Congressman Rodney Davis (R, IL-13) visited 1871, Chicago’s entrepreneurial hub for tech startups on March 4, 2016 to meet with Peanut Butter CEO David Aronson. The topic of the meeting was student loan debt in the U.S., and potential solutions for the $1.3 trillion debt crisis. Davis is sponsoring a bill in congress, HR3861: Employer Participation in Student Loan Repayment Act, that would make it easier for companies to help employees pay off their student loans.
Many companies are starting to offer a student loan repayment benefit to their employees. However, student loan contributions from the employer are currently treated the same as compensation by the IRS, meaning both the company and the employee are taxed for the contribution.
Under HR3861, the portion of the US tax code that allows tax-free tuition reimbursement from employers would be amended to also include tax-free contributions towards student loan repayment. This is good news for forward-thinking companies who can offer a great new benefit to their employees and gain a tax benefit for doing it. The proposed change would enable an employer to contribute up to $5,250 per year, tax-free, towards an employee’s student loans. Providing a tax benefit is a great way to encourage more companies to provide a student loan repayment benefit to thousands or even millions of employees in the U.S..
Mr. Davis explained his motive for finding solutions to the student loan debt problem. The 13th congressional district in Illinois contains several colleges and universities, including Illinois State University, the University of Illinois and Southern Illinois University Edwardsville, making student loan debt a key issue for Davis’ constituents. And at a personal level, Davis has one child in college already, and two others not far behind. The cost of college increases every year, and the future burden of tuition for his family is looming.
From our perspective, Peanut Butter wanted to help Mr. Davis frame up a business case in support of the bill. If companies are able to make student loan repayment contributions tax-free, then that will result in lost revenue for the federal government. However, is that cost sufficiently offset by the benefits that this bill will generate? We think so.
Consider the fact that the U.S. government is by far the largest provider of student loans. This means that the government has a vested financial interest in those loans being repaid and bears the risk of lost revenue if individuals default. How many people default on student loans? A lot: according to the U.S. Department of Education 11.8 percent of borrowers who began repaying their loans in 2012 had defaulted by 2014.
If more and more companies provide student loan repayment benefits to their employees, default risk is significantly reduced, and loans will be paid off faster, which improves the federal government’s bottom line. Passing HR3861 is a win-win-win for individual borrowers, companies who offer the benefit, and the federal government.