Student loan debt is a serious problem in need of meaningful solutions – from education for borrowers about the impact of debt on their financial future, to help repaying their debt faster so they can save for other financial goals.
This article was originally published via The Hill on 5/26/17 by Chris Walters and Jovan Hackley
Tax reform presents an opportunity for Congress to address the student loan debt crisis, which is creating a national economic drag.
You’ve heard the numbers before: Over 43 million Americans have more than $1.3 trillion in student loan debt. Unfortunately, the implications are worse than the numbers themselves – high levels of student debt undercut the opportunities that higher education is intended to provide for young Americans.
To help those already in debt, as well as those who will acquire it in the future, the federal government should encourage and expand a practice that already exists: student loan debt repayment as an employee benefit. Congress should use the tax code, as it has used it many times before, to incentivize employers and employees to work together toward a better financial future by changing the tax treatment of an employee benefit.
There is strong precedent for this minor change to the tax code. For example, tuition assistance plans already enjoy favorable tax treatment. Changing the tax code to treat student loan repayment like other employee benefits – by reducing the employer tax on student loan assistance plans and allowing employees to pay down student loan debt with pre-tax dollars – would create a pathway to debt retirement and to future savings and investment.
Under current tax law, an employee in the 20 percent tax bracket who receives a student debt benefit from their employer is losing 20 cents on every dollar they receive from their employer. This money is going to the Internal Revenue Service (IRS), rather than to helping the employee pay down their debt. Over the course of a year, if a company invests $5,000 in repaying an employee’s loan, $1,000 of this money goes to the IRS. No wonder why only four percent of U.S. companies offer student loan assistance as an employee benefit.
By changing the tax code, employers could better assist their employees in repaying their student debt because all payments would go to the lender, not to the IRS. This change would encourage more employers to offer this benefit, creating a positive economic ripple effect.
Members of the U.S. Senate and House have proposed a few bipartisan solutions to address this issue. Reps. Rodney Davis (R-Ill.) and Scott Peters (D-Calif.) have introduced legislation in the House to modify Section 127 of the tax code to allow a tax exclusion for employer student loan assistance to be used to repay student loan debt. Similar bills were introduced by Sens. Mark Warner (D-Va.) and John Thune (R-S.D.), as well as Rep. Patrick Meehan (R-Pa.).
These bills are designed to help the U.S. business community balance the need for a highly educated workforce with the long-term economic costs created by overwhelming student debt. Each offers a thoughtful solution for debt holders and for an economy that cannot absorb another loan crisis.
This spring, college graduation ceremonies will have a cloud over them, because more than 70 percent of graduates will leave school with debt – a burden they incurred, in part, due to a lack of education about the impact that student loans may have on their long-term financial future. The average student loan balance for the class of 2016 was more than $37,000 – up 6 percent from the previous year. At that rate, 2017 graduates will have an average balance of approximately $40,000 apiece.
Most graduates will struggle to make payments – the delinquency rate on student loans is now more than 11 percent – and all will be inherently discouraged from saving for retirement or a home until that debt is retired. Some graduates will be employed by a company that offers a program to help pay their loans. More companies should — and more will if Congress takes action to change the tax treatment of this important employee benefit.
Chris Walters is CEO of GradFin and Jovan Hackley is Head of Advocacy and Engagement for Student Loan Genius. GradFin and Student Loan Genius are co-founders of the Student Debt Reduction Coalition, which supports federal and state legislative initiatives that would reduce the employer and employee tax on student loan assistance plans and improve financial counseling for student debt borrowers.