The past weeks have seen a blizzard of government efforts aimed at helping Americans weather the economic crisis caused by the coronavirus pandemic. One provision of the CARES Act may stand out as particularly useful to younger workers – the opportunity for employers to make tax-free contributions of up to $5,250 to help pay down their employees’ student debt. Anyone looking to pay down their student loans should learn about this opportunity, take advantage of it if possible, and urge Congress to make it permanent.
The underlying idea behind this policy is that employers are the greatest beneficiaries of their employees’ educations. When young people take out loans to get a higher education, they are doing exactly what our society tells them to do: invest in themselves and gain the skills and knowledge to be productive in the 21st-century economy.
Employers reap the benefits of this better-trained, better-educated workforce. But until now, our tax code has not acknowledged this reality. Instead, the only tax incentive offered is for tuition assistance. That made sense decades ago when workers often pursued higher education mid-career with their employer’s support.
In today’s job market, however, most employers demand that workers come to their first job with a degree or training certificate in hand. That means that while workers must finance their own educations, businesses are not incentivized to help pay down the debts associated with doing so.
As a result, few employers offer student loan repayment assistance and if they do the money is treated as part of the employee’s taxable income, which has negative implications. As a non-regulated benefit, employers aren’t required to provide it broadly. Rather, they pick employees to whom they will offer it, which usually means high-demand, highly paid employees get the help, while lower-paid workers rarely do.
This inability for employers to provide a widely available, tax advantaged loan repayment benefit is one part of the reason a generation of Americans lives under the shadow of $1.5 trillion in debt.
This provision in the CARES Act changes the calculus. Through the end of the year, employers can finally provide support for paying down their employees’ debts tax-free. Since this will be a regulated benefit, employers must comply with relevant non-discrimination laws, thus ensuring it is made widely available. Since the money is tax-free, employees will have no reason to avoid accepting the help. And since the provision modernizes the existing tax incentive offered for tuition assistance, making it apply to tuition repayment as well, it won’t be difficult for businesses to implement.
Contrary to the claims of critics, this benefit will be most meaningful to lower-income workers. Frequently, these are people whose debt load is relatively small in absolute terms, but large relative to their income – for example, someone carrying debt from a few years of a public university or community college now working in the retail sector. That individual isn’t carrying the hundreds of thousands of dollars in debt associated with advanced degrees or the most expensive private colleges. But for workers making low hourly wages, even $20,000 in student loan debt can be a decades-long burden that impedes the ability to buy a home or save for the future. If an employer can provide $5,250 in tax-free repayment assistance, it will go a long way toward extinguishing those debts.
To be sure, this measure does not “solve” the student debt crisis. But it’s an important step in the right direction. Combined with the emergency measures taken by the federal government to suspend payments and waive interest on federal loans for the coming months, this provision can help those living with student loan debt to not only survive the crisis, but also start paying down the principal they owe.
To make this work, it is going to take shared effort. Those who carry student debt and are currently employed need to reach out to their employers and urge them to take advantage of this opportunity. Employers need to proactively make this benefit available and encourage their workers to embrace it. For its part, Congress – which offered overwhelming bipartisan support for this proposal – should signal its intention to extend this provision, currently set to expire on Dec. 31, through another year or, better yet, make it a permanent part of the tax code. Doing so will increase the chances of businesses embracing this opportunity as the economy recovers and the job market tightens up again.
It is through this collective effort that we can start to drive student debt loads down and unshackle a generation to achieve the financial security they deserve as our economy rebounds from the depths of this crisis.
Anthony Noto is the CEO of SoFi.
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