Breaking down the tax benefits of employer student loan repayments

At Highway we’ve repeatedly said employer student loan assistance is one of the best dollar-for-dollar benefits out there, in part, because of the tax benefits associated with the employer contributions.

What exactly are those tax benefits (for both the company and the employee)? Let’s walk through it all in depth. 

‍A quick note: The following assumes the total benefit amount an employee receives each year is below the exclusion limit. If an employee receives more than $5,250 in total educational assistance, both the employer and employee are on the proverbial tax hook for the excess amount.  

What are the tax benefits of employer student loan repayments for employees? 

Employer student loan repayments are tax-free for employees. “Tax-free” as in, “not subject to income taxes or other employment taxes”. This means that as an employee, you will receive 100% of every benefit dollar you expect to receive. Not 90%. Not 99%. 100%. 

Normally, as an employee, many of the fringe benefits you’ll receive from your employer can be considered a form of compensation and, unless they’re legally allowed to be excluded, these benefits will be included in your gross taxable income and subject to income tax withholding and/or payroll taxes (i.e. social security and medicare taxes). 

Luckily for student loan holders, employer student loan repayments and other forms of educational assistance are one of the benefits that are legally exempt from income and payroll taxes.

You might be thinking “I’m familiar with income taxes, but payroll taxes? What’s the big deal, wouldn’t my employer pay those for me?” 

Actually, no. If you’ve looked carefully at your paystub, you might have noticed line item withholdings for various federal, state, and municipal taxes (depending on where you live). The most common such payroll taxes for employees are social security and medicare (usually labeled MedFICA or FICA). 

When applicable, employees and employers equally split the tax burden for social security and medicare. The medicare tax is a uniform tax so all employees pay 1.45% of their wages (plus an additional 0.9% if you make over $200K) in taxes; Social security is 6.2% of your wages unless you make more than the wage base limit for social security ($160,200 in 2023), in which case, you aren’t subject to social security taxes. In general, an employee will usually pay around a total of 7.65% of their gross compensation for Medicare and Social Security. 

Here’s a quick, simplified example to make it clear: ‍

Let’s assume you’re single with no dependents and live in a state with no state income tax. Your annual gross salary is $100,000 and you received a $5000 stipend or raise to help pay for your student loans in lieu of a student loan repayments benefit.

Assuming a marginal tax rate of 24% and payroll taxes of 7.65%, the amount of your stipend or raise that you’ll actually be able to put towards your student loans after taxes is around $3,418.

With a tax-free $5000 annual employer student loan contribution, you could put almost $1583 more towards your loan each year!  Pretty great, right? 

On the flip side, to be able to put an equivalent extra $5K towards your loan each year with a raise or stipend, you would have to have received a raise or stipend greater than $7000.

What are the tax benefits of employer student loan repayments for employers and companies? 

For employers, the tax-free nature of employer student loan repayments means that contributions made on their employees’ behalf are not subject to additional payroll taxes such as social security or medicare taxes. 

Contributions made on their employees’ behalf are not subject to additional payroll taxes such as social security or medicare taxes

Generally, employers are responsible for half of the tax burden for social security and medicare, a total 7.65% tax on an employee’s gross compensation. On a $5,000 raise for a single employee, that amounts to an extra $382.50 paid in taxes. This could start to add up across an entire employee population! With tax-free employer student loan contributions, these additional payroll taxes aren’t an issue. 

A second tax advantage for companies is that employer student loan repayments are deductible as an ordinary business expense and therefore reduce the company’s taxable gross profit. The size of the applicable tax shield will vary based on a company’s total annual contribution. 

Of course these are just the direct financial tax benefits of a student loan repayments benefit; they don’t include any savings on recruiting costs that companies might see from increased retention related to a student loan repayments benefit; they also don’t factor in any gains in employee productivity that the company might see from alleviating one of the biggest sources’ of their employees’ financial stress.  

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Highway makes it easy for companies to make tax-free contributions to their employees’ student loans. With our turnkey platform, administering an SLR benefit is simple, straightforward, and takes less than 5 minutes to manage each month.    

If you’re interested in learning more about student loan repayments, beyond just the tax benefits, talk to a member of our team today. 

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Disclaimer: This article is purely information and is not intended as financial or legal advice. For more in-depth questions on how to interpret US laws or the IRS Tax Code, we recommend you speak to a specialized Tax Attorney.