How many of your employees are struggling with the cost of higher education? As tuition costs soar, many employees cannot afford the education they need to advance in their careers. By providing employee tuition reimbursement, employers can help alleviate stress while boosting employee satisfaction and loyalty.
Tuition Costs Are Increasing Much Faster Than Wages
The National Center for Education Statistics says that 40 percent of full-time undergraduate students and 74 percent of part-time undergraduate students were employed in 2020.
In the past, people may have been able to pay for college by working part-time during the school year or full-time during the summer. But, this has become impossible as tuition costs have skyrocketed while wages have not come close to keeping up. According to the University of Michigan, college tuition has increased by 747.8 percent over the last 60 years when adjusted for inflation.
The Education Data Initiative says the average cost of college in the U.S. is $38,270 per year. Even in-state students attending public four-year institutions can expect to spend an average of $27,146 a year. Students who want to attend a private nonprofit university can expect to spend $58,528 a year.
For Americans trying to pay their way through college, rising costs are a major challenge.
Financial Stress Is a Workplace Problem
Financial issues may seem like a personal problem, but stress over money can impact every aspect of life, including work.
A Bankrate survey found that 47 percent of U.S. adults say money negatively impacts their mental health. Middle generations are particularly stressed about money, with 54 percent of Generation Xers and 50 percent of Millennials saying that money is a source of stress for them.
When stress gets bad enough, it can become a workplace problem. Research published in the National Library of Medicine shows a link between stress and productivity: when workers are stressed, they are less productive.
Employee Tuition Reimbursement Programs Provide a Solution
Workers are struggling to afford the education they need to advance their careers, and financial stress is negatively impacting their mental health and work performance. But, tuition reimbursement programs can help ease this burden for employees.
Under Section 127 of the Internal Revenue Code, employers can offer education assistance programs with tax advantages. Employers can offer up to $5,250 per employee per year, and this amount will be excluded from the employee’s gross income and therefore not subject to taxes.
To qualify for tax-free status, the program must meet all of the requirements established under Section 127. Among other things, this includes the creation of a written plan for the exclusive purpose of providing educational assistance to employees. Payments can be used for graduate or undergraduate courses, and the courses do not need to be work-related. However, courses involving sports, games or hobbies are not covered unless they have a reasonable relationship to the business or are required as part of a degree program.
Tax-free tuition reimbursement benefits can be used to cover tuition and fees, as well as books and certain other eligible expenses. However, tax-free tuition reimbursement programs cannot be used to cover expenses like meals, lodging or transportation. Benefits cannot be used to pay for tools or supplies that are kept after the course is over, with the exception of textbooks.
Tuition Assistance vs. Reimbursement
Employers that want to help workers with tuition costs have two primary options: a tuition assistance program or a tuition reimbursement program.
- A tuition assistance program can help cover tuition costs at the beginning of the academic term. This prevents employees from being forced to find a way to pay their tuition out of pocket. However, if the employee does not complete the course, the employer may not be able to recover the money. Employers may end up wasting money on college courses that their employees do not take seriously.
- A tuition reimbursement program can provide reimbursement for eligible costs, and reimbursement may not be available until after the course is completed. This can be difficult for employees, who have to find a way to pay for the upfront costs associated with the course. However, employees may be motivated to complete the course successfully so they can obtain reimbursement, and the employer doesn’t need to worry about wasting benefits on courses that are never completed.
What about workers with student loan debt?
According to the Education Data Initiative, student loan debt in the U.S. reached $1.727 trillion in 2023. In the United States, 43.2 million people have federal student loan debt, and the average balance is $37,088.
Although most borrowers plan to repay their loans once they graduate and to use their degree to secure a high-paying job, this doesn’t always happen. If graduates can’t earn enough money to pay off their loans right away, interest can cause the balance to balloon. The U.S. Department of Education says that 25 million borrowers owe more than they originally borrowed, often despite having made years of payments.
Employers who want to help with student loan debt have two new options:
- Section 127 Plans. The IRS says that employers can offer tax-free student loan reimbursement assistance as part of Section 127. This option is fairly new; it has only been available since March 27, 2020. Under current law, this option is set to expire on December 31, 2025, although it may be extended past then. Tax-free student loan reimbursement benefits can be used to pay the principal loan balance and interest on qualified education loans that the employee has. Currently, tax-free benefits are limited to $5,250 per employee per year.
- The Secure Act 2.0. Under Section 110 of the Secure Act 2.0 of 2022, employers can treat student loan payments as elective deferrals for the purposes of matching contributions. This provision is designed to help employees who are unable to save for retirement because they have too much student loan debt. Instead of using matching contributions to fund a retirement plan, such as a 401(k), employees can use matching contributions to repay student loans. This option has been available since December 31, 2023.
Should you offer an employer tuition reimbursement program?
A survey from EdAssist found that 8 in 10 employees say tuition assistance makes them more likely to stay with their employer, and 85 percent say it’s important to job satisfaction. Additionally, 76 percent of respondents say they used a tuition assistance program to help with advancement and growth opportunities in their company, and two-thirds say they learned new skills or were able to pursue a new role within their company.
Employee tuition reimbursement benefits can be powerful recruitment and retention tools. They can also help companies create a strong workforce with the skills needed to help the company succeed long-term – all while taking advantage of tax breaks.
If you have employees who are interested in attending college or if you want to attract workers who are embracing higher education, it may make sense to offer tuition reimbursement as part of your employee benefits package. Higginbotham can help you put together an employee benefits package that helps you attract top talent. Discover the Higginbotham difference by connecting with a member of our team today.
