The CARES Act
When the CARES act was passed in 2020 most people knew about it because of the stimulus money that was given to households and businesses in a time of need. However, there is a less discussed provision of the act in section 2206 that could save student loan borrowers money. This section allows for employers to exclude up to $5,250 from an employee's gross income in 2020 and use the excluded money to pay off a “qualified student loan.” Then, in 2021 when the CAA act was passed it extended the student loan repayment program from the CARES act to last through December 31, 2025. To qualify as a qualified student loan it must have been incurred in pursuit of a degree, certification, or other qualified education credential, and it must have been incurred while the student was completing at least ½ of a normal course load for their specific area of study. For a long time, employers have had the ability to reimburse employees for expenses related to higher education that were incurred while they were working for the company. The unique piece of the CARES act is that employers are now allowed to pay off student loans that were acquired prior to the employee working for their company.
My Situation
As a recently graduated college student I do have some student loan debt that needs to be repaid. In fact, I have about $25,000 in student loan debt that is currently in forbearance due to the government extending when student loan repayment will begin. However, while I am not required to repay the loans at this time, there is a time limit on how long I can take advantage of the CARES and CAA act’s provisions that will allow me to repay my student loans tax free. As a result, I spoke with Nick about the program and he agreed to utilize the program to maximize my benefit from it.
As a result, I will now be receiving $5,250 of my income per year tax-free. The withholding that I typically need to do on every paycheck amounts to 25%. As a result, saving 25% on the $5,250 will save me a grand total of $1,312.50 every year on taxes. Doing this every year through 2025 means that I will do this for 4 years and pay a total of $21,000 towards my student loans by using this program. My total tax savings over the 4 years will be at least $5,250, which is 21% of my $25,000 total loan balance. Once the 4 years of this program are complete I will still have roughly $6,000 in student loans left to be repaid, but I will have knocked out the large majority of the loans in just 4 years of a 10-year repayment plan. With one more year of larger repayments in 2026, I will be able to save myself an additional 5 years worth of accrued interest.
Conclusion
I highly recommend that anyone with a currently outstanding student loan balance speak to your employer to see if they would be interested in allowing you to utilize this program. The employer should also speak with their CPA to ensure that the program is worthwhile for their business. If you would like further information on this program there are many articles on the internet discussing this section of the CARES act including this one. The program can be a great way to not only save money while paying down your loans, but they can be a catalyst to pay more per month towards these loans and as a result finish paying off this debt faster.
If you would like to further discuss your situation with the Peak team please call us at (734) 681-7575 or email me directly at preston@peakwm.com.