The CARES Act Could Forever Change Future Student Loan Repayments
As the student loan crisis in the U.S. continues to grow, the CARES Act could slow its spread and help graduates actually get ahead in the future – thanks to a little-known, tax-free benefit.
What is the CARES Act?
You may have heard about the CARES Act over the past few years and wondered what it’s about. According to the U.S. Department of the Treasury website, the CARES Act is shorthand for the Coronavirus Aid, Relief, and Economic Security Act, which was passed and signed into law on March 27, 2020. Lawmakers created the provision to provide fast and direct economic help to American small businesses, families, employees, and students who were struggling in the aftermath of the lockdowns, work stoppages, business closures, and other economic fallout resulting from the COVID-19 pandemic.
In addition, the CARES Act provided financial assistance to self-employed freelancers, small businesses, schools, and renters. Those benefits included suspension of rent payments, direct grants, and business loans to keep paying employees who couldn’t work during lockdowns.
Specific to college students and graduates, the U.S. Department of Education further explains on its website that the CARES Act allotted $2.2 trillion to provide economic aid in the form of tax breaks, stimulus checks, enhanced unemployment benefits, as well as forbearance on student loan interest accruals, and student loan payback. Of that money, approximately $14 billion was given to the Office of Postsecondary Education as the Higher Education Emergency Relief Fund, or HEERF.
What are the Benefits of the CARES Act?
As part of the CARES Act, the federal Education Department automatically paused eligible federal student loan payments and reset the interest rate on those loans to 0%. During that loan repayment respite – which is still ongoing at the time of writing – debt holders didn’t have to make loan repayments. Furthermore, since the interest rate on those federal student loans was temporarily dialed down to 0%, the loans were not growing during the non-payment period.
Student loan payments and interest accruals are on hold
This pause in student debt payment was called “administrative forbearance” and helped tens of thousands of individuals make ends meet when the global economy stalled and came to a crawl during and after peak COVID-19 infection rates. However, some knowledge workers and individuals were still able to work and earn wages, and they wanted to continue making their loan payments and the “administrative forbearance” program accommodated that flexibility as well.
Under that scenario, loan servicers simply applied those continuing payments to the debt holder's principal balance – after any interest or fees that accrued prior to March 13, 2020 had been paid. It’s worth noting that the CARES Act doesn’t apply to private student loans. But some private student loan lenders recognized the dire financial situation that many college graduates and students were in due to the pandemic. As a result of those considerations, those private lenders developed options for delaying or reducing payments on educational debt.
How long will the deferred student loan payments last
The temporary deferred payment schedule for both student loans and interest accruals has been extended several times since the original bill was signed into law. Under that initial version, the repayment pause was scheduled to expire on Sept. 30, 2020, but lawmakers decided to push it through until Dec. 31, 2020, and it was extended again until Jan. 31, 2021. Then on his first day in office, President Biden extended the repayment freeze until Sept. 30, 2021. It was subsequently extended three more times with the final expiry date set for December 2022.
What happens after the student loan/interest amnesty ends?
Once the CARES Act’s forbearance expires, borrowers will have to start making monthly payments again at the interest rates they had before the CARES Act began. That means the current 0% interest rate will end on Dec. 31st, and federal loans will immediately start accruing interest again at the rate you were offered when you first signed up to borrow funds for college. You should expect to receive a billing statement about three weeks before your payment’s due date. You can get additional information about loan payments resuming at studentaid.gov.
Employer student loan repayment benefit and how it works One of the lowest profile parts of the $2 trillion financial package comprising the CARES Act was the employer student loan repayment assistance provision. Under Section 2206 of the CARES Act, Congress amended the law to allow employers to contribute up to $5,250 toward student loans for each employee, for each year. Then in the Consolidated Appropriations Act of 2021, Congress decided to extend this benefit for five years through Dec. 2025. That multiple-year extension essentially telegraphs to large employers that Congress ultimately intends to make this benefit permanent. Here’s how the ESLR rules are outlined under the CARES Act:
- The benefit is double tax-exempt, meaning neither the employee nor the employer pays tax on the contribution [CARES Act Section 2206(b)]
- The payment can be made directly to the employee or the lender [Sec. 2206(a)]
- This benefit falls under Sec. 127(c) of the IRS code, which means the benefit cannot favor highly compensated employees and no more than 5% of the benefit may go to owners
As stated under the first point, the tax-free employer student loan repayment benefit is double tax-exempt, which means that neither the employer nor the employee pays income tax on the earned value of the benefit, up to $5,250 annually for each eligible employee enrolled in the plan.
