The economic implications of COVID-19 are hard to overstate. More than 22 million Americans have filed for unemployment, with even more taking home less pay as a result of decreased hours. This is further underscored by the U.S. Chamber of Commerce’s statement that we are in uncharted economic waters. Those most vulnerable to the United States’ economic yo-yo are small businesses already operating on razor-thin margins, and individuals with debt obligations unable to be discharged via bankruptcy, such as student loans. Economically, the worst is yet to come. The federal government’s historic $2 trillion stimulus package is an attempt to stem the tide, with many policies targeted at those most vulnerable to the macroeconomic contraction.
The federal government’s economic stimulus package in response to the COVID-19 crisis contained a number of policies within the CARES Act to aid those with student loans. Most notably, the government has allowed borrowers to pause making payments on their student debt without interest accrual for six months, via section 3513, providing immediate relief for those facing unemployment or otherwise on the verge of defaulting on their student loans. The CARES Act enables borrowers to suspend all payments to federal student loans between now and September 30, 2020.
However, a long-awaited (but underreported) provision in the stimulus bill may ultimately yield the greatest relief for borrowers, which included the Employer Participation in Repayment Act. This provision allows employers to make contributions directly to the student debt of employees, tax-free, up to $5,250 per year. Put differently, just as employer contributions to tuition assistance under section 127 are exempt from payroll and income taxes, the same tax protections would be extended to contributions toward an employee’s student debt.
These policies could not be more timely. During a period where the hiring pace is slowing and layoffs are accelerating, the government should remove frictions to hiring and decrease the tax burden on firms and workers struggling to meet their obligations and stay out of default. Both of the above provisions, for the first time, acknowledge the crippling student debt burden today’s multigenerational workforce carries into the workplace.
On an individual level, this program could be game-changing for borrowers. For the average student loan holder, an employer contribution of $5,250 in today’s interest-free environment would reduce the total cost of their loan by over $10,000 and get them out of debt almost two years sooner.
Unfortunately, like many policies in the stimulus package, the CARES Act instituted an expiration date: January 1, 2021. If tax-free employer-sponsored contributions were to remain in play post-2020, the total outstanding student debt of $1.6 trillion could be reduced by one-third over 10 years. This is the aim of the Employer Participation in Repayment Act, HR 1043, and its sister bill, S.460, the latter of which mandates nondiscriminatory implementation. Both bills would not only reduce the total outstanding student debt by one-third over the course of a decade but would dramatically improve the health of the overall federal student loan debt portfolio, as the current default rate of 11% is projected to skyrocket in the wake of historic unemployment.
Proponents of the act could institute the policy more permanently as part of a tax extender package, which requires fewer legislative hoops to jump through. Its inclusion as part of a tax extender package would change this policy from an eight-month reality to a more permanent solution. This extension is critical to the stimulus package’s efficacy; employers need time to get back on their feet and respond to set up their organization and their employees for long-term success.
We urge borrowers to call their student loan servicer to communicate their intention to participate in six months of relief from student loan payments and reassess their repayment options. Many borrowers can greatly benefit from income-driven repayment programs and other federal repayment plans that enable borrowers to substantially reduce their monthly payments in relation to their financial context. On average, borrowers save $326 a month and $3,912 in the first year alone by simply transitioning to a federal payment program that is commensurate with income. Taking the appropriate steps based on the current legislation and state of the market is vital to managing student debt during this difficult time and, ultimately, securing future financial wellness.