Federal Student Loan Debt Relief Might Influence Employer Education Assistance Programs
President Joe Biden on August 24, 2022, announced federal student loan debt relief that is likely to affect many employees with earnings of $125,000 or less ($250,000 for married couples). These employees might qualify for up to $20,000 in federal student loan debt cancellation (if they received a Pell Grant, which is special federal assistance for low-income individuals that does not need to be repaid) and up to $10,000 in debt forgiveness for non-Pell Grant recipients.
The Pell Grant criteria is intended to designate more relief for lower-income individuals, since Pell Grants are based on financial need to pay for undergraduate degrees. In other words, borrowers who received Pell Grants are lower-income individuals, so they will be entitled to up to $20,000 under the new debt cancellation program, whereas non-Pell Grant borrowers had more financial resources to pay for college, so they will be entitled to up to $10,000 under the new program. Prior to this program, employees struggled with financial security notwithstanding full-time employment due to payments on crushing student loan debt.
How Employers Have Tried to Help Employees Cope With Student Loan Debt
Impact on Retirement Savings. Employees who had to pay student loan debt often could not afford to contribute to the employer’s 401(k) plan. Consequently, they lost out on the employer matching contributions. Forgone salary deferrals and related matching contributions, especially early in employees’ working lives, result in a negative lifetime impact on their retirement savings, due to losing decades of tax-deferred growth.
In 2018, the IRS issued Private Letter Ruling (PLR) 201833012 to Abbott Laboratories, allowing the employer to make a matching contribution to its 401(k) plan based on participants’ student loan repayments instead of based on the participant’s salary deferral into the 401(k) plan. While PLRs cannot be relied upon by anyone other than the recipient, the ruling provided employers some comfort that they could help employees save for retirement.
Since 2018, employers have explored amending 401(k) plans to match an employee’s payment on student debt just as if the payment had been an elective deferral to the plan. However, providing that benefit did not lower the student loan debt amount. The new federal debt forgiveness might make the 401(k) matching contribution for student loan repayments less attractive to employers because it should free up employee funds so elective deferrals can be made that would earn a true match.
Tax-Free Student Loan Reimbursements. In March 2020, the CARES Act expanded the educational assistance that employers could provide tax-free to employees to include up to $5,250 per year for tax-free reimbursement of student loan debt payments, but only for 2020. In December 2020, the Consolidated Appropriations Act extended that relief provision for five years (through December 31, 2025). This new tax-free benefit has been a hot topic for recruiting and retention during 2021 and 2022 in light of the “Great Resignation.”
While employers understandably want to help employees with their education debt, it is doubtful that employers would want to pay off education debt if employees could obtain debt forgiveness from the federal government under this new program. Therefore, employers who have educational assistance plans that include reimbursing employees for student debt payments should consider revising their programs to require employees to apply for all available federal student loan debt forgiveness. These programs become increasingly important for non-federal debt that is ineligible for the new federal student loan relief.
Other Relief
Employers might want to stay informed about other student loan debt relief that may become available to employees.
For example, along with the debt forgiveness plan, President Biden announced that the U.S. Department of Education (DOE) also intends to modify the income-based repayment rules, so that individuals who used a Pell Grant to obtain an undergraduate degree would have their federal student loan repayments capped at 5% of their monthly income (instead of the current 10%). The proposal would also forgive loans after 10 years of payments for borrowers with a remaining balance of $12,000 or less (instead of the current 20 years for many income-based repayment plans). The net effecr would be for eligible borrowers to pay half as much for half as long.
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