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Creative Way To Payoff Student Loans Faster!

December 6, 2024 by Marc Morris in Attract Talent, Hire Talent

How to Payoff Student Loans Faster

Tax Tips for Employees with Student Loans: A Win-Win Strategy

In my never ending quest to help employers hire top talent, I continue to see candidates carrying significant student loan debt. With mounting inflation I often question how these great candidates will ever be able to qualify for mortgages while owing so much on their education loans.

Needless to say, when I saw this information today I had to stop what I was doing and share this information with candidates facing this issue and their employers.

Here is a tax strategy that could be a game-changer for employees with student loans and their employers. Imagine reducing your student loan balance faster while avoiding extra taxes—sounds like a win, right? As I read it, employers can also save on payroll taxes by lending a helping hand. Let’s break this down.

Before we dive in, let me make one thing clear: I am not offering tax advice. This article is for informational purposes only. Always consult your tax advisor to determine what is best for your situation.

How Employer Loan Payments Work

Thanks to the CARES Act and Section 127 of the IRS Code, employers can make tax-free payments toward an employee’s student loans—up to $5,250 per year—through the end of 2025. This is an expansion of an already-existing program that covered tuition and other education expenses.

Here is why this matters:

For Employees

Normally, when you get a pay raise, that money is taxed as income. You pay federal, state, and payroll (FICA) taxes on it, which means you take home less than the full amount. But if your employer makes a payment directly toward your student loan under this program, that payment is tax-free. You do not pay income tax or FICA tax on it, and the entire amount goes toward reducing your loan balance.

For Employers

Employers win too! They do not have to pay their share of payroll taxes (FICA) on the amount they contribute to your student loans. Plus, offering this benefit can help attract and retain top talent in a competitive job market.

Why You Might Want Employer Payments Over a Raise

Let’s compare two scenarios. Say you’re eligible for a $5,250 pay increase.
1. Pay Raise: A raise is taxable. Depending on your tax bracket, you might only see a fraction of that amount after taxes.
2. Employer Loan Payment: The full $5,250 goes directly toward your loan, tax-free. You save money on interest, reduce your balance faster, and avoid the tax hit.

The bottom line: You get more value out of an employer loan payment than a taxable raise.

What Employers Need to Do

If you’re an employer, here’s what you need to know to implement this program:

1. Set Up a Written Plan: The IRS requires a formal, written plan that outlines how the benefit will work.
2. Offer It Fairly: The plan must be available to all eligible employees on a nondiscriminatory basis.
3. Follow IRS Guidelines: Compliance with Section 127 rules is essential to keep these payments tax-free.

For more details, check out Publication 15-B, Employer’s Tax Guide to Fringe Benefits and Chapter 10 in Publication 970, Tax Benefits for Education.

Talk to Your Tax Advisor

While this strategy offers clear benefits for both employees and employers, it’s crucial to get professional guidance. A tax advisor can ensure you’re following the rules and maximizing the potential savings.

By leveraging this program, employees can pay off their loans more efficiently, and employers can save money while supporting their workforce. It’s a win-win that’s worth exploring—just make sure to work with a tax professional to get it right.

Note: Neither the Author nor The Talmadge Group, Inc. is providing tax advice. This article is intended for informational purposes only. Please consult your tax advisor before making any decisions.