man and woman trying to move a rock labeled student loan

Globally, the COVID-19 epidemic has affected every aspect of life as we know it. In the U.S., Americans are banding together—by staying socially distant—to help flatten the curve. States are imposing work bans and restrictions on social gatherings in order to slow the spread. And most recently, Congress stepped up by approving a $2.2 trillion stimulus package that will go a long way toward easing the financial hardships facing many across the country.

One of the more progressive elements of the stimulus package are provisions aimed at tackling the student debt crisis. The word "crisis" isn't used lightly, either: Student loans are the second-largest source of debt in the US, with 46 million people owing $1.6 trillion, according to the Federal Reserve Bank of New York.

During uncertain times, it's encouraging that action is being taken to alleviate student debt burdens. Here's what those with federal student loans can expect as a result of the new legislation:

You don't have to make a payment toward your debt through September 30, 2020 and any interest that accrues will be waived. This is enacted automatically.
If you are currently in default, the US Department of Education won't enforce its typical collections efforts, like taking your tax refunds.
As an employer, you can provide student loan repayment benefits up to $5,250 on a tax-free basis.

The last point is critical both short- and long-term. Before this bill, many employers didn't offer student loan assistance because of the tax burdens. Now, this stimulus bill removes barriers for companies to enhance their employee financial wellness, recruitment, and retention offerings, and empowers employees to pay down their debt balances faster.

Annually, an employer may contribute up to $5,250 tax free, which would be excluded from the employee's income. This applies to any student loan payments made by an employer on behalf of an employee before the end of the year. Think of it like a 401(k), in that employers and employees can directly pay down the balance of student debt without paying income taxes on their contribution.

Legislation like this is critical because student debt is a major inhibitor to achieving long-term financial wellness—and meeting day to day living expenses.

Take for instance retirement, a goal which many experts say one should start saving for as early as possible. Student debt gets in the way: According to E*TRADE's Q1 2020 Streetwise Report, 94 percent of those with student debt say education costs or paying down student loans were a barrier when it comes to saving for retirement. This compares to only 30 percent for those who had no student debt.

Student debt also affects existing retirement accounts: 22 percent with student debt say they've taken out money from an IRA or 401(k) before the age of 59.5 to pay for an education, compared to 2 percent with no student debt.

Employers shouldn't underestimate the positive role they can play when it comes to helping with education costs and student debt, especially given this new legislation. According to Streetwise, 47 percent who have student debt said education reimbursement was an important benefit that a potential employer could provide; even 29 percent of those with no student debt said it would be helpful.

Debt also has a profound impact on employee well-being and performance. PwC found that one-third of employees admit to being distracted from work by their personal finances, and half admit they spend three hours (sometimes more) each week dealing with their financial problems at work. Business leaders are beginning to understand that employee financial wellness is about removing these obstacles from employees' lives and empowering them to achieve their goals.

At the end of the day, nothing will completely alleviate the exponential rise in student debt, which has doubled over the past 10 years. That being said, this new legislation is a commonsense step in the right direction and provides short-term relief for individuals and long-term opportunities for employers and employees. Employees are increasingly seeking financial wellness benefits, and businesses need every tool at their disposal to support their talent—this is a path forward, but we'll need companies and individuals to continue to work together to champion long-term solutions for an evolving workforce.

Kate Winget is managing director at Gradifi by E*TRADE, where she oversees the E*TRADE suite of financial wellness solutions including employer-sponsored student loan paydown and 529 contribution solutions, access to student loan refinance options, loan counseling, educational resources and digital financial planning tools.

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Instant Insights /

COVID-19 stimulus bill and student loan debt: A step in the right direction

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