Tax Implications of Employer Student Loan Repayment Benefits

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Student loans are one of the most significant expenses that young people have to deal with as they’re starting their adult lives. It’s estimated that about 70% of graduates have student loan debt. It makes sense to find an employer after you’ve earned your degree that will help make those student loan payments a little less of a burden. There are more companies that are offering student loan repayment as part of the benefits of the job. It’s a great way to attract the best and brightest talent by having amazing perks that go beyond salary. However, there can be tax implications for those that take advantage of this employer-sponsored student loan repayment.

Taxes and Student Loan Repayment

Having your employer give you money that is used to pay off your student loans is an excellent way to reduce your debt quicker. However, you have to keep in mind that these repayment amounts are considered part of your income. This fact means that when the next year rolls around, and it’s time for you to report your income to the IRS, this money will be included.

It doesn’t matter how much money was paid or any policies your company has in place regarding this payment. Under the current taxation laws, this money is more similar to a bonus check than an education reimbursement in the eyes of the government.

Student Loan Repayment vs. Tuition Reimbursement

Student loan repayment is a helpful benefit to have at a company, but the money will be taxable at the end of the year when you file your taxes. However, tuition reimbursement is treated differently. Per the IRS, you can receive yearly educational assistance benefits up to $5,250 that can be deducted from your taxes. These educational assistance benefits can include your tuition.

Student Loan Legislation

Two pieces of legislation were introduced with the intention of helping students with school loans. The first is the Student Loan Repayment Assistance Act of 2015. This particular act would allow individuals who receive repayments from their employer for their student debt to deduct up to $6,000 a year. This amount could be up to $50,000 during their lifetime. The only qualification is to make payments of at least $50 a month.

The other act is called the Employer Participation in Student Loan Assistance Act. This act would allow student loan repayments to be treated in the same manner as tuition reimbursement. The passage of this act would take away tax implications for graduates receiving this assistance. Both of these pieces of legislation have been introduced, but haven’t moved from that point as of now.

Companies Offering Student Loan Repayment

There are some great companies already offering this benefit to their employees. All these programs are a bit different but have the same goal in helping take some of the burden off paying student loans. Here are some examples:

  • Chegg, a company in the education niche, gives its employees a yearly student loan repayment disbursement of up to $1,000.
  • Aetna is taking an interesting approach by matching the funds paid by its employees up to $2,000 a year. This benefit maxes out when they hit the $10,000 mark of matched funds.
  • Fidelity Investments lets employees that have been with the company for over six months to take part in its reimbursement package. They can receive $2,000 for their student loan debt over the next five years.

How to Handle This Situation

You may wonder what the best option for you to do is in this situation. You certainly don’t want to increase the amount you’re taxed on and cost yourself more money in the long run. Often, you’ll want to look at the amount of money you’re paying, the interest rate, and how much money you’ll save by paying off the debt sooner using the employer-sponsored money. Then, you can look at the amount of taxes you’ll pay on the student loan repayments made by your employer.

Refinance and Save

Another option that can help to provide you with savings on your student loan debt is to go through the process of having your student loans refinanced. You can often receive a better interest rate than what you’re currently paying, and have repayment terms that are easier to handle for your finances. The lower interest rate will help reduce the amount you spend over the lifetime of your loans.

Tax Implications of Employer Student Loan Repayment Benefits

Touch Base With Your Employer

Getting a student loan repayment benefit can be a nice perk of remaining loyal to a company. That doesn’t mean there aren’t ways you may be able to make it even better. Talk with your employer about other things you can do to get the most out of this type of benefit. Some startups, such as Student Loan Genius, offer a way to get more for making student loan payments. This particular program allows a company to contribute to the employee’s retirement account pretax dollars after every payment made to their student loans.

For Employers

As an employer, it’s essential to understand that offering student loan repayment benefits to your employees requires you to treat it in the same manner as you would their regular compensation. Just like a paycheck, you have to pay Social Security and Medicare taxes on the amount. It is often in a company’s and employee’s best interest to have these taxes withheld in the same manner as you would for their check.

Are you in a situation where you’re faced with student loan debt and are a little lost on how best to handle it? That’s where Solvable can come in to help. We offer education and tools to help you find the best path forward when dealing with debt through the services we provide along with our partners. Contact us today to learn more about how to tackle your student debt, credit cards, or tax debt. It is possible to manage your student loan debt and be better prepared to tackle the world as an adult.

 

Shannon McKee
Author:
Shannon McKee
Shannon McKee is a freelance writer with many years of experience. She credits her ability to write well-researched articles that inform the audience to her time spent earning her business degree.