The Biden administration announced broad student loan forgiveness of up to $10,000 per borrower (or up to $20,000 for Pell grant recipients) for individuals who earned less than $125,000 in 2020 or 2021 ($250,000 if head of household or filing jointly).
It’s been reported that 33% of borrowers owe less than $10K plus another 20% owe less than $20K. By all accounts, this has the potential to eliminate federal student loan debt for about half of all adults with student loans (approximately 20 million out of 43 million borrowers).
According to the Government, nearly 8 million borrowers may be eligible to receive automatically; whereas the rest will need to complete a “simple application” which will be available by early October. More information regarding claims relief can be found here.
The other half of student loan borrowers owe amounts above $20K, with 39% owing between $20K and $100K. Employers may help employees with paying down their student loans as a tax-free benefit through the end of 2025. This opportunity cannot help toward student loans for an employee’s spouse or children, but it could be a significant lift for employees with their own student loans.
Section 127 Education Assistance Programs Can Include Student Loan Payments Through 2025
Section 2206 of the CARES Act introduced a special provision in 2020 allowing employers with a section 127 education assistance program to reimburse tax-free not only an employee’s tuition and books but also their student loan payments, up to a $5,250 annual cap. This provision to include student loans as a tax-free reimbursable expense was then extended under the Consolidated Appropriations Act (CAA) to last another five years through the end of 2025.
As a reminder, §127 educational assistance programs are employer-sponsored written plans that reimburse employees tax-free up to $5,250 per year for:
- “the payment, by an employer, of expenses incurred by or on behalf of an employee for education of the employee (including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment),
- in the case of payments made before January 1, 2026, the payment by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan (as defined in section 221(d)(1)) incurred by the employee for education of the employee, and
- the provision, by an employer, of courses of instruction for such employee (including books, supplies, and equipment), but does not include payment for, or the provision of, tools or supplies which may be retained by the employee after completion of a course of instruction, or meals, lodging, or transportation. The term “educational assistance” also does not include any payment for, or the provision of any benefits with respect to, any course or other education involving sports, games, or hobbies.”
The main stipulations under section 127 are two-fold:
- No more than 5% of payments go to individuals owning “more than 5% of the stock or of the capital or profits interest in the employer,” and
- Employees cannot claim a student loan interest deduction on their personal taxes regarding student loan interest already reimbursed via this program (since these payments are not taxable income, there’s no double-dipping on claiming a personal tax credit for student loan interest that’s already been paid tax-free via an employer’s §127 educational assistance program).
Other Tax-Free Ways to Reimburse Education Expenses (not Student Loans)
Keep in mind §127 educational assistance programs are different from tax-free scholarships under IRC §117(a) and tax-free work-related educational expenses under §132(d). These programs do not include student loan repayments as eligible expenses to be reimbursed.
A Potential Tax-Favored Way to Encourage Student Loan Repayments
In 2018, the IRS granted permission for Abbott Labs to offer the employer’s §401(k) match to the §401(k) of employees making student loan payments in lieu of contributing to their §401(k). By making this approval letter public, the IRS essentially gave employers a roadmap of how they could consider structuring a similar arrangement and applying for their own program’s approval. This approach is being considered by Congress for broader adoption via the SECURE Act 2.0 which passed the House in March 2022. The Senate is likely to take up this bill later this year.
IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information.
This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.