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May 24, 2018

Tuition Reimbursement Programs and Policy at a Glance

MHT Partners  | Education Investment Bank

The decision to pursue a higher education degree has become increasingly difficult as tuition costs continue to rise. The average cost of a bachelor’s degree is over $25,000 per year, which reflects a compounded annual growth rate of 5.5% over the last 30 years*. To help ease the financial burden of higher education, many companies offer tuition reimbursement programs to employees as a supplement to their existing benefit packages.

What’s in it for Employers?
The benefit to the employee is obvious, but you may find yourself wondering why employers would be willing to foot the bill for employee-education expenses. Like other benefits, tuition reimbursement programs help attract and retain top-tier talent. Studies have shown that employer-provided education benefits have a positive impact on a company’s bottom line. These perks not only reduce the costs to fill open positions, but research also suggests that participants in these programs earn promotions more frequently and employee turnover among participants is lower. Young professionals motivated to pay off student debt are incented to both perform and maintain their positions due to this desirable benefit. In such instances, it is fair to say the tuition reimbursement program is a win-win for everyone!

Tax Benefits for Companies
Generally, employer-provided benefits are subject to income taxes. However, when it comes to tuition reimbursement, the Internal Revenue Code of 1986 exempts up to $5,250 per employee of education expenses covered by the employer. Companies incurring such expenses on behalf of their employees can treat the cost as a business expense as opposed to wages, which therefore, are not subject to payroll taxes. As a result, hundreds of companies are now offering student loan repayment programs in some form. Out of this growing trend, new companies have emerged that develop various programs for client businesses. Gradifi, a Boston-based firm, provides student loan repayment and refinancing programs. The company believes that its platform and programs provide a better match between the benefits offered and those desired by young professionals.

Upward Mobility Enhancement Act
Interestingly, the $5,250 tax-free cap has remained constant for more than 30 years. Meanwhile, tuition costs have sky rocketed! In response to this dichotomy, U.S. Senators Catherine Cortez Masto and Jeff Flake introduced the Upward Mobility Enhancement Act in 2018, which aims to modernize this tax loophole by enhancing the tuition reimbursement benefit to employees. The bill intends to raise the tax-exempt cap to $11,500 and incorporate an inflationary index mechanism to allow for future increases to the cap. Though the Upward Mobility Enhancement Act was not addressed when Congress passed the Tax Cuts and Jobs Act in December 2017, there is speculation it will be a priority in the 2018 Tax Reform 2.0, particularly due to the initial level of bipartisan support for the bill. While the final result remains to be determined, MHT Partners, a leading education investment bank, makes it our goal to remain abreast of trends and changes in the education landscape, from the influences of the broader political and economic markets to new products and services. Stay tuned for more insights from our team on our Learning Curves blog!

Source: Based on the total cost of education for four-year institutions, including tuition, fees, room and board from 1984 through 2014, as provided by the National Center for Education Statistics

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