Benefits and Compensation, HR Management & Compliance

Year-End Appropriations Act Makes It Easier for Employers to Make a Difference in Tackling Employee Student Debt

With 44 million Americans owing an estimated $1.7 trillion in student debt,[1] policymakers in Washington, D.C., have been focusing on how to help people pay down their balances—and the good news is, they are making it easier for employers to make a difference.

Source: Photobuay / iStock / Getty

In addition to President Joseph Biden’s day 1 Executive Order extending the pause on student loan repayments through September 2021, Congress recently extended a tax incentive for employers to help their employees pay down student loan debt.

Originally enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act last March, the tax incentive was set to expire at the end of 2020 but was extended for an additional 5 years—through 2025—with a provision in the Consolidated Appropriations Act, 2021,[2] which was signed into law in December. The provision allows employers to contribute directly to their employees’ student loans tax-free, up to $5,250 per year. The new provision modernizes the long-standing tax exclusion for employer-provided tuition reimbursement; now, employers can apply the $5,250 exclusion to student debt, tuition reimbursement, or both.

Interest Spikes for Student Debt Assistance Benefits

How have employers responded to this game-changing tax incentive? Interestingly, workplace provider Fidelity Investments (where I work) offers plan sponsors a student debt benefits program that can be designed to best serve the needs of a company’s specific workforce, and we’ve seen a dramatic increase in interest following the enactment of the law. There are several good reasons for this.

First off, the tax incentive provides employers a compelling reason to offer a student debt benefit as part of an inclusive benefits package. Significantly, offering a student debt benefit has been shown to reduce stress among employees and improve financial wellness and has also been shown to improve retention. A recent analysis of employees whose employers offered a student debt benefit showed that employees who enrolled in the program had a 52% lower turnover rate than employees who were eligible for the benefit but did not enroll.[3]

With the extension of the tax incentive, offering the benefit becomes even more appealing, as it allows companies to make an even bigger dent in paying down employees’ balances. With up to $5,250 in student debt and tuition reimbursement now considered tax-free income, employees do not pay taxes on that income. So, as an example, Fidelity’s benefits team adopted the tax exclusion last April and estimates the provision will save each Fidelity associate enrolled an average of $500 in tax relief annually, meaning an additional $500 can be repaid to each person’s student loans each year. Associates in Fidelity’s program can expect to save a cumulative $2 million per year across approximately 4,500 employees.

Fidelity launched its own student debt benefit in 2016 after employees shared they were putting off major life events, such as buying a home and saving for retirement, because of burdensome student loans. Since 2016, Fidelity has enrolled more than 12,000 of its associates in the program, saving them $58 million in principal loan repayments and $27 million in interest payments, for an average savings of $7,000 per associate. Now, the extended tax incentive can help employees save even more.

Healthcare Workers Face Highest Student Loans

Aside from improved retention, offering a student debt benefit can be a significant draw in the race to recruit top talent. Fidelity is definitely seeing it as a motivator among the many plan sponsors now looking into offering the benefit, particularly healthcare employers. This makes sense because, according to recent Fidelity data derived from nearly 54,000 users of its student debt tool, employees working in the healthcare industry face the highest student debt burdens, with an average payment of $690 per month—more than $100 per month more than the next-closest industry.[4] Given the unique challenges healthcare workers are facing during the pandemic, the ability to make student loan payments should not be another cause of stress.

Fidelity’s research also shows many employees burdened with student debt are not able to save for retirement sufficiently. According to data, of those employees with student debt, 35% are contributing less than 5% of their income to a 401(k), while one in five has an outstanding loan against his or her 401(k).2 Low contribution rates and plan loans can negatively impact 401(k) balances, especially for younger employees who have longer savings horizons. Not to mention, employees should not have to borrow from their future to pay down the past.

The recent law acknowledges that employers want to get involved in helping reduce the burden of employees’ student loan debt. With this new tax incentive, there’s never been a better time for employers to take action and adopt a student debt benefit.

Kirsten Hunter is Director of Thought Leadership at Fidelity Investments, where she focuses on emerging benefits that address the needs of today’s workforce.


[1] SOURCE: Federal Reserve as of Q4 2020, https://fred.stlouisfed.org/series/SLOAS

[2] SOURCE: https://www.congress.gov/116/bills/hr133/BILLS-116hr133enr.pdf

[3] Fidelity analysis of 24 early adopters of the Student Debt: Direct Benefit, representing more than 100,000 participants. The overall turnover results were calculated from January 2019–January 2020.

[4] The data are derived from nearly 54,000 Fidelity tool users who shared student loan information, representing nearly 6,000 companies, as of December 31, 2020.