Pitfalls of Employer Student Loan Repayment Assistance Programs
Student loan repayment assistance programs (LRAP) are a new employee benefit offered by a few employers. Although any help paying down student loan debt is attractive to employees, there are a few potential pitfalls with these plans.
The primary problem is the taxability of employer assistance in repaying student loans. Employer-paid student loan repayment assistance programs represent taxable income to the employee under current law.
There have been numerous legislative proposals to treat LRAPs as an exclusion from income, including a few bipartisan ones, but so far none of the legislation has been reported out of committee. Some of the draft legislation proposes to integrate LRAPs with employer-paid tuition assistance.
Under current law, only loan forgiveness and repayment programs that are part of the loan program are tax-free. The loan forgiveness program must also be restricted to employment in specific occupations for a specific amount of time. For example, teacher loan forgiveness, public service loan forgiveness and National Health Service Corps are tax-free because they are part of the federal student loan programs.
(Tufts University has a clever LRAP for the university's alumni who work in public service fields. Eligible alumni must work in an occupation that will qualify for public service loan forgiveness. They must also choose an income-driven repayment plan. Tufts University makes the monthly payments under income-driven repayment on behalf of the participating alumni.
Although normally such payments would be considered taxable income, Tufts University has structured the payments as a loan, which is forgiven when the alumnus qualifies for public service loan forgiveness. This satisfies the requirements for tax-free treatment.)
Another problem is that few employers have adopted student loan repayment assistance programs. Adoption will be slow because of concern about the taxability of the benefits, until Congress enacts legislation that provides tax-free status for the employer contributions. Until then, LRAPs will function as a form of job lock, where employees will lose the benefits if they switch jobs. Many LRAPs require the employee to have worked full-time for the employer for at least six months to a year before the benefit begins.
Prospective employees should consider the tradeoff between a LRAP program and a higher salary or bonus with another employer. A higher salary is a permanent benefit, while a LRAP lasts for only a few years or until the debt is paid off. In effect, a LRAP is just like a bonus.
So far, employers have offered LRAPs in addition to retirement plan contributions. Do not neglect retirement plan contributions just because you are anxious about their student loans. Instead, you should always maximize the employer match on contributions to your retirement, as that’s free money.
Some employer LRAPs are limited to just federal student loans, while others include private student loans. Some LRAPs are limited to student loans and do not include parent education loans.
When financial aid and federal student loans aren't enough to cover all college costs, consider financing the gap with private student loans. Shop around to find the loans that best fit your needs.