Student Loan Payback Alternatives Look to Employer-Based Payoff, Not Pre-College Savings Accounts

NEW YORK (MainStreet) — The Obama administration’s February announcement that it planned to tax 529 College plans was panned in higher ed circles and by college savers alike. The White House reversed course almost immediately yet managed to throw a harsh light on a larger problem. Even with the incentive of a tax write-off, not enough people are saving for college. A criticism of the 529 program is that it mainly benefits people who can afford college whether they save for it in advance or not. People with no college savings are most likely to take student loan balances with them into the real world.

But what if there was a tax-free debt payoff solution alternative available to people after they're out of school and in the work force--one they could contribute to when they're drawing a salary rather than save for before they matriculate?

Such plans would likely have to be reconciled with U.S. tax laws--and therein may lie the rub. One alternative would be to allow firms to let employees with student loan balances open 401(k)- like accounts through their jobs that would let them earmark pre-tax money to pay off student loans.

These vehicles might compete with existing 401(k) plans and be met with resistance from fund managers. Andrew Josuweit, CEO of Student Loan Hero, noted that existing 401(k) managers might bristle at the idea that they're competing with another benefit plan.

"If less funds are being contributed to a 401(k), then the fund manager would likely see less fee revenues," he said. "The major barrier is that employers don't receive the same payroll tax breaks and benefits when compared to a 401(k) plan."

Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a Las Vegas-based website that provides information about student loans, said legislation has been introduced twice in Congress that would have provided an above-the-line exclusion of up to $5,000 from income for student loan payments made through employers.

"Unfortunately, the Student Loan Employment Benefits Act of 2012 (H.R. 5129), was never reported out of committee," he said. Introduced by Rep. Steve Israel (D-N.Y.) with the support of Republican House members, another attempt was made the following year, when it was reintroduced in the 2013 session of Congress as HR 395, but again it was not reported out of committee. Kantrowitz was involved in drafting the legislation.

It was not clear whether or not the third time might be a charm. In order for the bill to pass, the 1986 Internal Revenue Code would have to be amended to exclude from gross income any amounts paid by an employer on an employee’s student loans. A spokesperson for Rep. Israel could not be reached for comment.

Kantrowitz thought it had a fighting chance if legislators got pressure from their constituents. On the other hand he noted that "some policy makers might want to integrate it within a larger proposal, such as collecting student loan payments through the withholding system, which might derail it."

State governments can step in where the Feds fail to act. In Colorado, Democratic State Representative Cathleen Becker has proposed legislation that would give some employers tax credits for making student loan payments for their employees. Qualified workers would get up to $10,000 annually in student loan payments, while the employer would get tax credits equal to 50% of the loan payments.

But the plan would be limited to people with AA or BA degrees from a Colorado college or university and who work in the state in a STEM occupation, got their degrees no earlier than December 31, 2010, make less than $60,000 annually and remain on the job at least 12 months. The bill bogged down in committee last April. Rep. Becker is looking for ways to reinvent it and reduce its cost.

There are existing work-related student loan pay-off alternatives. Federal government employees can get up to $10,000 a year through the Office of Personnel Management Student Loan Repayment Program, also called Pay & Leave. According to its website, federal agencies are permitted to "repay federally insured student loans as a recruitment or retention incentive for candidates and current employees." The website added, "Although the loans are not forgiven, agencies may make payments to the loan holder of up to a maximum of $10,000 per employee during a calendar year" with a maximum total payment of $60,000 for an entire loan.

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