What Employers Need to Know about Federal Student Loans in 2022
Federal student loans are in the news. Whether it’s the extension of the repayment pause (again) or lawmaker efforts to reform federal student lending programs, there are plenty of headlines for benefit pros to keep up with when it comes to student loans.
More than 43 million people have federal student loans of some form, totaling nearly $1.6 trillion in debt. The likelihood that large swaths of your workforce are impacted by changes in the student lending landscape is high.
What follows is a review of the latest news on federal student loans and how it may impact your employees, along with tools that can help you assist employees who are navigating all of these student lending developments.
Federal Student Loan Repayment Pause Extended Again
In late December, the Biden administration extended the pause on federal student loan payments until May 1, 2022. That’s after an August announcement extending the pause until February 2022, and a warning that it would be the final extension. However, the continued economic fallout from COVID-19 prompted the administration to extend the pause on payments again and keep interest rates set at zero until the restart.
The pause also applies to those who have federal student loans in default; these borrowers won’t face any collection or garnishment of wages until May.
When the pause lifts, the government can once again report defaulted borrowers to credit agencies, withhold some government benefits, and allow collection agencies to contact borrowers. Student loan advocates worry the return to the status quo will adversely impact many borrowers who are still struggling to overcome the economic effects of the pandemic.
What Benefit Pros Can Do
Employers can help employees use the latest extension to further prepare for the restart of loan payments. Financial counseling on budgeting and managing college debt are key supports you can provide.
In addition, you may want to promote and facilitate a step ladder approach to saving for the repayment startup. This entails having employees open a separate account (like SoFi at Work’s Emergency Vault) specifically for student loan repayment, then setting up a tiered direct deposit (DD). The DD would start with a small portion of the upcoming payment (say $50 per pay period) the first month, then gradually increase over the next two months. The goal is to have the full payment in this account by May 1. With this approach, employees gradually get used to having less disposable income. Plus, they can use this account for making payments moving forward.
Efforts to Continue Zero Interest Rates on Federal Student Loans
Several lawmakers support the idea of continuing to waive student loan interest rates past the repayment startup date in May. Because federal student loan interest rates are typically fixed, borrowers will pay the same rate as before the pause when payments start again.
Last year, Congressman Mark Rubio (R- FL) re-introduced legislation that would eliminate interest on Federal student loans and replace it with a one-time non-compounding origination fee that borrowers would pay over the life of the loan.
And in December 2021, a group of 14 Senate Democrats asked President Biden to waive interest for the remainder of the time the pandemic continues. (They also proposed automatically rehabilitating loans held by borrowers who defaulted.)
So far, neither Congress nor the White House has taken action to waive interest on federal student loans, although the issue remains front and center.
What Benefit Pros Can Do
As the debate continues, employers can help employees learn about and apply for repayment and refinancing options that may help lower their monthly federal student loan payments.
Student loan and financial wellness counselors can help employees determine if they are eligible to participate in a government-sponsored income-based repayment plan . Under these plans, monthly payments are generally equal to 15% (10% if you are a new borrower) of your discretionary income, divided by 12, and loan balances are often forgiven after 20 to 25 years of payments.
Refinancing is another strategy benefit pros can help employees understand better. For some borrowers refinancing with a private lender can consolidate government and private loans and lead to a lower interest rate and/or lower monthly payment.
The Status of Student Loan Forgiveness Efforts
In addition to waiving interest payments, several lawmakers, including Senate Majority leader Chuck Schumer and Massachusetts Senator Elizabeth Warren, are promoting efforts to cancel up to $50,000 per borrower in student loan debt.
President Biden has indicated his support of canceling at least $10,000 of student loans for all and is reported to be looking into his potential authority to cancel some portion of student debt.
If broad student loan forgiveness occurs, higher education experts suspect it would be soon, since Democrats would like to see it implemented before the midterm elections this November.
What Benefit Pros Can Do
In the meantime, student loan and financial wellness counselors can help employees determine if they are eligible to participate in the Public Service Loan Forgiveness Program. (Last October, the Education Department announced major changes that will make it easier to qualify for the PSLF in 2022). There are also economic hardship deferment programs available. However, in most cases, borrowers will still owe interest that accumulates during the forbearance period, which can potentially increase their overall debt burden.
Also, keep an eye on this blog. Sofi at Work will continue to cover the breaking student loan news, and the efforts at loan forgiveness with an eye toward what employers need to be ready for to best help their employees navigate student loan debt.
The Navient Settlement
Earlier in January, student loan company Navient agreed to a $1.85 billion settlement with multiple state attorneys general, who allege that the company steered borrowers into predatory private loans and costly repayment plans.
The agreement, which spans 39 states and the District of Columbia, includes $1.7 billion in private loan cancellation for 66,000 borrowers, primarily students of for-profit colleges. An estimated 350,000 federal student loan borrowers will receive restitution payments of about $260 each.
Navient strongly denies all allegations and says the settlement is an economic decision that is less costly than litigating each individual lawsuit and state probe.
What Benefit Pros Can Do
Beneficiaries of the settlement should be notified by Navient by July. Meanwhile, employers can help employees determine if they qualify for a Navient cancellation or payment by reviewing the type of loans they have and whether they live in one of the states where the settlement is active. To see the full details of the settlement, employers and employees can visit NavientAGSettlement.com .
State Tax Incentives for Employers who Offer Payment Benefits
Following the lead of the federal government, several states have passed, or are considering, laws that provide tax incentives to employers that provide student loan repayment benefits. In Connecticut, for example, employers will receive a 50% tax credit of up to $2,625 per year for payments made on student loans starting with the 2022 tax year.
And, in Massachusetts, a bill recently filed by state Rep. Kate Lipper-Garabedian would set an annual tax exemption of $2,000 per employee for employers to help their employees pay off student loan debt. Other states are considering similar legislation.
What Benefit Pros Can Do
State tax credits, where available, add to an already tax-friendly HR benefit that can help your organization retain and attract talent. Under the CARES Act, employers may now provide up to $5,250 annually for an employee’s student loan repayment through 2025. Employers can write off the expense and employees have no tax liability for the benefit under Section 127 of the Internal Revenue Code. Before COVID-19 relief, an employer’s student loan contributions were subject to payroll taxes and were taxable income to the employee.
Looking for ways to help your employees navigate the student loan landscape? SoFi at Work’s student loan education, refinancing, and repayment benefit platforms can offer the tools you need to support your employees and promote their overall financial wellness.
Photo credit: iStock/PeopleImages
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