As far as government programs go, that’s an amazingly efficient tax benefit because the employer gets a tax break and so do you. If this benefit becomes a permanent worker perk we can expect a lot more employers will roll it out across their various organizations, providing a tremendous upside to enrolled employees. Because if you’re serious about paying down your student debt as quickly as possible, it’s better for you to pay off those loans using pre-tax money especially when you’re already making monthly payments to service the educational debt already. Doubling up monthly payments will knock down your debt in no time.
It’s also good for your employer because in a highly competitive labor market where businesses are fighting for top talent, they are incentivized to pay you as much as possible, but because the ESLR benefit is both non-taxable and a business write-off they can offer you more without having to spend more cash.
How does the tax-free Employer Student Loan Repayment work under the CARES Act
One of the unique aspects of the Employer Student Loan Repayment (ESLR) benefit, is that under the CARES Act section 127, employers can make the payment directly to the covered employee because the payment doesn’t have to be made directly to the loan servicer – but it can be. Such flexibility makes the benefit very attractive to a wider employee base. This pliable payment aspect also creates an additional bond of trust between the employers and their employees.
As long as the employee made equivalent payments on student loans themselves, the ESLR payment can go to either the employee or the lender, which allows for either payment path. And if the employee did not use that employer’s portion to pay down student loans, the money would be recognized as taxable income to the employee without any negative impact on the employer. However, any amount that the employer contributes that’s in excess of the annual $5,250 cap is also recorded as taxable income for the employee.
Empoyer Student Loan Repayment exclusions that must be considered
While there are many novel and exciting elements for an ESLR allowance, there are limits and exclusions on business owners and senior executives that prevent them from hoarding the benefit for themselves. Specifically, section 127(c) of the IRS code states that educational assistance programs cannot give owners of a business more than 5% of the benefit amount spent on the entire organization. For example, if a small business spends $100,000 a year on an Employer Student Loan Repayment benefit for the entire business, the owner’s benefit is capped at $5,000.
The law also prohibits owners and senior executives from showering employees that are already highly compensated – making more than $125,000 a year — with the loan repayment benefit. Lastly, management must document and distribute the eligibility rules for the ESLR benefit to all workers.
Does the CARES Act let my employer pay my student loans?
Yes! Your employer can provide educational assistance today, but the CARES Act and section 127, allow your employer to help contribute to loans that are in your name up to $5,250 per year tax-free until January 2025. If your loan(s) is a Parent Plus or Direct PLUS loan, your employer can still contribute, but the contributions will not be tax-free. Paidly can help your employer provide supplemental payments to your student loans with our Student Loan Repayment Benefit service.
The CARES Act is a Win-Win Situation for Everyone Involved
In a recent Insider article, According to The Education Data Initiative, the average student loan payment is $460 per month, and it takes the average borrower 20 years to pay off their educational debts. Additional data from the Federal Student Loan Portfolio shows that 63.9 million borrowers under the age of 61 owe a total of $1.4 trillion in federal student loans, which are staggering numbers to consider and sobering indicators of just how serious the student loan crisis has become.
One of the points alluded to earlier, is that the CARES Act requires the borrower to be in good standing with the loan servicer and not be in arrears on payments. That ensures that the employer contribution is in addition to what the employee pays each month themselves to service the student loans.
That way the employer’s contribution goes directly to paying down the loan principal since the employee's payments already covered the monthly interest due. That makes a significant difference in reducing the duration of the total loan and overall interest paid, saving thousands of dollars over the life of the loan for the borrower. So for a minimal investment by employers, companies get a much happier and more productive worker.
Not only do employees benefit, there are several ways that business owners and managers can benefit from providing an employer student loan repayment benefit under the CARES Act. Those employer benefits include:
- Improved employee productivity and well-being
- Higher levels of employee retention and workplace satisfaction
- Employer Student Loan Repayment is a novel differentiator when it comes to recruiting new hires and positions the organization as an employer that cares about its employees
- It’s a non-taxable payroll event for the business, but it’s an expense that can be aggregated for the number of employees enrolled, and that total amount can be deducted as a business expense to help lower overall income taxes for the business
For all these reasons and more, employers need to seriously consider offering this benefit to employees, and employees need to educate their employers about the student loan paydown perk, if such a benefit is not currently in place.
If you’re interested in finding out more about Employer Student Loan Repayment (ESLR) benefits or sharing more information about this perk with your employer, the benefits consultants at MeetPaidly.com are standing by to help answer questions. But contact them now, don’t wait. The longer you delay, the more student debt you’ll have to pay on your own, when an ESLR program offers immediate and long-term benefits to both you and your employer.
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