New Bipartisan Bill Could Save Borrowers Thousands

Michael Lux Blog, News, Student Loans 0 Comments

A new House Bill sponsored by 12 Republicans and 19 Democrats would treat employer contributions for student loan payments like 401(k) contributions.

Currently, employer contributions to student loan payments are taxed like normal income.  The new legislation would create an above-the-line deduction allowing employers to assist in student loan repayment without triggering tax consequences for their employees.  The maximum benefit would be $5,250.  Employers can obviously contribute more if they like, but the tax benefit is capped at $5,250.  If passed, the bill would go into effect for the 2018 tax year.

Representative Rodney Davis (R-Ill.) noted that student debt is a large drag on the economy and that student loans force many to delay buying a house, purchasing a car, or saving for retirement.  He sees this bill, called the Employer Participation in Student Loan Assistance Act, as a way to help borrowers and to provide a boost to the economy.

Chances of Passing

This is one of the first bills we have seen where we have real optimism that it will pass and become law.  The first positive sign is that there is large bipartisan support for the bill.  Very rarely does this happen, but with support for both parties, the odds of passage becomes much higher.

Another reason for optimism would be the large number of companies backing the bill.  Congressman Davis’s website shows a huge list of “coalition participants”.  Call us skeptical, but the many financial services companies backing the bill probably means there are campaign contributions to be collected as well.  With a large number of companies in a position to benefit and no obvious opponents, there is reason to believe that the bill will pass.

What does it mean for me?

If you have student loans, it means your employer could contribute up to $5,250 per year towards your student loans without you having to pay taxes on it.  While some employers already offer a benefit of this nature, most do not.  Those that currently receive student loan assistance, have to pay taxes on it.

If you already receive student loan assistance from your employer – The bill would mean less taxes in 2018.  The exact amount would depend upon your tax rate.  If you are in the 25% federal income tax bracket, the bill could save you well over $1000 per year, depending upon how much your employer contributes.

If you do not currently receive a student loan benefit, and your employer adds one – The bill would be huge for you.  You would get a new work benefit, like health insurance or a 401(k), and you would not be taxed on this new benefit.

If you do not currently receive a student loan benefit, and your employer does not add one – The bill could still be potentially helpful to you.  If your employer elects not to add the benefit, you could potentially ask them to restructure how you are paid.  For example, suppose you make $45,250 per year.  If you asked your employer to pay you $40,000 per year and to use the extra money to make a student loan contribution in the amount of $5,250 per year, it would cost your employer the exact same amount of money (just a little extra effort from HR or payroll).  However, the shift could save you a ton of money on your taxes each year.  Instead of being taxed for 45k in income, your income drops to 40k.  That all being said, this approach would depend heavily upon the final language of the bill and your results will certainly vary by employer.

Bottom Line

It is nice to see Congress acknowledge the burden of student loans on the economy and to take some steps to improve it.  While this action would amount to little more than a Band-Aid on a 1.4 trillion dollar issue, it would be a step forward.