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Understanding the Tax Implications of Student Loan Repayment Benefits

Updated: Jul 29, 2023

**Disclaimer: This is not tax advice. LoanBYE employees are not tax experts, and you should consult with your own tax experts before making any financial decisions.


As the cost of higher education continues to rise, student loans have become a significant burden for many young professionals. In fact, the average student loan debt for 2019 graduates was $28,950. To help alleviate this burden, many employers have started offering student loan repayment benefits as a way to attract and retain top talent. While these benefits are a great help for employees, they also have tax implications that employers should understand before implementing them.


What are Student Loan Repayment Benefits?

Student loan repayment benefits are a type of employer-sponsored benefit that helps employees pay off their student loans. Under these programs, employers make monthly contributions to their employees’ student loan payments. The payments can be made directly to the loan servicer or to the employee, who can then use the funds to pay down their loans.


The amount of the benefit varies depending on the employer, but it typically ranges from $100 to $500 per month. Some employers also offer a lump-sum payment to help employees pay off their loans more quickly.


Why Offer Student Loan Repayment Benefits?

One of the main reasons that employers offer student loan repayment benefits is to attract and retain top talent. In today’s competitive job market, offering unique benefits can be a great way to stand out from the crowd and attract top candidates.


According to a recent survey by the Society for Human Resource Management, only 8% of employers currently offer student loan repayment benefits. This means that offering these benefits can be a great way to differentiate your company and show employees that you value their education and financial well-being.


Tax Implications for Employers

From a tax perspective, student loan repayment benefits are treated differently than other types of employer-sponsored benefits like health insurance or retirement plans. While these benefits are tax-deductible for employers, they are not tax-free for employees.


Under current law, the IRS treats student loan repayment benefits as taxable income for employees. This means that employees will need to pay federal, state, and local income taxes on the amount of the benefit they receive.


Employers are also responsible for withholding taxes on the amount of the benefit. This means that they will need to report the value of the benefit on their employees’ W-2 forms at the end of the year.


In addition to income taxes, student loan repayment benefits may also be subject to FICA taxes, which include Social Security and Medicare taxes. However, there is some ambiguity in the law as to whether FICA taxes apply to these benefits, and the IRS has not yet issued clear guidance on the matter.


How to Mitigate the Tax Burden

For employees, the tax implications of student loan repayment benefits can be significant. Because these benefits are treated as taxable income, employees may end up owing more in taxes than they realize. For example, if an employee receives $5,000 in student loan repayment benefits over the course of a year, they could owe an additional $1,500 in federal taxes alone.


To help mitigate the tax burden, some employers offer additional benefits like tax preparation assistance or financial counseling. These services can help employees understand their tax liabilities and plan accordingly.


Another option is to structure the benefit as a qualified educational assistance program. This would allow the benefit to be excluded from the employee’s income and would not be subject to FICA taxes. To qualify as a qualified educational assistance program, the benefit must meet certain requirements, such as being available to all employees and not exceeding $5,250 per year.


In addition, some employers are advocating for legislative changes that would make student loan repayment benefits tax-free. The Employer Participation in Repayment Act, which was introduced in the House of Representatives in March 2021, would allow employers to contribute up to $5,250 per year tax-free to their employees’ student loans. While this bill has not yet been passed, it highlights the growing recognition of the financial burden that student loans place on young professionals and the need for employers to step up and offer innovative solutions.


Conclusion

Student loan repayment benefits are becoming an increasingly popular way for employers to attract and retain top talent. While these benefits are a great help to employees, they also have tax implications that employers need to understand before implementing them. By structuring the benefit as a qualified educational assistance program or offering additional services like tax preparation assistance or financial counseling, employers can help mitigate the tax burden for their employees. Additionally, advocates for legislative changes that would make these benefits tax-free could help alleviate the financial burden of student loans for young professionals.


Overall, offering student loan repayment benefits can be a great way for employers to show their commitment to their employees’ education and financial well-being, but it’s important to carefully consider the tax implications and plan accordingly. With the right strategy in place, student loan repayment benefits can be a win-win for employers and employees alike.


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