0107.1 / Student Loan Stimulus

In response to the COVID-19 pandemic early in 2020, the CARES Act introduced a provision that allowed employers to offer student loan repayment assistance to employees under IRC Section 127. Under the law, employers could offer up to $5,250 in student loan assistance without raising the employee’s taxable income for 2020. To offer this tax-free employment benefit, employers must first adopt a formal educational assistance program (EAP) for employees under the IRC Section 127 rules. Because the option was so temporary, it initially attracted very little attention. However, the tax-free student loan assistance option was extended through 2025 by the year-end stimulus package.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the potential impact of this new tax-preferred employment benefit option.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: Americans are struggling with student debt more than ever in the face of the pandemic. Allowing employers to offer student loan repayment assistance as a tax-free benefit is a great alternative to the proposals that we simply forgive this student debt. This should be seen as a win across the board—both for employees who are struggling and employers who are looking to find non-traditional ways to motivate valuable employees.

Bloink: Tax-free student loan assistance is, of course, a great idea. It’s the way the assistance must be structured under the law that makes me wary. Employers who don't already sponsor a formal IRC Section 127 educational assistance program might be wary of adopting yet another type of employee benefit plan with yet another set of rules. It adds a level of complexity to this important benefit that's really unnecessary.

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Byrnes: This type of nontraditional employment benefit can be a valuable part of an employee benefit package and function as a part of the person's compensation, rather than an outright giveaway across the board. So many employees haven’t returned to a traditional office setting—and many anticipate never working full-time in an office again. We need to find new ways to incentivize employees who add value to the employer’s operations.

Bloink: Employers should be able to provide a tax-free student loan repayment benefit, yes. The way this law is structured makes the option overly complex for many small business clients. Americans need help reducing the student loan burden now, and Biden's play to forgive $10,000 per-person in student loan debt is a much more effective way of getting them the help they need.

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Byrnes: We’re living in a world where benefits like free meals in the office or tax-free transportation benefits no longer carry any weight to employees who are working from home. Why not allow employers to get creative in the types of benefits they want to offer their employees? This relieves some of the financial burden for employees without simply transferring that burden to the government in the form of a handout.

Bloink: I’d anticipate that many small business owners are going to ignore this option entirely. For some, it might only benefit a few workers and at what administrative cost? The last thing struggling small business owners want right now is more paperwork. The most effective way to relieve the student loan burden that’s dragging down this economy is with an across-the-board student loan forgiveness program.