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About 43 million Americans have federal student loans totaling more than $1.77 trillion. In December 2023, the Administration proposed a limited student loan forgiveness program. If and when it will be implemented and who it will help remains to be seen, but the vast majority of those repaying loans now likely will have to continue their repayments. Why does this matter to employers? According to one source, employee retention rates increase by 20% to 40% with student loan repayment assistance. Here are some ways to do this without busting your budget.
1. Payment assistance
There is no rule preventing a company from personally helping with student loan repayment. Any direct payments on behalf of an employee or reimbursements to employees for their student loan repayments are taxable compensation. This is subject to payroll taxes.
Employers that want to help on a tax-advantaged basis can do so through an educational assistance program. Instead of paying for an employee’s education, funds can be used for student loan repayment. The annual cap on this tax-free benefit is $5,250. Benefits must be offered to employees on a nondiscriminatory basis, which means that very small businesses with family members on the payroll may not be able to meet nondiscrimination rules and offer this tax-free benefit. Note: the option to make student loan repayments through an educational assistance program only runs through 2025 unless Congress extends it.
2. Loan information
Employees can benefit from information that helps them reduce their interest rate, reduce their monthly payments, and pay off debt faster. While small businesses likely can’t offer much counseling on how to do this, they can provide a list of resources that can, including:
Another option is for companies to connect employees for student loan repayment solutions, such as via Candidly.
3. Employer matching contributions to 401(k)s
Effective January 1, 2024, employers with 401(k) plans that make contributions on behalf of employees based on their elective deferral contributions to the plan can do so based on employees’ student loan repayment. Total elective deferrals—for student loan repayment and/or retirement savings—can’t exceed a set dollar limit, which is the lesser of compensation or $23,000 for 2024. Employees can build up retirement income through employer contributions while they pay down their student loan debt.
4. Education assistance to avoid future/additional loans
There’s another way to help with student loan debt: prevent it by helping employees pay for their higher education.
Educational assistance program. As described earlier, employers can offer an annual tax-free benefit up to $5,250 annually. The courses don’t have to relate to the job and the employer can fix the criteria for reimbursement (e.g., at least a B in the course).
Working condition fringe benefit. There’s no dollar limit for tax-free treatment of this payment as long as the courses relate to the job. The employer can fix the dollar amount and set other conditions for this benefit.
Final thought
Ascela identified “tailored educational initiatives” as part of the list of top employee benefit trends in 2024. Helping employees with their student loans is an important way to create financial stability for them and, hopefully, have a more productive and loyal staff.
More about helping employees with student loan debt can be found here.
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