Making employer-provided student loan repayment benefits exempt from federal taxes is the newest scam in student lending. But rather than the borrowers being the victim, this time it’s the taxpayers.
There’s been growing support behind the idea that when employers help students repay their student loans those benefits should be exempt from taxes, both for the employer and employee. Right now, there are two bills in the House that would create this tax break.
The first, which was introduced by Reps. Rodney Davis, R-Ill., and Scott Peters, D-Calif., even has bipartisan support. The idea, of course, is that this policy change, while creating a cost to taxpayers in terms of lost tax revenue, would benefit borrowers who are struggling to repay their debts. Supporters suppose that borrowers would be helped directly by the deductibility of the benefit but also because employers would be incentivized by their own tax exemption to increase compensation.
This is not at all the case.
Since borrowers wouldn’t be paying taxes on the portion of their compensation that was paid as a student loan repayment benefit, the same level of compensation could, at least theoretically, go farther.
But there’s a flipside to that coin. This policy also makes it possible for employers to spend less on compensation while keeping the overall value to their employee the same.
Sure, some employers might pass that savings onto employees, but why would we expect that to be the typical response? And why would we assume that the employer’s tax benefit from shifting salary compensation into student loan repayment benefit would translate into higher overall compensation?
It’s very possible that these tax cuts could be entirely captured by employers.
But let’s assume for a minute that employers are being altruistic and would pass through the benefits to their employees rather than capturing the subsidy themselves. Then would this policy change help struggling borrowers?
Unfortunately, no.
Borrowers who hold consistent employment at companies offering this sort of benefit are probably the borrowers that policymakers should be the least concerned about. They’ve likely completed a degree and obviously have been able to secure employment. That means they’ll go on to eventually become among the highest-earners in our economy. How about individuals with student loan debt who are unemployed or working for companies with less generous compensation and benefit packages? They’re on their own, this does nothing for them.
It’s likely borrowers that didn’t complete their degrees and tend to have low balances and high rates of default—the ones we do need to be concerned about—won’t often be employed at the types of companies where these benefits are offered.
Not a day goes by that a politician doesn’t take the stage somewhere to talk about the student loan crisis and the financial challenges it’s creating for our nation’s young people. So it’s no surprise that policymakers are clamoring for policy solutions to quell the concern of their constituents.
Unfortunately, that desperation has led policymakers to cling to some solutions that sound good at first blush but can be revealed to be misguided under even superficial examination. This is just another in a growing list of examples that make the mistake of delivering benefits to already well-off borrowers and leaving the neediest students without any relief.
Congress should stop this proposed legislation in its tracks. If they don’t, it will amount to a hand-out to companies, particularly those who hope to profit from selling the administrative infrastructure necessary to offer student debt repayment benefits.
This is hard to do, I know. Constituents are clamoring for a solution to the student loan crisis and may not have a nuanced enough understanding of the issue to appreciate the shortcomings of this proposal. But our representatives owe it to the taxpayers to be good stewards of their dollars.
There are solutions out there that both “sound good” and do good. This isn’t one of them.
Beth Akers (@BethAkers_) is a contributor to the Washington Examiner’s Beltway Confidential blog. She is a senior fellow at the Manhattan Institute and co-author of “Game of Loans: The Rhetoric and Reality of Student Debt.”
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