Written By Travis Hornsby, CFA®, CFP®
Editor's Note: Since this podcast was released, Congress created then extended a tax-free employer student loan benefit of up to $5,250 per year per employee that expires in December of 2025. See this article for the full details on how the new student loan tax benefit works.
Think about this for a minute: Your employer wants to help you pay off your student loans. Sounds like a great deal, right? Unfortunately, that’s not always the case.
Taking money from your employer to pay off your student loans can be a trap. Your employer isn’t being malicious on purpose; the company just didn’t think through the far-reaching effects of helping employees pay off student loans.
It starts with good intentions, but your employer paying off your student loans can work against you and mess up your finances.
How a $100,000 employer benefit could cost you $50,000
A hospital was looking to bring on a new physician. The facility doesn’t have a great location and was trying to sweeten the pot to attract new applicants. As part of the benefits package, the hospital was offering $20,000 per year for five years toward employees’ student loans. That’s a free $100,000.
This is a true story. One of our clients was considering the offer, thinking it was a great way to help pay down his student debt.
Can you blame him? You’d probably jump at the chance for a free $100,000 without giving it much thought, right?
Let’s take a closer look at the facts, though:
- This client is married and has a combined tax rate of about 40%.
- The total employee benefit is $100,000 ($20,000 for five years).
- Because the job is at a not-for-profit hospital, it’s eligible for Public Service Loan Forgiveness (PSLF).
- The money to pay off the student loans from the employer would be subject to income tax.
- In some employer student loan repayment plans, the income tax is paid by the employer; however, this offer wasn’t clear as to who was responsible for paying the income tax on the benefit.
Tax consequences of employer-paid student loan payments
If you consider the income tax at a rate of 40% on the $20,000 per year benefit, that’s $8,000 in extra taxes the client will need to pay.
But it doesn’t end there. To be eligible for PSLF, the client needs an income-driven repayment (IDR) plan, and IDR plans use your taxable income to calculate your monthly payment.
The student loan payoff employee benefit of $20,000 would raise the employee’s taxable income by that amount. Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) payments are 10% of the borrower’s income, which means the client would pay an extra $2,000 every year in student loan payments.
The employee benefit might balance itself out if the offer came with a higher salary, but it didn’t.
Plus, there is no tax bomb with PSLF forgiveness, so it doesn’t matter what your balance is when you hit the required 120 payments. For example, let’s say our client had taken the extra $100,000 from the employer to pay toward his student loans, hypothetically bringing his balance down to $200,000 at the end of a 10-year PSLF repayment plan. The loans would be forgiven, and he’d have no additional tax payment due.
If he didn’t accept the student loan benefit from the employer and the balance would have been $300,000 when PSLF kicked in, the loans would still be forgiven and he’d have no additional tax payment due.
There isn’t a real benefit to this strategy, and it could have ended up costing the client an extra $8,000 per year in taxes on top of an extra $2,000 per year in student loan repayments. That $10,000 a year, times five years, means he would have been out $50,000.
The problem with old-school thought patterns about debt
I’m not necessarily anti-employer student loan assistance programs. Generally, they’re just not thought-through enough to deliver a real benefit, which makes them bad for the employer and bad for you.
In the above example, the hospital could have given the doctor a higher income. Instead, they forced the doctor to accept a student loan benefit without leaving room for negotiation. It’s an old-school thought pattern that goes something like this:
The hospital program basically said, “This is what you’re going to do: You’re going to take this benefit because the best way to deal with student loans is to get a benefit to pay them off. I had to pay my student loans off and I’m 65 years old. I designed this benefit program so you’re going to accept it because the best way to handle debt is to get it to zero.”
Employer student loan benefits like this might have helped 30 or 40 years ago when dentists, physicians and lawyers graduated with student loan balances that were roughly equal to 20% of their first-year incomes.
But it reflects an older way of thinking that’s not in touch with the size of student loan balances across various professions today.
Don’t overvalue employer student loan repayment benefits
I believe people are overvaluing student loan payoff benefits at work. With that said, I’m all for you doing what you need to do if you have a family. Don’t mishear me on that. If I had a special-needs child, didn’t have a lot of savings and needed health benefits, I would do whatever it took to get the best job to take care of my family.
And if that’s you, you should do whatever it takes to obtain a good-paying job.
On the other hand, if you don’t necessarily need job security because you have a big financial safety net, don’t overvalue employee benefits. Placing too much confidence in the student loan benefits at work can be to your detriment.
Instead, create your own benefits with your employer by negotiating a higher salary, lower time worked, research money, more time off, or another benefit that’s important to your work-life balance.
