The Coronavirus Aid, Relief and Economic Security (CARES) Act offers a slew of benefits for Americans, including benefits related to student loan repayment. In addition to allowing borrowers to take a temporary break from making payments on federal loans, the act also provides tax-free student loan repayment benefits for both employers and employees. If you owe student loans, here’s what you need to know about how this student loan relief works and who qualifies.
Do you have questions about how to manage your student loan debt? Speak with a financial advisor today.
What Are Tax-Free Student Loan Repayment Benefits?
Ordinarily, employers could exclude up to $5,250 in educational assistance paid on behalf of an employee from that employee’s wages for the year. The Internal Revenue Code classifies educational assistance as a fringe benefit and it covers specific expenses paid by employers, including:
- Books and equipment
- Tuition and fees
- Necessary supplies
The CARES Act takes this a step further and allows employers to claim a tax credit when providing financial assistance toward an employee’s existing student loan debt. Under the expanded tax-free student loan repayment benefits, employers can pay up to $5,250 toward employee education costs or toward their student loan debt. Employers can take advantage of the credit for any loan payments made on or after the act took effect and before Jan. 2, 2021.
Employer Student Loan Repayment Assistance Programs
The expansion of education assistance tax benefits can provide a much-needed tax break to employers who may have seen revenues drop due to the coronavirus pandemic. At the same time, it could also be an incentive to encourage more employers to offer education assistance benefits to employees, including student loan repayment.
Currently, only about 8% of employers offer some form of student loan repayment as an employee perk, according to the Society for Human Resources Management’s 2019 Employee Benefits Survey. Student loan repayment programs can be used by employers to attract and retain employees.
In terms of how they work, they vary from company to company. Some employers, for example, may offer a flat amount of benefits paid monthly to eligible employees who have student loans. Others may match the amount you pay toward your student loans each year. It’s not uncommon for these plans to have a cap, either on the dollar amount they pay or the number of years an employee can draw benefits.
What Tax-Free Student Loan Repayment Benefits Mean for Employees
First and most importantly, any student loan assistance offered by your employer is excluded from your taxable income, up to the $5,250 limit. That means you don’t have to include any benefits paid to you in your taxable income for the year so receiving student loan assistance won’t increase your tax liability.
Second, the act can make managing student loans easier if your income has been affected by the COVID-19 outbreak. If you’ve had your work hours reduced, for example, that could make keeping up with your monthly loan payments more difficult. Getting tax-free help from your employer could help you avoid falling behind on your loan payments.
Of course, there are some potential downsides. Since tax-free student loan repayment benefits apply to employers and their employees, you won’t be able to take advantage of them if you’re not working. And if your employer doesn’t currently have an education assistance or student loan repayment program in place, you may miss out as well if they choose not to implement one under the CARES Act guidelines.
Other Options for Student Loan Relief
If your employer doesn’t offer student loan repayment as part of your benefits package or you aren’t working, there are other avenues you can look into for managing student loans during the COVID-19 outbreak.
First, be aware that if you have federal loans, payments for Direct and FFEL loans are automatically suspended for all eligible borrowers through Sept. 30, 2020. No interest accrues during this period for eligible loans either.
If you’re seeking Public Service Loan Forgiveness, any payments due during the temporary suspension still count as qualifying payments. The same is true if you’re in the process of rehabilitating defaulted student loans.
Note that the CARES Act guidelines for student loan relief don’t cover these student loans:
- Federal Family Education Loans (FFEL) held by commercial lenders
- Campus-based Perkins loans
- Private student loans
If you have any of these loan types, you’ll need to contact your lender directly to discuss whether options such as deferment or forbearance are available. With interest rates at zero, you may also consider refinancing private student loans to try and get a lower rate and/or monthly payment.
Keep in mind that you’ll need good credit to qualify for student loan refinancing. It may be necessary to bring a cosigner on-board to qualify for a refinance loan.
Other Relief in the CARES Act
The CARES Act also provides other benefits that can help indebted people stay on their feet. One is a tax credit for employers that encourages them to not lay off or furlough their employees, some of whom are students carrying debt. Secondly, if you are laid off, the act provides enhanced unemployment benefits that indebted students can use. Thirdly, the act offers relief for anyone struggling to make rent payments. Finally, some banks are lowering or temporarily eliminating their fees and account minimums. Here’s a partial list of these banks.
Finally, you could apply any stimulus check benefits you receive toward student loan payments if you’re not able to defer them and you’re worried about defaulting. Keep in mind that if you’re still enrolled in school, your ability to qualify for a stimulus check depends on whether your parents can claim you as a dependent on their taxes.
The introduction of tax-free student loan repayment benefits is one of many federal initiatives to respond to the pandemic. The student loan repayment program can help employers and employees who may be struggling with student loan payments. It’s possible that the introduction of this tax break may motivate more companies to offer student loan repayment plans for employees. If you don’t have access to these benefits at work, take time to research other federal benefit programs and reach out to your lenders to understand your options for managing your loans.
Tips for Investing
- A financial advisor can help you build a financial plan to pay down your debt and start saving for your future. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
- As long as you’re receiving a paycheck, do your best to continue contributing to your retirement account. It may be tempting to stop, but investing when the market is low will help balance out the past years of investing when the market was high.
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