.
The CARES Act allows for a combined limit of $5,250 toward an employee’s student loan and other educational assistance. How does it work?
The Bright Horizons EdAssist Solutions platform manages both educational assistance and student loan payments on a single, integrated platform and will automatically calculate total payments in both programs during the year. If your policy allows employees to receive total payments greater than $5,250 annually, the excess amount may be subject to taxation.
How is the taxation handled?
Payment amounts for tuition and loan payments with pay codes (both taxable and non-taxable) are included in a payroll file from the Bright Horizons EdAssist Solutions platform so that taxation can be handled accurately for each employee.
Is it likely that the tax free provision of employer-sponsored student loan payments will be renewed beyond 2020?
The CARES Act legislation authorizes the employer contribution tax-free provision between March 27, 2020 through December 31, 2020. While there have been other instances of temporary legislation being extended (notably IRS Section 127 covering tuition programs) we cannot speculate if this legislation will be reauthorized beyond that date.
Does this legislation have any impact on our education assistance program if we are not offering student loan repayments?
If you choose not to offer student loan repayments, it will have no impact. The CARES Act does not include any additional provisions specific to employer-sponsored education assistance programs.
Can employees benefit from the tax-free employer loan repayment assistance for their own student loans as well as loans they have borrowed for their dependents.
The tax-free provision applies only to student loans taken by the employee for their own higher education. Dependent loans (e.g. Federal PLUS loans) are not eligible.
What are your best practice recommendations for an employer student loan repayment policy?
Bright Horizons EdAssist Solutions can provide clients with a policy template to help with swift implementation of this program to maximize the tax benefit for employees in 2020. Our best practice recommendations for student loan programs include specifying which types of loans are covered, loan verification processes, and making payments directly to the loan servicer. We can provide full policy consulting to our clients as a part of the implementation process on these and all other aspects of policy, based on more than five years’ experience in designing student loan repayment programs.
Is it possible for employers to make contributions to employee student loans even when they are not required to make a payment due to $0 balance due or to the temporary automatic forbearance.
Yes. This is in fact highly advantageous for employees as it directly reduces the loan principal, after any accrued interest is paid, shortening the duration of the loan and interest costs.