What New Student Loan Relief Means for Employee Benefits
The Biden administration announced several student loan debt relief measures on August 24, 2022, including an extended loan repayment moratorium through December 31, 2022, and debt cancellation that will be available near the end of the year. Pell Grant recipients will receive $20,000 of student loan forgiveness. Other borrowers are eligible for $10,000 of student loan debt cancellation, if they earn $125,000 or less ($250,000 or less for married filers and heads of household). In light of these changes, employers may want to consider reassessing their existing education assistance program benefits.
The future relief measures the Biden administration proposed included a new income-driven repayment program and a restriction on unpaid interest. Under these proposals, borrowers who have paid loans for ten years and have remaining balances of $12,000 or less would be eligible for forgiveness at that time. Currently, borrowers are eligible for forgiveness only after twenty years of repayment. The proposal also would restrict interest accruals for borrowers who are making monthly payments, so that total loan amounts would actually be reduced by repayments. Borrowers earning under 225 percent of the federal poverty level (i.e., earning around the federal minimum wage) would be exempt from repayment and from accruing interest.
Accordingly, now is a good time for employers to consider reviewing any education assistance program benefits that are currently being offered, as well as corresponding amendments for the upcoming year. Education assistance program rules underwent a few changes in the past several years. In a private letter ruling in 2018, the Internal Revenue Service (IRS) allowed employers to tie 401(k) plan matching contributions to employee student loan repayments. Proposed legislation, the Securing a Strong Retirement Act of 2022 (H.R. 2954), often referred to as “SECURE Act 2.0,” has been passed by the U.S. House of Representatives and is under review by the U.S. Senate contains a similar mechanism. Further, in 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed employees to exclude from income up to $5,250 if their employers made interest or principal payments on qualifying student loans through education assistance programs meeting the requirements of section 127 of the Internal Revenue Code. The Consolidated Appropriations Act, 2021 extended this exclusion through December 31, 2025.
Employers may want to consider building in flexibility to their education assistance programs and to any matching contributions offered through coordination of such a program and a 401(k) plan benefit. While the Biden administration’s announcement refers to the repayment moratorium ending December 31, 2022, as a “final” extension, the state of federal student loan repayments has been uncertain during the years of the COVID-19 national emergency. In addition, if proposed measures take effect, more individuals will be eligible for $0 monthly income-based payment amounts in the future. Finally, employers that do not currently offer education assistance programs may want to consider adding one by January 1, 2023, as many borrowers’ priorities will be shifting from retirement savings to student loan repayments then.