Expanding the tax-free eligibility of Section 127provides meaningful support and relief to individuals with studentloans and equips companies with a new tax-free benefit to attractand retain top talent. (Photo: Shutterstock)

Much has been written about provisions in the CARES Act thatsupport student loan borrowers. Particularly, the provision enabling student loan borrowers topause payments and interest on their student debt for close to 6months is recognized as an effective way to free up much-neededcash during this period of economic uncertainty.

What has largely been overlooked is part of the CARES Act thatallows employers to make tax-free contributions directly toemployee student loans. This allows employers to help theiremployees pay down student debt faster and save a significantamount of money on student loan interest over time. This feature was included in the stimulus package asa temporary form of legislation this readership likely knows a lotabout: the Employer Participation in Repayment Act, otherwise knownas EPRA.

Related: Student loans still worry borrowers in coronaviruscrisis

Why is this relevant now and how does it help those mostin need?

To understand its current relevance and importance requiresbrief historical context. In 1978, a law was passed allowingcompanies to pay for employees to go back to school and furthertheir education, tax-free. This was done through Internal RevenueCode Section 127 and is generally referred to as "tuitionreimbursement." If this assistance were to be taxable, those whocould not afford the additional income tax would be forced to optout, so Congress made it tax-free. The reasoning was captured inthe congressional explanation on the passage of thelegislation:

"The tax law has requiredout-of-pocket tax payments for employer-provided educationalassistance from those least able to pay, even though they receiveonly services, not an increased paycheck."

Since 1978, much has changed. The cost of college tuitionhas risen by 1,120%. The number of companiesincreasing their educational requirements for jobs has jumped 68%. As a result, 7 in 10 individuals in the workforce have taken outstudent loans to cover educational costs in pursuit of careeropportunity.

Yet Section 127 had not changed to reflect this new reality.Employers could still only reimburse employees tax-free foreducational expenses currently being incurred. Meaning, ifemployees took it upon themselves to get the education required toget a job – and in doing so, took out student loans – then theywere on their own to pay them back.

This is why more than 55% of all members of Congress (more than300 in total), from both houses and both parties, co-sponsoredEPRA. This bill would update the Section 127 tax-provision toinclude student loan repayment as a qualified form of educationalassistance. Outside of Congress, a wide-ranging group ofconstituents, from the Society of Human Resource Management (SHRM),to the Association of Young Americans (AYA), to the U.S. Chamber ofCommerce, similarly supported the bill.

Before this benefit was recently made tax-free, roughly 8% of employers chose to offer student loanrepayment as a benefit. Many of them are our clients. I had theprivilege of sharing the news with them over the past few weeksthat this benefit is now tax-free – for them and their employees.This means they no longer need to withhold taxes for employeesenrolled in the student loan repayment program, and their employeeswill see their take-home pay increase.

Instead of an employer-sponsored student loan payment of $100 amonth costing the employee $30 a month, it is now free foremployees to participate. This can have significant implicationsfor those struggling to make ends meet month-to-month. As a pointof reference, the additional $30/month in relief equates to $360for the full year – that's about one third of the amount of thefederal government stimulus on its way to many Americans rightnow.

Some believe this benefit disproportionately helps those who"don't need the help" or those with degrees who are able to affordtheir student loan payments on their own. This argument – that ifyou have a degree, you aren't financially challenged due to yourstudent debt – has been disproven in multiple studies. People withstudent loans put off significant life milestones such asowning a home, getting married and saving for retirement.

Furthermore, student loans aren't exclusive to those withcollege degrees. In fact, a disproportionate number of those whowould benefit most from employer contribution to student loanpayments are individuals who did not complete their degrees, but stillcame away with student loans. Many of these folks work inindustries with high turnover, such as hospitality, food serviceand retail businesses. The impact of a monthly student loanrepayment benefit in these roles is incredibly high. Among ourclient base, we have a wide range of firms offering student loanassistance, from retail companies to non-profits to techenterprises. Based on our data, the assumption that this benefitonly goes to those most fortunate, is simply not accurate.

Expanding the tax-free eligibility of Section 127 providesmeaningful support and relief to individuals with student loans andequips companies with a new tax-free benefit to attract and retaintop talent. While some companies may not be in the position tointroduce this benefit now, others are. Making student loanrepayment a tax-free benefit will increase the take-home pay forparticipating employees and create further incentive for employersto introduce such programs. That is good for businesses and studentloan borrowers alike.

Tara Fung is chief commercial officer atCommonBond, where focuses on providing educationbenefits to employers.

Read more: 

• 8 ways the stimulus package helps student loanborrowers
• COVID-19 stimulus bill and student loan debt: Astep in the right direction
• What you need to know about student loan programsand consolidation