As part of the CARES Act, Congress provided certain relief for student loans. Among other things, the bill suspended the payment on all student debt owned by the U.S. Department of Education, set a 0% interest rate on these loans and paused collection activities on defaulted student loans. As passed in the CARES Act, this relief was set to last from March 13, 2020 until Sept. 30, 2020. However, on Aug. 8, 2020, the Trump administration extended student debt relief until Dec. 31, 2020. On Dec. 4, 2020, Secretary DeVos again extended these student debt relief measures through Jan. 31, 2020.
In December, a group of bipartisan congressional leaders proposed extending the administrative forbearance that paused federal student loan payments, set the 0% interest rate and paused collection activities until April 30, 2021. But that measure was ultimately dropped from the bill and the stimulus package passed without an extension of the relief. Student loan borrowers should therefore be prepared to resume making their student loan payments beginning on Jan. 31, 2021, unless Congress or the new administration takes action.
However, the stimulus bill just passed by Congress does extend one of the other student loan benefits that was included in the CARES Act—a provision that allows employers to pay up to $5,250 on their employees student loans, tax free. Specifically, the CARES Act amended Section 127 of the Tax Code’s rules on Educational Assistance Programs. Under the Code, Employers may pay up to $5,250 to an employee, or to the employee’s lender, for the repayment of that employee’s student loans. The funds cannot be used to pay for the students loans of an employee’s dependent or spouse. Further, employers can choose to participate in a tuition assistance program or this student debt repayment program, but not both. While already a fringe benefit employers can provide employees, the CARES Act amended the Code to give employers an extra incentive to participate by providing a tax-free benefit for payments to their employees’ student loan debt. However, the CARES Act only allowed for this tax-free benefit in 2020. But, with the passage of the December 2020 stimulus package, Congress has extended this tax-free benefit through Dec. 31, 2025.
Accordingly, until 2025 money an employer pays, either in a lump sum or spread out monthly, on a student’s student loan debt can be treated as a business deduction and is not considered as W-2 income for the employee. And employees can take advantage of this benefit no matter the type of student loan debt that they may have—the rule applies to both federal and private student debt. Employers should remember, however, that the Tax Code’s requirements for “educational assistance programs” still apply to this expansion. The employer must make the payments pursuant to a written plan, cannot discriminate in favor of highly compensated employees, and must provide reasonable notice of the availability and terms of the program to eligible employees.
Given the change in administrations in January, there is much speculation as to what kind of relief for student loans the Biden administration may implement. Previously, Biden has voiced support for the cancellation of $10,000 of federal student loans for “economically distressed” borrowers. However, Senators Chuck Schumer and Elizabeth Warren, relying upon a Sept. 14, 2020 analysis from the Legal Services Center of Harvard Law School, have called upon the incoming Biden administration to cancel $50,000 of student loans per borrower.
There is currently conflicting information as to whether Senators Schumer and Warren’s call for$50,000 of cancellation of student debt would apply across the board, or only to borrowers who make less than $125,000 per year. The proposal to cancel $50,000 in student debt per borrower has garnered criticism for providing a windfall to high-income student debt borrowers, such as doctors and lawyers, and for trading one kind of debt—student loan debt—for another kind of debt—IRS debt. Specifically, there is concern that any type of executive action cancelling student loan debt would trigger a “cancellation of debt” tax event, thereby creating significant tax liabilities for student loan borrowers. There appears to be agreement that while there may be some legal authority supporting the cancellation of debt through executive action (although there is a dispute as to the extent of the President’s authority), that only Congress could ensure that any cancellation of debt does not trigger a taxable “cancellation of debt” event.
In recent years, the amount of student debt has ballooned—with approximately 45 million borrowers collectively owing a total of $1.56 trillion in debt. When considering consumer debt, student debt is now second only to mortgage debt.
If you have any questions about the recent federal relief for student loans or any of the topics mentioned in this article, please reach out to Justine Lara Konicki at jlk@kjk.com or 216.736.7211.