Picture graduating from college and landing a job that offers a good salary, health benefits, retirement package — and your employer will help pay off your student loans.
More and more companies are jumping on the bandwagon, sponsoring benefit programs to repay their employees’ student loans. The benefits are clear on both ends: Employers get the leverage they need to attract and retain millennial talent, and new hires find professional advancement and help on their student debt.
But there is one drawback — job-sponsored student loan reimbursement is not tax-free. Like your paycheck, it’s counted as income and subject to income tax.
Does this mean that accepting student loan help isn’t worth it? Not necessarily. Offsetting the tax burden may be possible with smart student loan decisions, and some proposed Congressional legislation may eventually make employer-sponsored student loan payments tax-free.
How job-sponsored student loan payments work
Companies generally allocate a certain amount of money from their budgets for employees with student loans. We’ve previously mentioned some high-profile organizations who offer student loan payoff benefits. Here are other examples of companies that pay off student loans.
- Fidelity Investments offers a $2,000 reimbursement package distributed over five years to employees who pass the 6-month mark at the firm.
- Education-based Chegg disburses up to $1,000 in student loan repayment annually to all its employees.
- PricewaterhouseCoopers’ student loan plan gives employees the chance to receive up to $10,000 over six years to pay off their debt, up from $7,200.
- Global asset management company Natixis offers workers employed for more than five years $5,000 applied to their student loan debt, with an extra $1,000 annually for the following five years.
- Aetna will start providing a $2,000 annual match for employee student loan payments, maxing out the benefit at $10,000.
- LendEDU also offers employees $200 per month — $2,400 per year — towards their student loans.
Beware of the tax implications
Don’t confuse student loan reimbursement with tuition reimbursement. Under IRS rules, if your employer pays you up to $5,250 annually in educational assistance benefits (including tuition), it’s tax-deductible.
Student loan reimbursement is a different story. You’ll need to claim any amount on your tax return if your employer compensates you for your loans, no matter what the company policy or payout is. Considering that it qualifies as taxable, it would technically be closer to a salary bonus than a benefit.
All that may change if the Student Loan Repayment Assistance Act of 2015 passes muster through Congress.
The proposal would amend existing tax code to allow recipients of employer-sponsored student loan repayments to deduct up to $6,000 per taxable year, or $50,000 over a lifetime. To qualify, according to the pending bill, participants are required to pay at least $50 towards their student loans each month.
A second piece of legislation in the works, the Employer Participation in Student Loan Assistance Act, would liken job-endorsed student loan payment plans to educational assistance benefits, permitting employers to compensate employees up to the same $5,250 in student loan debt, tax-free.
Benefiting from employer-sponsored benefits
Don’t let tax fears discourage you from participating in an employer-backed student loan assistance program. If you’re concerned that you’ll end up paying more to the IRS compared to what you’d likely save in student loan payments each month, consider the following:
Tax rates and potential savings depend on your finances
Minimizing the tax hit will depend on several factors, like the interest rate and terms of your student loans, your salary, and the structure of your employer’s student loan assistance program.
According to The Wall Street Journal, if an employee carries the national average of $35,000 in student loan debt with a 10-year standard repayment plan and 5% APR, the worker could pay off their loans in just 7.5 years with a $100 monthly contribution from their employer.
If that same employee earns between $40,000 and $70,000 annually, they’ll owe $2,250 in taxes but earn $6,750 towards their loan repayments.
Crunch some numbers to see if you’ll come out ahead of the tax liabilities by receiving student loan benefits from your employer.
Some programs are already tax-free
Some public sector student loan repayment programs are tax-exempt, including the National Health Service Corps Loan Repayment Program, student loan repayment programs under the Public Service Health Act, and other similar loan repayment or forgiveness programs dedicated to providing health services in underserved areas.
Refinancing can save you even more
A student loan refinance can provide borrowers with a lower interest rate and more amenable repayment terms. Combine it with repayment assistance from your employer, and you could come out on top financially.
According to NerdWallet, an MBA holder with about $52,800 in student loan debt could potentially save up to $5,039 in interest payments if their employer paid them $167 monthly for five years — but they could potentially save an extra $2,142 by refinancing.
Research potential employers’ student loan repayment policies
Future employers who reimburse student loans may be ahead of the curve on the tax-savings front.
Some companies have begun partnering with startups like Student Loan Genius, whose student loan 401k contribution feature links retirement savings to student loans. With the feature, companies can contribute pretax dollars to an employee’s retirement account each time the employee completes a student loan payment.
Consider your retirement
There’s a less-obvious benefit of working with an employer who’ll contribute towards your student loans: The faster you pay off your student loans, the sooner you can really tackle your retirement contributions.
For now, prioritize your student loan payments and weigh the pros and cons between the benefits you’re likely to receive against the taxes you’ll need to pay.
By keeping abreast of emerging companies participating in student loan payment programs as well as pending legislation, paying off your balance and reducing debt are just a few ways to get your job to go to work for your loans.
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