Tax perks nudging employers to help pay workers’ student loans

Most employers have tuition-reimbursement budgets, though they hardly spend them. Those budgets instead could go to student loans.

As part of last year’s CARES Act, employers received an incentive to pay down student loans for workers — they have been able do so, tax-free, for up to $5,250 per year. When Congress passed the Consolidated Appropriations Act of 2021, that arrangement was extended through 2025.

By next year, many large companies will likely add that perk for their workers, after they’ve had time to amend their IRS Section 127 Educational Assistance Programs, said Laurel Taylor, CEO of FutureFuel.io, a company that works with employers and individuals on student loan debt. More than 70% of employers provide tuition reimbursement assistance to workers, making that a more common benefit than a 401(k) match, Taylor said. However, only about 7% of their budgets for those programs are spent, and contributions to student loans would be an easy way to utilize more of them, she said.

“Employers have a budget that they’ve set aside that just isn’t getting used,” she said.

Currently, about 8% of large employers provide loan repayment assistance, up from 4% in 2018, said Lydia Jilek, senior director of voluntary benefits solutions at Willis Towers Watson. Another 3% of companies are planning to provide that benefit next year, although as much as a third of employers say they are interested in doing so, Jilek said.

The federal student loans payment freeze temporarily tamped down the sense of urgency that employers felt in adding assistance programs, as has the push in Congress for loan forgiveness and the larger overall need to support workers affected by Covid, she said.

“That has caused a bit of dampening in the contribution or payment market for some of our clients,” she said. “There are so many other ways of spending money on employee well-being.”

Employers that have loan contribution programs have typically allowed about $1,000 per employee per year, but some have increased that due to the recent tax benefits, she said.

Some companies also let workers cash out their paid-time-off balances and direct that to loan payments, she noted.

[More: Sharing the student debt load]