Q/A about Employer-Provided Student Loan Repayment Plans
Eileen St. Pierre, The Everyday Financial Planner
There has been a lot of press lately about a growing corporate perk – employers offering to help employees pay off their student loans. These plans are not new, but more employers are starting to realize that these plans may help them retain top millennial talent. Student loan debt now tops $1.3 trillion and can keep employees from saving for long-term financial goals like retirement.
Here are answers to some basic questions about these plans.
How do these plans work?
The company will establish its own eligibility guidelines, but you typically will have to work for a company for a set period of time to get the benefits. Payments are normally paid directly to the employee. It will be up to the employee to use them to pay off student loans.
- Some companies may pay a set amount per year, like $100 a month or $1200 a year.
- Some may provide a larger amount after a set number of years, and then make smaller, annual payments after that.
- There will be a maximum amount the company will pay out over a set period of time.
Are these payments taxable?
Yes, they are. Since they are made directly to the employee, they are treated just like a bonus. They are considered compensation and will be reported on your W-2. They are subject to both payroll and income tax.
- This is not the same as student loan forgiveness.
- Forgiven debt is usually treated as taxable income in the year you receive forgiveness, unless forgiveness is based on your occupation (i.e., working in the public sector or in certain fields).
Will these payments really help me pay off my loans faster?
Remember, you are ultimately responsible for paying back your student loans. These plans are not going to completely wipe them out. You are still going to have to come up with most of the money to pay these loans back. Consider anything your employer provides as “free money” and use it to your advantage.
- Since interest accrues on your student loans, the best company plans are those that make higher payments up front so there is less time for interest to accrue.
- Likewise, it is better to get payments monthly than annually so you can reduce interest accrual.
- If you have multiple student loans, you need to determine where to allocate your payments.
Now is a good time to re-examine your choice of student loan repayment plan. Visit my College Planning page for more information and to listen to my webinars on this topic.