COVID and the Great Disappearing Student Loan

A temporary change in the tax code expanded the definition of 'employer educational assistance' to include student loan repayment - what difference will it make for adult learners? 

With any change of presidential administration, there are great expectations about what will change and who will benefit. One of the big sets of questions at the start of 2021 was whether the bold idea of federal student loan forgiveness would happen. At various times, the discussion was whether it would be $50,000 or $10,000, whether there would be means testing, or whether the president could make loans go away permanently through executive order. 

Notwithstanding the progress made on Public Service Loan Forgiveness and for student borrowers affected by school closures, we still don't know if federal loan forgiveness will happen for all borrowers and what such a change would cost. But a massively underreported story in higher education policy circles (at least in my view) is that student loan relief is already possible as a tax-free employee benefit, should employers choose to offer it. 

Brief History of Section 127

In 1978, a temporary change to the tax code, Section 127, made it possible for employers to provide employees up to $5,250 per year for educational assistance, without those dollars being counted as income for federal tax purposes. Prior to that time, if employers covered the tuition of workers going back to college, that amount was considered income, and the employee would have to pay income taxes on that amount. Section 127 made it possible for employers to provide that benefit as a tax deductible expense for the company and without a tax penalty to the employee. Periodically over its first 30 years, Section 127 was in danger of not being renewed until it was finally made permanent in 2012. 

Section 127 is great for adult learners who are lucky enough to work for employers offering this benefit. If time and money are the biggest barriers to adults returning to college, then Section 127 rips one of those barriers down, at least up to $5,250 per year. A 2010 study by SHRM and NAICU found that that average annual earnings of Section 127 recipients was $42,711 in 2007, indicating that 'Section 127 benefits were used by individuals that are not considered highly compensated and in many instances, would be unable to afford attending college but for the support provided by Section 127 benefits.'

(A little CAEL history: CAEL spent a good part of the 1980s and 1990s working with employers to make sure that those kinds of tuition benefits were extended to frontline workers, that the benefit would be paid upfront to the education provider rather than reimbursed, and that employees could have considerable latitude in what kind of education and training they pursued.)  

The CARES Act Expanded Section 127 to Student Loan Repayment

One thing was very clear in the original legislative language for Section 127: tax exclusion benefits were only for current educational pursuits. The tax benefit did not apply to past educational pursuits. In other words, Section 127 could not be used for repaying a worker's student loans.That all changed in 2020. Part of the CARES Act temporarily expanded Section 127 to allow employers to offer up to $5,250 annually for student loan repayment as a tax-free benefit. That provision was scheduled to expire at the end of 2020, but in the Consolidated Appropriations Act of December 2020, the expiration date was pushed out to January 1, 2026.

Advocates are now turning their attention to making this change permanent as well as increasing the allowable amount. The limit of the benefit was set at $5,250 back in 1978 and has never been increased in all that time. This past May, U.S. Senators Maggie Hassan (D-NH), Todd Young (R-IN), Catherine Cortez Masto (D-NV), and Tim Scott (R-SC) reintroduced the Upskilling and Retraining Assistance Act, which would temporarily increase the Section 127 tax exclusion from $5,250 to $12,000 for two years as well as expand it to cover the cost of education-related tools and technology, such as hand tools, construction equipment, computers and software.  

What Does This Change in Section 127 Mean for Adult Learners?

How this will ultimately affect adult learners is unknown - but definitely something to watch. Historically, student loan repayment has not been a common employee benefit, but SHRM has reported that in recent years, there has been a growing number of companies offering it. From 2018 to 2019, such programs doubled from 4 percent to 8 percent of companies. In comparison, 56% of employers offer tuition assistance. 

But what about now, after the change in the tax law? Forbes reported last year that during the pandemic, many employers took action to help their workers financially, and student loan repayment was a popular benefit that was expanded or offered for the first time. The actual policies could vary quite a bit from employer to employer: fixed contributions, matching contributions, consolidation of loans, and refinancing. Some employers have allowed workers to redirect PTO and vacation pay to pay down student debt. Some employers who have publicly shared their new policies are large ones like Aetna, Staples, Estee Lauder and Google. For example, the Google policy offers to match an employee's student loan payments up to $2,500 per year - in other words, not the full $5,250 allowed under the new law. 

Adult learners with student loans cannot assume that an employer-provided tuition benefit can be used for repayment of student loans, even though the law now permits it. And they cannot assume that a student loan payment policy from their employer will be for the full $5,250 allowed annually. They will need to confirm that their employee assistance programs specifically allow for student loan repayment, and what the details of that policy are, in a written policy document.

At postsecondary institutions, financial aid advisors should be well-practiced in asking working learners if their employers provide educational assistance. Now, that conversation could include discussions about current and future loan repayment that could be possible from an employer.

I'll be following this topic with great interest, as I'm curious to see whether employers change their policies, and whether workers take advantage of this option more than they take advantage of tuition assistance. From an equity perspective, it would also be great to have more data on what the demographic makeup of Section 127 beneficiaries were prior to the change compared to after - particularly the race-ethnicity of beneficiaries. I also wonder whether having existing student loans repaid could lead workers to feel more willing to return to school to pursue skills and credentials they need for their careers. In any case, Section 127 - though limited in scope and practice - is one way we will definitely see student loan relief in the coming years.