Laurel Taylor, founder and CEO of FutureFuel.io in San Francisco, says the Coronavirus Aid, Relief and Economic Security (CARES) Act included two provisions that are critical to helping Americans with student loan debt.
“Section 2206 passed into law a bill we had been heavily engaged with,” she says. “It allows employers to make payments up to $5,250 toward employees’ student loans tax-free through end of this year.”
Kate Winget, managing director of Gradifi by E*TRADE in Boston, explains that this means the payments do not have to be included as income for employees for tax purposes. “Previously, when employers made such contributions, they were considered taxable income,” she says.
The second provision helpful to those with student loan debt is in Section 3513. “It empowers all borrowers on federal repayment plans to suspend payments through September 30,” Taylor says, adding that interest on student loans will not accrue from now until September 30.
Further, for those on public forgiveness programs, or on a schedule of 120 qualified payments, the time when payments are suspended will not negatively impact their ability to stay on the program. “It is treated as though the borrower has continued to make payments, which is absolutely critical to keep borrowers on the right track,” Taylor says.
“Borrowers are more confused than ever in terms of what their options are—what they can do and what they should do,” she adds. She suggests employers provide subject matter expertise to participants to help them understand the provisions passed in the CARES Act, send out communications to make them aware of their abilities, and tell them to call their student loan servicer to communicate their preference regarding deferring payments.
Winget notes that, previously, employers didn’t have to have a separate benefit plan document to make payments toward employees’ student loans;, it was just considered income. She suggests that employers now document what they are doing and review it with the tax advisers and legal counsel. “We’re still sorting through what’s going to be required and will continue to share what we learn,” Winget says.
Employers that don’t already have a student loan repayment program in place can reach out to providers. For example, BenefitEd, a joint venture between Ameritas and Nelnet offering customized student loan repayment and college savings programs to companies of all sizes, announced it will begin working with employers to offer tax-advantaged student loan repayment programs.
FutureFuel.io has launched a platform called Reassess to help student loan borrowers get on the right repayment plan. In just 3 1/2 minutes, the tool lists all the repayment plans a person is eligible for based on five questions and allows him to sign and submit an application online. The company says, on average, borrowers save $254 a month by getting on a payment program that is commensurate with income. “Getting on the right repayment plan is critical because even if borrowers choose to defer payments as they can under the CARES Act, their payments must resume,” Taylor says, adding that she is seeing a surge in employees shifting to income-driven payment plans.
To Defer or Not to Defer
While many borrowers may have no choice but to defer their student loan payments as the coronavirus pandemic has created a surge in unemployment, those who are not adversely financially affected have other options.
Taylor says it is a great opportunity for people who can continue to make payments because the relief in the CARES Act means those payments will have roughly twice the impact right now in terms of decreasing student debt. “One hundred percent of payments made by either employees or employers until September 30 will go to the principal on the loan. It’s a bit of gamification on compound interest,” she explains.
Another option for those who can still afford the payments is to accept the deferral opportunity and pay their student loan payment into an emergency fund. “This can be an opportunity to take a breath and make some progress on emergency savings, then resume payments on an appropriate repayment plan based on income,” Taylor says.
Whatever employees decide to do, Winget says allowing employers to help with employees’ student loan repayments has had great support across both sides of the aisle in Congress. She is optimistic that the CARES Act provision will be extended.
“Including [Section 2206] in an historic stimulus package signals to plan sponsors and providers that benefits to address student debt in the workplace are here to stay,” Taylor says. “It should be anticipated that Section 2206 will be made permanent in a tax extender.”
She noted that the IRS issued a private letter ruling (PLR) to the firm Abbott about amending its retirement plan to offer a student loan benefit program, under which it would make an employer nonelective contribution on behalf of an employee conditioned on that employee making student loan repayments. Lawmakers have introduced a bill that would allow all 401(k), 403(b) and SIMPLE [savings incentive match plan for employees] retirement plan sponsors to use their plans to provide student loan repayment benefits to employees. “I look for lawmakers to pass such legislation. I can feel the momentum building,” Taylor says.
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