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Employer Student Loan Repayment Program: 5 Tips for 2023
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Benefits Administration

Employer Student Loan Repayment Program: 5 Tips for 2023

One Minute Takeaway

  • In 2022, 9.7 million borrowers have $20,000-$40,000 in student loan debt.
  • Employers can offer up to $5,250 in student loan repayment benefits tax-free through 2025.
  • Companies that offer student loan debt relief can more easily attract and retain talent.

As voluntary turnover hits record highs, employers are on the lookout for any edge in the fight to attract—and retain—top talent. Companies are getting increasingly creative in the benefits they offer employees and, with student loan debt skyrocketing, repayment programs can be an attractive perk. The good news is, these programs recently became more affordable.

Student loan repayment programs: now tax-free

Through 2025, employers can offer up to $5,250 in student loan repayment benefits without paying a dime in tax. This is thanks to the Consolidated Appropriations Act, signed into law in 2020 as part of pandemic relief efforts, which expanded Section 127 of the IRS code. The number of companies offering repayment programs is still small, but likely to rise going forward, especially with the current moratorium on student loan repayment. The student loan repayment pause has been extended until the U.S. Department of Education can either carry out the debt relief program or when current litigation is resolved. Student loan payments will restart 60 days following. If the debt relief program has not been implemented and litigation has not been resolved by June 30, 2023—payments will resume 60 days after that.

The student loan epidemic

Currently nearly 43 million Americans owe more than $1.6T in student loans. It’s the second highest U.S. debt category—behind mortgages—and default rates have been on the rise. The average federal student loan debt balance is nearly $38K, while the total average balance (including private loan debt) may be more than $42K. More than 38% of Americans are saddled with loan amounts of more than $100,000. It’s not too surprising to understand the enormous appeal a student loan repayment program would have to job candidates.

One benefit to employers–5 years of employment.

Companies that offer student loan debt relief can more easily attract and retain talent. In fact, studies indicate that 86% of workers between the ages of 22 and 33 would commit to an employer for five years if the employer offered a student loan repayment program. Another aspect of the employee experience to consider when thinking about implementing a loan repayment program is engagement. The very real fear and anxiety suffered by workers who are stressed out about defaulting on their student loan payments can take a toll on their performance.

5 tips to help employees repay their student loans

Creating a program to help recruit the brightest and the best to your company can easily be achieved. The quickest way to set one up is to take a look into financial organizations that already have a program management platform in place. These programs enable your company to make after-tax contributions towards your employees’ loans.

If you want to DIY it, a few points to consider include:

  1. Determine the monthly payments you want to contribute. Most organizations start off at $50-100. While this is a seemingly small amount, the contribution can help employees save thousands of dollars in interest.
  2. Set a cap on the maximum amount you’ll contribute.
  3. Figure out who will be eligible to receive the benefit. Keep in mind that the nondiscrimination rules that apply to other benefits programs—such as 401(k) plans and health insurance—do not apply to student loan repayment programs.
  4. Decide if you want to tie a specific work commitment from the employee in exchange for loan repayment assistance.
  5. Remember, if the student loan repayment benefits exceed $5,250 annually, any excess amount is considered wages, so are subject to federal income and payroll tax withholding.

401(k)s and student loan repayments: Recent updates

Back in 2018, the IRS approved a novel method Abbot Laboratories developed to help its employees pay off their student loan debt. They make a matching contribution that equals 5% of the employee’s compensation if:

  • the employee makes a contribution to their 401(k) that equals at least 2% of their compensation, or
  • the employee makes a student loan payment that equals at least 2% of their compensation (even if the employee doesn’t contribute to their 401(k).

The program is an attractive benefit, especially for those employees who think they can’t save for retirement due to hefty loan payments. This program helps them pay off their loans without sacrificing the contribution of an employer match. And because the company’s contributions are payroll tax free and not subject to federal income tax withholding, the program offers significant tax advantages.

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