It is one of the most popular perks taking hold in corporate America, and soon employers everywhere could be incentivized to help their workers pay down student loans.
A bipartisan bill, introduced this week by Reps. Rodney Davis (R-Ill.) and Scott Peters (D-Calif.), would give companies a tax break for providing employees up to $5,250 a year to repay education debt, while sparing employees from being taxed on the money. The deduction is comparable to the existing tax benefits for tuition reimbursement, Davis noted. He said the repayment incentive could ultimately help the government save money on student loan defaults.
“We’re talking about tax reform every day. This would be a simple change in the tax code that would be a net benefit to taxpayers,” Davis said.
The legislation taps into a trend of companies offering student loan repayment benefits as a way to compete for talent. Global consulting firm PricewaterhouseCoopers provides as much as $1,200 a year to junior employees burdened with debt, while investment house Fidelity will apply up to $2,000 a year toward the principal balance of its workers with loans. There are also a number of smaller outfits, like LendEDU, Chegg, Mitre and Kronos, that provide the benefit. Student loan financiers SoFi and Commonbond are on board, as are education financial tech firms Gradifi and Tuition.io.
Gradifi developed the platform that companies such as PwC use to send direct payments to employees’ student loan servicers. Company chief executive Tim DeMello said the platform is now in use at 60 firms across the country, with five to 10 companies adopting the technology every month. Out of the Fortune 500, he said about 200 of those companies have inquired about the platform since it launched in January 2016.
“Employers know that millennials will be 50 percent of the workforce by 2020, and 75 percent of millennials have student loans,” DeMello said. “Employers are also starting to see that they play a role in helping with this educational investment employees made because they’re a beneficiary.”
Easing the burden of student debt has been billed as a way to attract millennials, but with 44 million people saddled with $1.3 trillion in education loans, the benefit has broader appeal. Still, student loan repayment benefits are rare. Only 4 percent of companies surveyed by the Society for Human Resource Management last year said they offer the perk, but that number is up by a percentage point from the previous year.
If more employers are getting on board, then do they need a tax incentive? DeMello said a lot of companies are actually waiting for Congress to pass tax legislation before pulling the trigger.
“We have around $160 million in commitments from employers to pay down student loans, so these are companies under contract that over the next five to six years will pay that amount. If they tax law were to change tomorrow, that would go to about $1 billion to $2 billion,” DeMello said.
The human resources society said the benefit can come at a high cost to employers. Half of the companies that provide student loan assistance contribute on average more than $1,000 a year toward each enrolled employee’s debt, while 16 percent provided less than $500, according to SHRM.
“The private sector is calling for us to do this,” Davis said. “The private sector wants us to give them another tool they can use to lure and hire the best talent.”
Davis is confident that the bill, with 19 Democrats and 12 Republican co-sponsors, has a good chance of passing. Both he and Peters had individually introduced similar bills last year but decided to join forces.
Some higher education experts argue that the legislation would primarily benefit high-income employees at well-heeled companies, not low-wage workers who are most likely struggling to repay their student loans.
Matthew Chingos, a senior fellow at the Urban Institute, calls the bill “a regressive handout to the wealthiest borrowers” because tax rates rise with income, so the more you make the larger the break. A recent college graduate with $35,000 in taxable income, for instance, would receive $789 in tax savings on the full $5,250 pretax payment, he said. The same payment made for a lawyer pulling in $200,000 in taxable income would be worth $1,733. What’s more, the perk would only go to people working at companies that can afford it.
“It delivers public subsidies in an arbitrary and potentially unfair manner and would encourage employers to do the same,” Chingos said of the legislation. “The largest benefits go to individuals with the most student debt, who are least likely to default on their loans. A worker with $10,000 in debt could only use the benefit for two years, whereas a worker with $100,000 in debt could use it for 20 years.”
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