An Earned Student Loan Repayment Program as a Non-Taxable Employee Fringe Benefit: A Tax Policy Proposal

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Abstract

Student loan indebtedness is the only kind of household debt in the U.S. that has continued to rise through the Great Recession and now is the second largest debt balance after mortgage indebtedness (http://www.newyorkfed.org/studentloandebt/). The number of student loan borrowers has increased by 70 percent between 2004 and 2012. Moreover, the average amount borrowed increased nearly 8 percent between 2001 and 2012. A 2013 study by the New York Federal Reserve Bank revealed that the average indebtedness of borrowers under age 30 is $21,402. Several years ago, then College Board president Donald Stewart cited that Congress’s solution to student aid was in the form of loans, which caused the nation to face, “a deeply mortgaged future . . . we as a society are co-signing the mortgage—and paying a high social cost as well” (College Board, 1995, p. 11). Stewart’s forecast became reality. Nobel Laureate Joseph Stiglitz argues that rising student debt levels are “’an educational crisis’ that is ‘affecting our potential future growth’” (Kitroeff, 2014, p. 1). The purpose of this paper is to examine the challenges of student loan debt by proposing a potential solution to reduce student loan debt principal, known as the Earned Student Loan Repayment Program, for Congressional lawmakers to consider that would benefit both employers and employees. This proposal would create a tax policy that would allow employers to assist employees holding student loans by paying down an employee’s student loan principal by reclassifying a portion of their compensation and applying it toward the loan. Structured as an inducement policy, and based on positive employment outcomes, this proposal would also amend Internal Revenue Code §108, which provides exceptions to taxation of individuals for discharge of indebtedness. This proposal would allow employers to repay up to $5,000 of an employee’s outstanding student loans once per year, resulting in potential FICA tax savings by the employer and employee, as well as a decrease in the employee’s student loan principal. As our study will reveal, if the program were implemented, a graduate participating in the Earned Student Loan Repayment Program with $50,000 in outstanding student loans could have their ten-year loans paid off in approximately 5.2 years, coupled with an interest savings of over $9,000. This tax proposal would provide significant economic security to loan borrowers, particularly those holding high debt burdens.

Authors

• Benjamin R Silliman, St John's University

• Irene N McCarthy, St John's University