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Employer forgiving loans but charging tax

Started by heoxia, April 24, 2021, 11:38:43 am

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heoxia

I accepted enrollment into a particular university due to a loan forgiveness program I was offered by a local employer that made the tuition manageable. I agreed that I would be a full-time employee of this employer for three years, and that they would pay up front for 80% of my tuition, holding it as a loan at 5% interest, then forgiving it on a biweekly basis for 3 years provided I stay with the company. They offered this to 16 people every year in order to recruit/retain "choice" candidates for their business.

In order to ensure we are taxed on this forgiveness, they add the forgiven amount to our paycheck every two weeks, then remove it, so it looks like we're making $20k more per year than we are.

My question is, is this loan forgiveness now non-taxable by government standards? It looks like there's a clause in the new bill that says loan forgiveness is still taxable if it's provided in exchange for services performed... however, we're getting paid for our labor same as everyone else - this is simply an employer benefit where they preemptively contracted us for employment.

The company is still adding/subtracting from our paycheck for forgiveness and I can't figure out if this loan forgiveness should now be tax-free.

If it is, in fact, eligible to be tax-free, do we anticipate there will be a place on next years tax returns to indicate how much money we were taxed on that was actually forgiven student loans?

TheCollegeInvestor

Your employer would need to create a Section 127 benefit plan for all eligible employees, and then the loan repayment assistance would be tax-free (at least federally - some states still may tax it).

There are also tuition reimbursement programs, but that doesn't sound like what this is either.

My guess would be this odd setup is taxable, but you should speak to an accountant.

See these resources:
- $5,250 In Employer Student Loan Repayment Tax-Free
- State Taxes and Loan Forgiveness