In response to the coronavirus crisis, Congress has approved the largest emergency relief bill in U.S. history, flooding every sector of the economy with over $2 trillion. While the Coronavirus Aid, Relief, and Economic Security Act’s (CARES) corporate bailouts and helicopter money will dominate the headlines, a largely unheralded tax subsidy buried deep in the legislation may prove to have a longer-lasting impact.
Included as Section 2206, it gives companies the ability to help pay down their employees’ student debt without the payments being taxed. Similar to contributions made under a 401(k) plan, an employer can pay down an employee’s loan balance every month, and neither the company nor the employee pays tax on those payments. This tax exemption will be temporary, lasting until the end of this year. A separate clause (Section 3513) will suspend all federal student-loan payments until Sept. 30 without interest.
While these provisions will help the nearly 45 million Americans saddled with student debt to weather the immediate crisis, it won’t do much for them over the long run. Making student-loan repayment a permanent tax-exempt employee benefit represents a lasting solution to the $1.6 trillion student debt problem.
My company, Tuition.io, works with companies to develop means for their employees to pay down student-loan debt. We would therefore benefit financially from the implementation of this legislation, which can lead to more potential customers for our business.
Companies are used to offering their workers financial benefits such as 401(k) contributions. Based on our experience working with over 200 companies over the last four years, we have found that by implementing student-loan repayment assistance as a benefit, companies can reduce the time needed to retire an average student-loan balance by four years. For many young adult workers, the choice between saving for retirement or becoming debt-free is a no-brainer, due to the burden of compounding interest.
The only problem is that most companies in America have yet to give their workers this choice. By making the benefit tax exempt, it will be much easier for firms to adopt student-loan assistance. Even without a tax benefit, student-loan assistance has already been adopted by companies like Aetna, PwC, and our client Estée Lauder.
Critics of the measure have argued that it’s a regressive tax subsidy, since its benefits are greater for higher-income workers who often have higher debt loads from more advanced degrees. Others point out that the plan neglects unemployed people who struggle with student debt. These criticisms are valid, and those issues should also be tackled by the government.
But we need to focus on the bigger picture first. Financial insecurity affects every aspect of people’s lives, from their productivity in the workplace to the quality of their personal relationships. According to a 2019 Bankrate survey, millennials who have carried student debt have postponed getting married, buying homes, and having children because of their debt.
This financial insecurity is also holding back millennials as they enter their prime years of spending. Millennials were set back by the Great Recession and have been struggling to gain ground for the past decade. Now the COVID-19 shock threatens to derail their ambitions just as they were starting to recover.
In addition, a 2015 study from the Federal Reserve Bank of Philadelphia showed that student debt negatively impacted the formation of businesses with one to four employees, which are key drivers of our economy. If you’re bound by monthly payment obligations and growing interest, why would you take the risk of starting a business?
While the positive impact of student-loan assistance will be felt right away by individuals, the broader boost to our economy will likely take longer to manifest, as more companies help reduce workers’ debt over time. This is why there is only one thing wrong with the recent congressional legislation: It is temporary. Nine months is hardly enough time to achieve meaningful adoption among companies, despite the burgeoning interest in this type of employee benefit.
We should applaud the legislators who fought to have the student debt provisions language included in the larger bill. Perhaps they believe its inclusion as an emergency measure can lead to more permanent legislation.
But at the same time, we need to call on lawmakers to do more. By making the tax credit for employer student-loan assistance a lasting part of the tax code, we can improve the lives of millions of Americans and give a sustained boost to our economy at the same time.
Scott Thompson is CEO at Tuition.io.
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