Section 2206 of the compromise version of the CARES Act provides an exclusion from income for employer-paid student loan repayment assistance, but only through the end of 2020.
Payments of principal and/or interest by the employer to the employee or to the lender will be tax-free.
The tax-free status is implemented by expanding the definition of educational assistance in the exclusion from income for up to $5,250 in employer-paid educational assistance [26 USC 127].
Thus, employers may provide each employee with up to $5,250 a year in combined tuition and textbook assistance and student loan repayment assistance, tax-free. Most employer LRAPs provide employees with $100 per month in student loan repayment assistance, or $1,200 a year.
Borrowers can’t claim the student loan interest deduction based on a tax-free payment of student loan interest from their employer. But, employers can target their student loan repayment assistance just to principal, letting the employee pay the interest, thereby working around the “no double benefit” coordination restriction.
According to the Society for Human Resource Management (SHRM), 8% of employers currently offer LRAPs. An additional quarter (24%) of employers are waiting for LRAPs to have tax-free status before they offer them to their employees. LRAPs are good employee recruiting and retention tools.
If enough employers offer LRAPs to their employees, there will be a lot of pressure on Congress to permanently extend the tax-free status of LRAPs beyond the January 1, 2021 expiration.
Chicago-based Abbott Labs allows employees to direct the 2% minimum they’d make to their company 401(k) plan into their student debt repayment plan. In turn, the employee would earn a 5% company match to be used as a 401(k) plan contribution.
Mark Kantrowitz is a nationally-recognized expert on student financial aid, scholarships and student loans. His mission is to deliver practical information, advice and tools to students and their families so they can make informed decisions about planning and paying for college.
Mark writes extensively about student financial aid policy. He has testified before Congress and federal/state agencies about student aid on several occasions.
Mark has been quoted in more than 10,000 newspaper and magazine articles. He has written for the New York Times, Wall Street Journal, Washington Post, Reuters, Huffington Post, U.S. News & World Report, Money Magazine, Bottom Line/Personal, Forbes, Newsweek and Time Magazine. He was named a Money Hero by Money Magazine. He is the author of five bestselling books about scholarships and financial aid, including How to Appeal for More College Financial Aid, Twisdoms about Paying for College, Filing the FAFSA and Secrets to Winning a Scholarship.
Mark serves on the editorial board of the Journal of Student Financial Aid and the editorial advisory board of Bottom Line/Personal (a Boardroom, Inc. publication). He is also a member of the board of trustees of the Center for Excellence in Education. Mark previously served as a member of the board of directors of the National Scholarship Providers Association.
Mark is currently Publisher of PrivateStudentLoans.guru, a web site that provides students with smart borrowing tips about private student loans. Mark has served previously as publisher of the Cappex.com, Edvisors, Fastweb and FinAid web sites. He has previously been employed at Just Research, the MIT Artificial Intelligence Laboratory, Bitstream Inc. and the Planning Research Corporation.
Mark is President of Cerebly, Inc. (formerly MK Consulting, Inc.), a consulting firm focused on computer science, artificial intelligence, and statistical and policy analysis.
Mark is ABD on a PhD in computer science from Carnegie Mellon University (CMU). He has Bachelor of Science degrees in mathematics and philosophy from MIT and a Master of Science degree in computer science from CMU. He is also an alumnus of the Research Science Institute program established by Admiral H. G. Rickover.
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