Answers on Employer Student Loan Repayment Assistance Programs (LRAP)

You’ve got questions, we’ve got answers. During our webinar about the Impact of Coronavirus on Paying for College, participants asked dozens of questions. Here are the answers to these questions on Employer Student Loan Repayment Assistance Programs (LRAP).

Does the tax credit for employer contributions to student loans apply to just federally-owned loans or do private loans get the same benefit this year?

It is an above-the-line exclusion from income, not a tax credit. Previously, employer payments toward an employee’s student loans were treated as income to the employee. Now they won’t, as least through December 31, 2020.

The exclusion from income is not limited to federally-owned student loans or even federal student loans. It applies to any qualified education loan, which includes all federal student loans and most private student loans, as well as parent education loans.

Can a self-employed individual take advantage of the $5,250 pre-tax employer-paid student loan payment on behalf of the employee? So, effectively the self-employed individual pays $5,250 off of their student loan using pre-tax dollars?

Potentially, yes. The self-employed individual must operate a formally recognized business, such as a sole proprietorship, partnership or corporation. The student loan repayment assistance program (LRAP) must not discriminate in favor of highly-compensated employees. No more than 5% of the amounts paid can be provided to shareholders or owners of the business, or their spouses or dependents, including anyone who owns more than 5% of the stock on any day of the year. 

Are there tax benefits for employers who sign up for LRAPs? Any benefits besides just employee retention?

Employers provide student loan repayment assistance programs because they are really good recruiting and retention tool.

The employer can exclude the LRAP contributions from the employer’s taxable income. Previously, the student loan payments were counted as income to the employee. Now, the LRAP contributions will be excluded from the employee’s income through the end of the year.

There are no other federal tax benefits for employers, but several states provide a state income tax deduction or tax credit for employers to encourage employers to offer these benefits.

Does the employee have to have been both the borrower and the individual who used the loan for higher education in order for employer to offer payment assistance tax free?

Yes. The tax-free status provided in the CARES Act requires the qualified education loan to have been “incurred by the employee for education of the employee.”