The Department of Education has released guidance that school districts may use emergency federal funding from the recent stimulus bills to create and support educational assistance programs that pay off employees’ student loans. The employee benefit can be funded from money the school receives through the ESSER and GEER programs (the Elementary and Secondary School Emergency Relief Programs and Governor’s Emergency Education Relief Programs).
Offering to cover an employee’s student loan payments can help schools recruit and retain educators in response to the pandemic, and these payments will not be treated like taxable income for the employee if distributed through an educational assistance program.
Here’s how it works:
Under section 127 of the Internal Revenue Code, an educational assistance program allows employers to contribute up to $5,250 per year for an employee’s educational expenses, and the payments will not be considered taxable income for the employee. The CARES Act established that educational assistance programs may now be used to pay off federal or private student loans for an employee’s education (loans for a spouse or dependent’s education are not covered).
The student loans can be for education received before employment or education the employee is currently pursuing while employed. The education does not have to be job-related or result in a degree. Payments can be made directly to the employee, to the lender, or to the student loan servicer that processes payments for the lender.
Congress has extended this tax-free student loan benefit until at least January 1, 2026.
With payments of $5,250 per year, the benefit could add up to over $25,000 in student debt relief by 2026.
Affiliates should consider bargaining with employers to assist members burdened with student debt. With payments of $5,250 per year, the benefit could add up to over $25,000 in student debt relief by 2026. This can erase an educator’s student debt or significantly reduce it. Educators who are also pursuing Public Service Loan Forgiveness may use the money to make the required monthly or lump-sum payments for that program.
Now that the Department of Education has clarified that school districts can use money from the American Rescue Plan and previous COVID-relief bills to pay for any student debt relief benefits, school employers may be more willing to negotiate this benefit.
Unions may collectively bargain the terms of the program, with a few caveats:
- The terms of the educational assistance program must be set forth in a separate, written document containing only the educational assistance program.
- If an employer adopts an educational assistance program (or amends a current one to include the new benefit), the employer must notify eligible employees of the benefit and the program’s terms.
- If the employer makes the payments directly to the employee, then the employee must be able to provide proof to the employer that the payment is being used for the employee’s student loans (like a receipt or student loan statement).
- Employers cannot offer this tax-free benefit as a choice in lieu of an employee’s salary or other taxable benefits. And the educational assistance program cannot discriminate in favor of highly compensated employees making over $130,000.
HOW TO TAKE ADVANTAGE OF THE BENEFIT
CBA and MOU. Affiliates can collectively bargain for the creation of a tax-free employer-paid student loan benefit. Even if you’re currently not in scheduled full negotiations, consider bargaining a Memorandum of Understanding (MOU) to create the benefit.
Model Collective Bargaining Language:
The employer and association shall create and adopt a separate written educational assistance plan, establishing an educational assistance program under Section 127 of the Internal Revenue Code. The program shall provide all eligible employees with student loans with $5,250 per year in student loan payment assistance until the expiration of the tax-free benefit. The program shall cover any student loan incurred by the employee for education of the employee. Immediately after the jointly developed educational assistance plan is agreed to by the employer and the association, the employer will provide employees the terms and availability of the program. The employer will make payments directly to eligible employees, and employees will provide the employer with a statement from their student loan servicer or lender showing the payment was used for their student loans.