No Fringe Benefit Left Behind: Incentivizing Employer-Provided Student Loan Repayments


Student loan debt is a disease plaguing most college graduates. In fact, about 70% of college graduates have student loan debt; and the average college graduate owes approximately $40,000.

Some companies understand that rising education costs are a problem for their workforce. Employers like Starbucks, and most recently Walmart, have introduced policies where they will pay for (or reimburse) the tuition costs of employees seeking higher education. However, these policies are only specific to employees who are currently enrolled or are about to enroll in college classes. Although these education benefits are helpful to individuals who have not yet obtained their degree, they provide no assistance to employees who are already burdened with student loan debt.

There are some employers that do provide student loan repayment assistance. According to the Society for Human Resource Management, 3% of SHRM members provided such assistance in 2015, growing to 4% in 2017. These numbers are relatively miniscule when considering that student loan debt amounts to $1.48 trillion in the United States. I doubt the number of employers providing such assistance will climb much in the near future, as there is no incentive to do so.

There are many different ways that Congress has incentivized employers to treat their employees well. For example, fringe benefits, like working condition fringes and de minimis fringes, are both deductible by the employer (under §162) and excludible from the employee’s income (under §132). In the 2017 tax act, Congress created another incentive by adding a business credit for employers who provide paid family or medical leave to employees. Currently, however, employers are not incentivized properly to provide student loan repayment assistance. And they should be.

There are certain, albeit inadequate, education-related tax benefits that currently exist in the Internal Revenue Code. For example, under §117, qualified scholarships are specifically excluded from income. Additionally, under §127, the value of certain educational assistance programs (like those provided by Starbucks and, soon, Walmart) are excluded from income, up to $5,250 per year (not indexed for inflation). Because only $5,250 is excludible from income, any excess costs paid by companies such as Starbucks and Walmart for educational assistance will be taxable income to their employees. This unindexed limit does not help much these days, considering most institutions charge thousands of dollars per credit, and each course has multiple credits. $5,250 will surely not cover a course, let alone a semester. For employers only providing assistance up to the $5,250 limit, employees will still need to foot the bill (read: take out more loans) for the remaining costs. And, again, this doesn’t help any employee who already has the degree and associated student loan debt.

Then there’s the issue of the employer deducting the cost of providing the assistance. Generally, employers can deduct the costs under §162, if they reasonably can make the argument that the expense is an ordinary and necessary trade or business expense. For instance, Walmart’s policy covers tuition and fees for employees who enroll in business or supply chain management degrees. This could easily be described as a trade or business expense, because it is directly related to Walmart’s business activities. However, Starbuck’s policy is to provide tuition assistance to employees seeking any higher education. I find it unlikely that the IRS would allow Starbucks to deduct tuition assistance paid for an employee seeking a marine biology degree, as that has no reasonable relationship to their business model.

Luckily, there has been some movement from Congress to address this issue. In February 2017, a bill was introduced to amend §127 to extend the tax exclusion of employer-provided education assistance to include payments of qualified education loans by an employer to either an employee or directly to a lender. Unfortunately, the exclusion under this bill would still be limited to $5,250. In May 2017, a second bill was introduced to extend the tax exclusion to include payments of qualified loans and to increase the maximum amount excludible from $5,250 to $10,000. Unsurprisingly, Congress hasn’t done anything with either of these bills.

As a law school graduate, I can attest to $10,000 per year still not being enough, but it would be a huge help. With the average graduate having approximately $40,000 in loans, $10,000 a year excluded from income is significant. The most important change and the one that will most incentivize employers, however, would be to include the payment of already existing loans in the §127 exclusion, and provide a corresponding employer deduction. Another option would be to add a business credit for student loan repayment. If Congress can provide a tax credit for employers who provide family or medical leave to their employees, it seems reasonable for them to also provide a credit for payment of their employees’ student loan debt.

So what this all boils down to is this: college graduates are crippled with student loan debt. Assuming the rising education cost problem isn’t fixed, we need to find new ways to pay for it. Incentivizing employers to provide loan repayment benefits as deductible and excludible fringe benefits is a logical, and easy, way to do that.