Economy & Budget

Want to grow the economy? Make student loan repayment assistance tax-free.

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Senators Mark Warner (D-VA) and John Thune (R-SD) recently introduced a new bill, The Employer Participation in Repayment Act.

This legislation extends the $5,250 per year tax exemption currently granted to employers for employee tuition assistance to cover student loan principal repayments. H.R. 795, a companion bill introduced in the House last month by Representatives Rodney Davis (R-IL) and Scott Peters (D-CA), has already garnered significant bipartisan support, with 23 Republican and 27 Democratic co-sponsors.

I{mosads}n a year when tax reform is a central issue in Washington, it’s easy to see why lawmakers on both sides of the aisle are behind this legislation. It incentivizes American businesses to help solve the massive $1.4 trillion student loan problem, and it provides employers with a powerful new benefit to attract and retain talented young workers.


However, there are some who feel this bill is misguided policy because it helps borrowers who are relatively advantaged. Matt Chingos, a senior fellow at the Urban Institute, argues that the bill is regressive and arbitrary: the benefits are greater for workers with more income and they can be taken over longer periods of time for those with higher debt loads.

Rooney Columbus, a researcher at the American Enterprise Institute, also makes the case that the bill neglects unemployed borrowers, who are in most need of assistance.

While these criticisms are valid, they are missing a much bigger picture. Providing a tax subsidy for employer student loan repayment doesn’t just benefit certain employees, it will help grow our economy as a whole. To understand this, it is useful to touch on basic concepts from macroeconomics 101: The tax multiplier, the marginal propensity to consume, and the impact of household formation on consumption.

The millennial generation, defined as those born between 1980 and 2000, is the single largest cohort in American history: 92 million people. 

Historically, economic growth swells 23 years after the peak birth year of a generation. This is when new household formation is at its strongest. When young couples buy homes and have children, they increase their discretionary spending on things like new cars, appliances, TVs, and family vacations.

The boost in marginal consumption during a generation’s prime household formation years is a key driver of economic growth. Along with technological innovation and a sustained decline in interest rates, the peak consumption of the boomers was a major contributor to the sustained economic growth of the period from 1980 to 2000.

Research by the Federal Reserve Bank of San Francisco has shown that since the onset of the Great Recession, household formation among young adults (ages 18-29) has declined significantly, and the percentage of young adults living with their parents has increased. Millennials who have been unemployed or have low-wage jobs and who are struggling to pay off student loans have been slow to start new households.

Today’s young adults are now reaching the beginning of what should be their peak spending years, but starting their professional lives during a lengthy recession while laden with student debt has diminished their income and dampened their propensity to consume.

When considering the economic impact of a tax cut or subsidy, the higher the tax multiplier, the more it will stimulate the economy. The higher the marginal propensity to consume of those receiving the tax break, the higher the multiplier and the more the tax cut will grow the economy. 

By most directly benefiting the 90 plus million people who are entering their peak years as consumers, the subsidy for student loan repayment has a high tax multiplier.

Early evidence has shown that employer repayment assistance can reduce the time needed to retire an average student loan balance by four years.

Eliminating the drag of student debt for many Millennials will free them up to take over the mantle of new household formation and consumption from their Boomer parents. Additionally, lower personal debt will also enable more young entrepreneurs to start new businesses, a primary source of job creation.

To criticize the tax break for employer student debt repayment as favoring those with jobs is missing the point. By helping those young adults who have jobs to free up more of their income for consumption, we will stimulate more economic growth, which is the best way to generate more jobs. 

This is why, in a highly partisan environment in Washington, The Employer Participation in Repayment Act is favored by both social progressives and fiscal conservatives alike. 

It is that rare piece of legislation that benefits individuals as well as the economy as a whole.

Scott Thompson is CEO for, the nation’s first and most comprehensive employer-funded student loan contribution platform.

The views expressed by contributors are their own and are not the views of The Hill.

Tags Consumer spending Economic recovery economy job market John Thune Mark Warner Milliennials Student debt Student loan
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