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An Epidemic Amidst a Pandemic:
New provision aids in the fight against student debt
By: Jonathan Joseph, Consultant
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In October 2019, we chronicled the ongoing student loan crisis in the United States and discussed how the tide was slowly turning towards allowing Plan Sponsors to assist employees in paying down this debt. In our second installment on this topic, we are taking a refreshed look at the latest changes and trends that have transpired over the past 10 months since we last touched on this issue.
At the end of 2018, student loan debt in the U.S. totaled a staggering $1.47 trillion. That number continued its steady climb to a whopping $1.56 trillion at the end 2019 with no end in sight1,2. To no surprise, most of this burden fell to the younger members of the workforce; Generation Y, more affectionately referred to as “Millennials”, and Generation Z. These two generations, fall between the ages of 18-40, represent roughly 38 percent of the American workforce. However, they account for about 65 percent of the $1.56 trillion in student loan debt3,4.
Even before the global pandemic of COVID-19 placed serious constraints on the U.S. economy, employees and Plan Sponsors were looking for new ways to help ease the strain caused by the burden of student loan debt. Congress reviewed several new bills of legislation that the industry had been tracking in hopes of receiving more guidance on how Plan Sponsors would be allowed to aid in the process of paying down this mounting debt carried by its plan participants.
When the $2.2 trillion economic recovery package known as the CARES Act was passed in late March 2020, there were several provisions to alleviate participant hardships, as most of the country was, and is, continuing to deal with negative economic impact of the pandemic. One of the less-discussed provisions of the CARES Act (Section 2206) is specifically related to student loan repayments via Plan Sponsors.
The provision states that for the first time, employers can make payments on employees’ behalf for up to $5,250 toward student loan payments, and that those contributions will be free of tax. Allowing employers to assist with payments is mutually beneficial, because their reimbursements can be applied directly to principal, which in turn helps employees save on compounding interest and pay off their loans faster5.
While this perk is only applicable through the 2020 calendar year, there is hope that it will be made permanent, as many corporations will push their elected officials in Washington to maintain the incentive. Before the CARES Act allowed for tax-free student loan repayments, roughly 8 percent of employers were already offering this feature as a benefit5. They were simply paying the taxes associated with doing so.
With momentum building, there is a strong chance that this benefit is either extended, or made permanent. A recent article on plansponsor.com quoted a prominent CEO of a platform designed to help Plan Sponsors and borrowers who believes “It should be anticipated that Section 2206 will be made permanent in a tax extender.”6
Now that the benefit is tax-free, albeit temporarily, we may begin to see a bigger uptick in Plan Sponsor assistance. We at DiMeo Schneider have been monitoring the situation closely and will continue to track Plan Sponsor contributions to see how that figure changes at the end of this year7.
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Next Steps for Employers
With all that has happened in the first half of 2020, this may be a topic that a lot of employers are just now getting up to speed on, and may be asking themselves “what do we do now?”
The best first move will be to contact your consultant and recordkeeper to see what your options are. This will allow you to gather more information and determine what would work best for your firm and participant base, as this is certainly not a one-size-fits all arrangement. Furthermore, due to the fact it is currently in place only until the end of 2020, there may not be enough time for some Plan Sponsors and/or recordkeepers to effectively implement a program. In spite of the time constraints, a few third party providers have already made tremendous strides in providing a streamlined platform for this student-loan repayment service. This may be another option for employers to explore.
Hope for Long-Term Solutions
At a time where Plan Sponsors and employees are dealing with so much on their plates, the government has come to their aid in terms of providing options and temporary flexibility. Looking forward, with the COVID-19 pandemic ravaging the U.S. showing no signs of slowing down, it is fair to assume that the government must continue to be more accommodating in terms of assisting both corporations and citizens as we all work through this very difficult time. That approach can’t just be for this year.
The pandemic will come to an end at some point, and when it does, the student loan debt crisis will remain. Likewise, we will need the policies that have been in place to remain, in order to further assist us in our quest to help the American workforce climb up from under the mountain of student debt.
For more information, please reach out any of the professionals at DiMeo Schneider & Associates, L.L.C.
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This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. The information contained herein is intended for the recipient, is confidential and may not be disseminated or distributed to any other person without the prior approval of DiMeo Schneider. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Any forecasts represent future expectations and actual returns, volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is a possibility of a loss.
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