Americans came into the COVID-19 crisis carrying cumulative student debt of nearly $1.59 Trillion. https://www.fool.com/student-loans/student-loan-debt-statistics/. So logically, among the many relief gambits included in the massive federal relief package enacted on March 27 (CARES Act) were provisions to help student loan borrowers.
Deferment of Federally Backed Student Loans
Relief for borrowers of student loans owned by the U.S. Department of Education (eligible student loans), which is the vast majority of all student debt, for a period of at least 60 days was previously announced by executive order on March 13.
The CARES Act replaced this executive order and expanded upon that relief to offer borrowers no interest and no payments on eligible student loans for a period of six months (until September 30). Borrowers need not take any action to be eligible for this benefit. Just stop making payments. There should be clear indication or direct communication from loan servicers indicating this change. Servicers are also being directed to halt automatic payments, and refund automatic payments debited since March 13, at borrowers’ request.
There won’t be penalties or late fees assessed. And because the relief is in the form of waiving interest rather than payments by the government, borrowers’ balances should see no change between now and September 30 unless they choose to continue making payments. Payments made on eligible student loans during this period will be applied directly to principal, unless the borrower has accrued interest as of March 13.
Borrowers pursuing Public Service Loan Forgiveness who stop payments through September 30 will still have skipped payments count toward the 120 monthly payments required.
Deduction for Employer Contribution to Student Debt Principal
Section 2206 of the CARES Act includes a quirk allowing companies that make payments toward their employees’ student loans to contribute up to $5,250 between March 27 and December 31, without that money counting toward the workers’ taxable income.
The Act is crafted so as to not allow borrowers to claim a double benefit by excluding student loan interest payed by the employer while also deducting it. But if employers offer the benefit so as to only make principal payments, borrowers can have their all their student debt payments come from tax-free earnings and thereby work the maximum savings.
These payments must be pursuant to a “separate written plan of an employer for the exclusive benefit of his employees.” These plans are known as Loan Repayment Assistance Programs (LRAPs). The CARES Act provision requires employers to perform non-discrimination testing to help ensure that highly compensated employees do not disproportionately benefit. That kind of testing is required for retirement plans such as 401(k)s, under the Employee Retirement Income Security Act. According to the Society for Human Resource Management, only 8% of employers currently offer LRAPs.
A significant caveat to the implementation of these plans to benefit eligible employees is the requirement that the “program must not provide eligible employees with a choice between educational assistance and other remuneration includible in gross income . . . the business practices of the employer (as well as the written program) will be taken into account.”
This is all great news to the small minority of employees already benefiting from such an LRAP, but with employers increasingly strained to make payrolls and sustain operations, the idea that many will be able to implement a new benefit program has been met with some skepticism. Those who wish to implement such a plan so that their employees can take advantage of this new benefit should absolutely seek professional guidance.
It is important to note that although the CARES Act is in effect, regulatory oversight from the government is being issued on a rolling basis. If you have questions about any of the CARES Act’s provisions, one of our attorneys can assist you. Please do not hesitate to contact the Wladis Law Firm. We will do our best to provide you with updates and will be available to answer questions as circumstances change. We may be reached at (315) 445-1700 or by e-mailing your everyday firm contacts.
Christopher J. Baiamonte
Mr. Baiamonte concentrates his practice primarily on civil litigation. He counsels individual, corporate, and municipal clients on resolving disputes ranging from environmental liability to shareholders rights to creditor–debtor suits. He also works with clients to navigate various state and federal regulations relating to areas such as environmental protection, employment, and civil rights.