The student debt burden: Congress is closer than you think to solving it
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This month 1.9 million young Americans will walk the stage to obtain their bachelor’s degrees. And with diploma in hand, seven in ten of these students will graduate at a disadvantage. For the next several years, they’ll be working to pay off tens of thousands in student loan debt. It will get in the way of owning a home, saving for retirement, buying a car, or having a baby.

Much has been written about how to counteract what’s starting to feel like a full-blown crisis. Suggestions range from improving the federal government student loan application process to holding colleges accountable for rising tuition costs. But one proposed solution could have a dramatic and immediate impact on reducing this mountain of debt:

Passing legislation that allows companies to contribute to their employees’ student loan payments, in a way that is tax-advantaged for the employee and employer.

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Some companies are already contributing, say, $100 per month to their employees’ student loan debt, for as long as the employee is at the company. It’s an emerging employee benefit that many companies increasingly want to start offering as a way to attract and retain top talent – 86 percent of employees would commit to a company for five years if the employer helped pay back their student loans.

But there’s a problem – this benefit is not tax-advantaged. While 401(k) retirement contributions are tax-advantaged, as are many health and even commuter benefits, student loan repayment benefits are not. The government taxes the student loan contribution as ordinary income for the employee and requires companies to pay the payroll tax on the benefit amount. It’s why only about 4 percent of companies offer this benefit today, even though most companies want to.

This could be fixed tomorrow by clarifying a rule in the tax code that already exists. It’s the rule that governs tuition reimbursement, whereby an employer can reimburse an employee’s education expenses up to $5,250 each year, tax-free. The Treasury Department would simply need to clarify the definition of qualified education expenses – to include the act of paying back student debt.

If the administration doesn’t clarify the pre-existing rule to make that change, then Congress can. In fact, there’s a bill in Congress right now that would clarify the rule legislatively. The Employer Participation in Repayment Act is a bipartisan House bill with over 140 Republican and Democrat co-sponsors at last count, as well as a wide array of support from third-party organizations. The companion bill in the Senate, introduced by Sens. Mark Warner (D-Va.) and John Thune (R-S.D.), has over 25 co-sponsors from both sides of the aisle.

Incentivizing student loan contribution in the workplace is not limited to high-paying industries or lucrative jobs. We have seen companies adopt student loan benefits in hourly wage sectors such as retail, entertainment and hospitality. Across industries, employer student loan assistance is becoming more attractive as companies seek to adapt to the needs of the workforce.  

Politically, this is a no-brainer. Constituents of both political parties have student debt, and both sides want a solution. Enabling employers to pay off employees’ student debt in a way that allows employees to get out of debt faster and more cheaply is political gold in 2020. 

Economically, this is a lay-up. The CBO scored the bill at a relatively low cost, and that was before incorporating known economic positives, such as increased spending and saving from the higher amounts of money that flow into the pockets of employees from such benefit. 

Additionally, this would give the federal government a practical guarantee on a portion of student loan payments it intends to collect from its student loan borrowers – the federal government has more than $1 trillion of student loans on its balance sheet, meaning a lot of people owe the government a lot of money. If people don’t pay the government back, then the government has to take losses on its student loan portfolio. This law would lead more companies to offer this benefit which would decrease delinquencies and defaults, thereby increasing the amount of money that the government actually collects. Accountants over at the IRS – as well as the American taxpayer – should certainly like that.

Employees love this benefit. We recently reached out to over 50,000 individuals with student loan debt about this legislation and were overwhelmed with their stories about how this company perk would change their lives. One borrower from Texas captured the sentiment well: “I am a hard worker, an honest human being, and like many other people my age, would like to own a home and provide for myself. This bill would help relieve some of the debt I have accumulated over the course of my college career. Please keep my American Dream alive and pass this bill.” 

Working Americans with a monthly student loan payment have been making many financial sacrifices. One of the first budget items they sacrifice is saving for retirement. This bill can help them more quickly pay down the student loans of their past and get on with planning for their futures.

Making an employer’s student loan contribution tax-free is a sound investment for the employer’s human capital strategy, a potential boon for the federal government’s balance sheet, and welcome relief for the employee’s wallet. A win-win-win not only makes for good politics, it also makes for good policy. 

 David Klein is CEO & Co-Founder of CommonBond, a leading fintech company on a mission to lower the cost of higher education in the U.S. It was one of the first companies in the country to offer its own employees monthly student loan contributions in 2015. Edmund F. Murphy III is President & CEO of Empower Retirement, the nation’s second-largest retirement services provider serving all segments of the employer-sponsored retirement plan market. Empower and CommonBond recently partnered to provide student loan benefits to nine million Americans through Empower’s 39,000 employer-sponsored retirement plans.