A small tweak to the tax code could make student loan repayment the new 401(k).by
March 18, 2016, 10:14 AM EDT
Imagine a world in which the standard benefit package at work includes health insurance, 401(k) contributions, and a few thousand dollars to pay off your student debt.
More companies than ever are offering that last perk, but it's still a fringe benefit. Two bills making their way through Congress could change that, by giving companies a tax incentive to help employees repay their student loans.
At the moment, when employees get money to pay off their student debt, it counts as taxable income, like a salary bump, just for debt payments. Unlike money that goes toward a 401(k), both employees and employers have to pay taxes on the benefit. For many businesses, it costs more than it's worth. "I think the tax treatment now is a detriment to more companies adopting this," said Rob Lavet, general counsel for SoFi, a nonbank lender, which works with around 400 employers that give employees loan refinancing reductions.
The bills proposed in the U.S. Senate and House of Representatives aim to take away that hurdle by expanding a section of the tax code. The new policy would treat up to $5,250 per year in employer contributions toward student debt as nontaxable income, a change could make the student debt benefit go from a niche offering to one that's more common than parental leave.
"Student loan repayment would be a very attractive benefit that employers could offer," said Kathleen Coulombe, a government affairs adviser at the Society for Human Resource Management, an industry group that worked with representatives on the bill. As of 2015, only 3 percent of companies surveyed by SHRM put money toward their employees' student debt, but this year, there's a boomlet of companies offering the benefit. Just this week, Fidelity announced it would put up $2,000 a year and up to $10,000 in total toward student debt. While hundreds of companies are reportedly lining up to chip away at their employees' student debt, it's mostly organizations that hire a lot of young people right out of college, such as PriceWaterhouseCoopers, that use it as a recruitment tool. "We anticipate that that number would definitely go up, should it be covered in section 127," said Coulombe, referring to the section of the tax code the proposed bills are looking to adjust.
The 401(k) didn't exist before 1980, when Ted Benna, the "father" of the 401(k), took advantage of the tax code. Benna started the first 401(k) program at his own company, the Johnson Cos. It caught on even more than he expected. "I was certainly not anticipating that it would be the primary way people would be accumulating money for retirement 30-plus years later," he told Workforce magazine in 2012. Now 90 percent of companies offer their employees a 401(k) plan, and about 75 percent of companies match employee contributions. It's possible that the same thing could happen with student debt.
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It's certainly a benefit young people want. One survey found 80 percent of those surveyed want to work for a company that helps pay off student debt. Many young people prioritize paying off debt over saving for retirement, because the average debt burden for U.S. college graduates who take out loans is a $30,000 monster. "I've been in the workforce for 15 years, and I still have student loans," said Coulombe. Companies offering the student debt benefit say it will help employees start putting away for retirement earlier. One survey found that just a couple of hundred dollars a month can save debt holders thousands of dollars in interest. The legislation could inspire employers to pony up even more than that to hit the $5,250-per-year ceiling.
The bill's backers are "cautiously optimistic," said SHRM's Coulombe. They don't expect the bill to pass during an election year, but it has bipartisan support. The benefit will, in theory, reduce defaults, which will offset some of the loss of tax revenue, the bill's supporters argue. "We're looking at this as a longer-term solution," said Ashley Phelps, the communications director for Representative Rodney Davis (R-Ill.), who introduced the legislation. "If you don't have this debt, then you don't have as many at-risk borrowers that could default on their student loans."