Student loan debt: Tax and other considerations.

• Author: Kelley, Claudia L.

Prior to the COVID-19 pandemic, the competition to attract and retain talent was fierce. While national unemployment has surged, in certain industries the shortage of qualified workers remains. (1) According to a recent survey by the organization American Student Assistance, one benefit employees find desirable is assistance with paying off their student loan debt. (2)

Student loan repayment assistance, which started as a niche offering by a few companies, is becoming a more common workplace benefit. Since 2018, the number of employers offering student loan assistance has doubled, and these employer-offered programs are expected to continue growing despite a stagnant economy, (3) in part because of tax benefits introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. (4)

This article examines the student loan burden in the United States, reviews programs designed to assist borrowers with repayment, and discusses the tax issues associated with student loan repayment assistance programs and debt forgiveness. Although tax implications are the primary focus of this article, alternative ways of repaying student loans are also discussed.

Consequences of student loan debt

With regularity, major news sources are publishing articles about the crushing student loan debt burden. There are more than 45 million American borrowers who collectively owe nearly $1.6 trillion in student loan debt, a burden amounting to nearly 8% of national income. (5) Forty-six percent of federal student loan borrowers surveyed said they expected to struggle making their payments once forbearance relief ended under the CARES Act. (6) Research shows that post-college debt often compels people to delay marriage and reduces the borrower's ability to purchase a house and save for retirement. Excessive debt can also affect a student's post-college career choice, employment decisions, and enrollment in graduate programs. (7)

Fifty-nine percent of respondents to a survey conducted in May 2020 reported facing increased stress, anxiety, and depression stemming from their student loans during the pandemic. (8) Furthermore, financial stress and anxiety have been shown to affect an employee's ability to concentrate and job satisfaction. Individuals and employers are increasingly aware of the student loan debt crisis and are looking for solutions.

CARES Act provisions

The CARES Act, enacted in March 2020, provided relief to students in several ways. First, federal student loans were automatically placed into administrative forbearance until Sept. 30, 2020, which meant payments were not required until that time. Interest did not accrue on the suspended payments nor was the interest capitalized into the loan balance. (9) In August 2020, President Donald Trump issued a memorandum extending similar relief until Dec. 31, 2020. (10) Because only government-held federal student loans are covered by these actions, millions of student loan borrowers with private loans and commercially issued federally guaranteed loans are not provided relief. Private lenders may offer their own help, however; borrowers should contact their lender for assistance. For example, private lenders have entered into an agreement with several states to provide student relief options similar to what the CARES Act did for those with federal student loans. (11)

Under a separate provision, the CARES Act created temporary incentives for employers to help pay their employees' student loan debt. The act expanded, until the end of 2020, the types of employer-provided educational assistance that an employee can exclude from gross income under Sec. 127 to include the payment by the employer of the principal or interest on any qualified higher education loans as defined in Sec. 221(d)(1) for education of the employee. The loan repayments, which must be made under a written educational assistance program, are subject to the overall $5,250 per employee limit for all educational assistance. (12)

The employer may pay either the employee or the lender, and the amount paid, as well as being excluded from gross income, is not subject to payroll taxes. (However, if the employer pays student loan interest, the employee cannot deduct the interest under Sec. 221.) Collectively, these tax breaks may provide a great benefit to both the employer and employee, although they are currently set to expire after 2020.

Employer programs that assist with student loans

Eighty-six percent of young workers say they would commit to their employer for five years if the employer helped pay off their student loans. (13) Below are two examples of employer-provided student debt assistance programs that were created prior to the CARES Act. (14) Unless a student loan payment made by an employer is made in 2020 under an educational assistance program and the payment meets the CARES Act requirements described above, or is made under a plan with a similar structure to the Abbott program discussed below, the student loan payment likely will be taxable to the employee as compensation. (15)

Abbott

In June 2018, the health care company Abbott implemented a program that helps employees pay their student loans and save for retirement. (16) A survey Abbott conducted with research firm YouGov showed that nine out of 10 college students with student loans are looking for a company with student loan assistance, and six out of 10 working adults would consider switching companies to gain a student loan debt benefit. (17) Interestingly, Abbott is currently the only company with a private letter ruling from the IRS approving the structure of its program. (18)

The idea behind Abbott's Freedom 2 Save program is that employees paying student loans were generally unable to contribute to retirement savings plans and were therefore unable to receive Abbott's 5% matching retirement contribution. This essentially resulted in employees with student loans receiving less compensation than their loan-free colleagues. The new plan allows employees with student loans to pay down their loans without missing out on the employer matching retirement contributions.

Under the Freedom 2 Save plan, Abbott will make an employer nonelective retirement contribution on behalf of an employee conditioned on the employee making student loan repayments (SLR nonelective contributions). The program is voluntary, and all employees eligible to participate in the company's 401(k) plan are eligible to participate in the SLR program. Under the program, if an employee makes a student loan repayment during the period equal to at least 2% of the employee's compensation for the pay period, then Abbott will make an SLR nonelective contribution to the employee's 401(k) as soon as practical after the end of the year equal to 5% of the employee's eligible compensation for the pay period.

Abbott found this program structure more valuable for employees because the payment is not taxed immediately as cash rewards and the investment grows tax deferred. Many individuals under the burden of large student loan debt are unable to put money into retirement savings, often losing the company match as a result. (19) The Abbott structure works to alleviate this issue.

KPMG

KPMG's approach involves student loan avoidance rather than repayment assistance. KPMG has created a Master of Accounting With Data and Analytics Program, and the company funds tuition, fees, books, and a stipend to cover room and board to a select group of students accepted into the program. (20) Students take courses and obtain their degree from one of the universities participating in the program. The amount received is included in the student's income. KPMG also pays the student for an approximate amount of taxes due on the funds. The program includes an internship and a full-time associate position with the firm.

Students commit to work for KPMG for three years after graduation; otherwise, 100% of the tuition, fees, books, and stipend (including taxes paid) must be paid back to KPMG. If the student is required to repay the amounts paid by KPMG for their education, the student may be able to deduct the repayment under the claim-of-right doctrine and, if applicable, Sec. 1341. KPMG's program is another example of how employers are attracting talented employees while also assisting with the cost to educate these individuals.

Repayment of student loan assistance

If an employee fails to meet contractual obligations under an employer's student loan repayment assistance program, he or she may be required to repay a portion, or all, of the benefit received, depending upon the requirements of the program. Employees who recognized income as a result of the employer's paying their student loan debt and who in a later year are required to repay all or a portion of the student loan payment to the employer, may be able to take a deduction under the claim-of-right doctrine for...