A student loan reimbursement benefit would be a deciding or contributing factor to accepting a job offer for about 76 percent of millennials, according to the 2015 American Student Assistance survey.
It’s not surprising as cases of severe student debt are becoming more and more widespread every year in every age group. Some companies have seen this rising demand as an opportunity to lure in new talent with the promise of help for paying off student loans.
Considering that most people graduating with a bachelor’s degree have significant student debt, it makes sense that an increasing number of companies are sponsoring benefit programs to repay their employees’ student loans. This practice can be an exceptionally good recruitment tool for new, young talent burdened with debt. The program can be mutually beneficial for both the employer and the employee; employers get the leverage they need to draw in millennial talent, and staff can advance in their careers while paying off their student debt.
Student loan reimbursement programs also have been shown to be excellent for employee retention. Roughly 70 percent of hiring managers believe offering a student loan payment program improves employee retention and morale, high levels of which improve overall company productivity.
While only 4 percent of companies offer such a benefit, according to the Society for Human Resource Management’s 2016 survey, that number is up since the previous year and is expected to rise t the increasing levels of debt. So far, the list of employers offering student loan reimbursement programs include some big names such as PwC, Aetna, and Natixis Global Asset Management.
But wait, there’s a catch
There are so many clear and present positive traits of student loan reimbursement programs that they almost seem too good to be true.
However there’s one big drawback — they’re taxable.
Student loan reimbursement plans are often confused with educational assistance benefits, also called tuition reimbursement. The IRS rules state that if you are currently attending school and your employer pays you any amount less than $5,251 annually for educational assistance benefits, covering costs including tuition, that money is tax-deductible.
Student loan reimbursement is not treated the same way. Any amount given for loan reimbursement must be claimed on your tax return. Loan reimbursement is technically more like a salary bonus than a benefit because it is taxed as income. But unlike an increase in salary, you will stop receiving this benefit either once your loans are repaid or until you hit your employer’s cap, which is typically about $10,000.
Student loan reimbursement programs provided through your employer are not tax-free. Just like your paycheck, money from this program is taxed as income.
That doesn’t mean that accepting an offer of student loan reimbursement isn’t worth it, but it does mean that you might not be getting as much as you think you are, depending on the policy of the particular program your job provides. It is possible to offset the income tax with smart debt-management choices, for example making larger payments to pay off more of your debt at once, thereby reducing the amount of interest your loans will accrue in the long run.
Changing legislation for changing times
There’s good news in this regard; two pieces of legislation have been proposed to Congress recently that could eventually reclassify employer-sponsored student loan payments as non-taxable income.
The Student Loan Repayment Assistance Act is a bill proposed in 2014 that would seek to amend the tax code to allow recipients of employer-provided student loan repayments to deduct up to $6,000 per taxable year or a $50,000 lifetime total. To qualify, participants would need to regularly put at least $50 toward their student loans monthly. Unfortunately, this bill has been stuck in committee since 2015.
Additionally, a second piece of proposed legislation, the Employer Participation in Student Loan Assistance Act, would reclassify employer-provided student loan payment plans as educational assistance benefits. This law would allow companies to compensate up to $5,250 of employee’s student loan debt tax-free, just like tuition reimbursement. This act also has been stuck in committee for two years, but lobbyists remain hopeful that it could be passed in the near future.
Takeaway
Student Loan Reimbursement programs are excellent tools that employers use to bring in the best and the brightest of today’s graduates into their companies, and to get them to settle for fewer other benefits, such as a lower starting salary, weaker health benefits, a less competitive 401(k) option or even none at all. These tricks work; people are so preoccupied with their debt that they prioritize it over other long-term needs such as health and retirement costs. With student loan reimbursement, as soon as you hit the cap or run out of loans, the benefit goes away, while a 401(k) or a good health care plan will benefit the employee much longer.
When accepting a job based on benefits, you have to make sure you’re making conscious choices about what you want to prioritize and the trade-offs that you are willing to make in exchange.
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