United States: CARES Act Offers New Incentives To Employers Considering Student-Loan Repayment Programs

The CARES Act included a variety of new provisions to help employers and workers affected by the COVID-19 pandemic. Among those provisions were two aimed at student-loan repayment. These provisions allow: (a) employers to make tax-free payments toward their employees' student loans; and (b) borrowers to suspend payments under certain loan programs. Employers that offer—or want to offer—help with student loans should consider these provisions when evaluating their benefits packages.

Tax-Free Payments Toward Student Loans

First, section 2206 of the CARES Act allows an employer to contribute toward an employee's student loans at no cost to the employee. To do so, it amends an existing provision of the Internal Revenue Code (IRC), section 127, which excludes payments under an approved educational-assistance program from the employee's taxable income. Section 127 already allows employers to help employees with tuition and books; now it also allows employers to help with student loans.

Section 2206 of the CARES Act does, however, have some limitations. It allows employers to contribute only up to $5,250 per employee. The employer must make these contributions between now and the end of this year, after which the favorable tax treatment expires. And most important, the employer must make the payments under an educational-assistance program complying with IRC section 127. That section requires, among other things, that the employee have no option between educational assistance and taxable remuneration. In other words, the employer cannot let the employee choose cash instead of student-loan help.

Deferral of Loan Repayment

Second, section 3513 of the CARES Act allows certain student-loan borrowers to defer payments through September 30, 2020. It also suspends involuntary collection, such as wage garnishments, on delinquent loans.

While generous, these benefits cover only loans held by the Department of Education under parts B and D of title IV of the Higher Education Act—i.e., Direct Loans and Federal Family Education Loans. Section 3513 does not affect private loans.

Separately, the U.S. Department of Education announced on March 25, 2020, that it was stopping all involuntary collection efforts on student loans. It ordered private collection agencies to do the same. But again, this directive applies only to loans held by the Department; private loans are unaffected.

Upshot for Employers

Together, sections 2206 and 3513 offer different incentives. On one hand, they encourage borrowers to delay repayment by freezing interest, payments, and involuntary collection. On the other hand, they encourage employers to make payments toward employees' loans by offering favorable tax treatment. Employers with existing educational-assistance programs should weigh these new incentives before deciding what, if any, changes to make to their programs. And employers with questions about creating a new program, or the CARES Act in general, should of course consult with their tax advisors and experienced counsel.

As with all parts of the CARES Act, agencies are releasing guidance on these provisions daily, if not hourly. Littler Workplace Policy Institute (WPI) will continue to monitor these developments and advise our clients of important updates.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.