What You Need to Know about the IRS’s Private Letter Ruling on Student Loan Payments and 401(k) Contributions

Top employers are increasingly offering a student loan HR benefit. According to SHRM, 4% of companies currently offer some form of student loan monetary benefit, and many more offer non-monetary programs — such as refinancing support or financial counseling — that may be stepping stones to a more robust program.

But until a few weeks ago, there was quite a bit of uncertainty about the interplay between a student loan repayment program and 401(k) contributions. The IRS’s recent private letter ruling has provided some much-needed guidance on this topic.

This article will summarize the current options for student loan HR benefits, give some background on the program from Abbott Laboratories that spurred the private letter ruling that the IRS issues in August, and summarize the main takeaways for any HR departments looking to explore a monetary student loan benefit.

Types of Student Loan Benefits

It’s important to identify exactly what type of student loan benefit program the private letter ruling addressed. There are many types of student loan benefits:

The IRS letter ruling only deals with the last category: benefit programs where an employer makes 401(k) contributions to match an employee’s student loan payments rather than their employees’ own 401(k) contributions. The letter ruling does not address a more traditional matching program where employees are given money directly to pay down their loans.

401(k) Contributions Based on Student Loan Payments

After noticing that their younger employees were not meeting the company’s offered 401(k) match, Abbott Laboratories modified their 401(k) plan to help their younger employees save for retirement. Under Abbott’s usual plan, an employee who contributed 2% of her salary to the company’s 401(k) plan received a 5% matching contribution from the company. Under Abbott’s new program, an equivalent 2% payment towards an employee’s student loans would be sufficient to trigger the company’s 5% contribution towards the 401(k) plan, even if the employee never contributed a dime directly into the 401(k) plan itself.

In other words, employees who were paying off their student loans would receive retirement savings directly from the company as though they had been saving for retirement themselves.

(Source: http://www.abbott.com/corpnewsroom/leadership/tackling-student-debt-for-our-employees.html)

IRS Private Letter Ruling

The IRS’s private letter ruling approved Abbott’s plan. Abbott had been concerned that the IRS would see the student loan contribution as an improper conditional requirement to getting the 5% match. But the IRS said that the program did not run afoul of the “contingent benefit” rules of section 401(k)(4)(A) or section 1.401(k)-1(e)(6). The IRS noted that the program was elective and employees had the option of either not participating or returning to the usual 401(k) contribution to qualify for the 5% match.

The IRS also said that a critical feature of the plan was that Abbott did not extend any student loans directly to employees. The letter ruling implies that any such student loan offering would raise questions about the legality of the plan.

The letter ruling is specific only to Abbott’s program and cannot be cited as precedent if your company wants to move in the direction of a student loan 401(k) benefit. However, the ERISA Industry Committee has requested that the IRS make their ruling broader, allowing more more programs to take advantage.

Starting Your Own Student Loan HR Benefit

The IRS’s private letter ruling may encourage trail-blazing employers to follow in Abbott Laboratories footsteps. However, doing so will require changing your company’s retirement plan and having some amount of risk tolerance for the quickly-changing tax and compliance issues surrounding 401(k)s and student loans.

The Abbott Laboratories private letter ruling is certainly encouraging and provides a useful model for any employers who wish to move in that direction. But it does not yet assure that any similar 401(k) plan will meet IRS approval.

What is a student loan consultation?

A common service I provide is a student loan consultation for borrowers.  So, what exactly does that mean?

The goal of the consultation is to (1) help you understand your student loans, (2) have you walk away with a plan for how to handle them based on your current job and expected career path, and (3) identify whether you have any on-going needs that requires further advice.

Every person I work with on a consultation gets an individualized spreadsheet that answers the specific questions they have about their student loans.  Common questions include: how can I minimize my current payment?  Do I need to consolidate or refinance my loans? If I pay extra every month, how much will I save? Am I on track for public service loan forgiveness?

The materials also include additional tools to help determine payments under income-driven repayment plans and cost savings from lowered interest rates.

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A sample spreadsheet.  Your spreadsheet will be customized to answer your questions and provide you with a clear, actionable plan

If you are interested, here are the steps involved in the process:

Step 1: Reach out and confirm eligibility.  The first step is to verify that you live in a state where Maurer Law LLC can provide advice.  Rebecca Maurer is licensed in Ohio and the District of Columbia.  If you live in another state, it is still possible to work with me, but I will have to verify that it can provide limited service in your state.  Either way, use the contact form to reach out.

Step 2: Exchange Paperwork.  You will need to send me your student loan information (preferably from National Student Loan Data System) and your goals / questions that want answered during the consultation.  You will also receive a limited services agreement outlining what is included in the consultation.

Step 3: Set up a time for a phone call.  You and Rebecca Maurer will pick a mutually convenient time to speak by phone.  Consultations usually take between 45 minutes to an hour.  Maurer Law needs at least 48 hours between sending paperwork and the consultation.

Step 4: Receive materials and have consultation. Be sure you are near a computer so you can go over the spreadsheet and other materials provided to you during the phone call.

Step 5: Payment.  A student loan consultation with Maurer Law LLC costs $250 for an individual or $350 for married clients who both have student loans.  If only one spouse has student loans, the cost is the same as for an individual.

A student loan consultation is a limited scope service.  If we identify on-going legal needs during the consultation, you can discuss on-going representation with Maurer Law at that time.  The consultation price does not include on-going representation beyond the one-hour phone call.

I do provide discounts for veterans, educators and others in public service.

Did the Department of Education Make Up a Legal Risk to Discourage Student Borrowers from Seeking Student Loan Discharges?

Early on in the Trump administration, Betsy DeVos’s Department of Education blocked an Obama-era regulation from going into effect that would overhaul how defrauded student loan borrowers could obtain debt relief.  A few weeks ago, the Department issued its own set of proposed rules that will make relief harder to obtain for hundreds of thousands of borrowers who were either misled by their schools or whose schools closed their doors.

These new changes were widely criticized by borrower advocates, who pointed out that many of the new rules were clearly aimed at protecting for-profit schools rather than average citizens.

However, one part in particular of the proposed rules leaped out at me.  The Department repeatedly claims that borrowers who obtained a closed school, false certification, or borrower defense discharge are at risk of having their official school transcripts withheld.

Withholding a transcript can have a devastating effect on already at-risk students.  A borrower may need that transcript to transfer to another school and finisher her degree, or prove to a potential employer that she’s completed the requisite coursework for a job.  Withholding a transcript can put a borrower’s life on hold and take away the promise that education offered in the first place.

The Department’s assertion that borrowers with discharged loans were at risk of having their transcript withheld came as news to me — and I research the issue of transcript withholding.  My paper on the topic will be presented at a higher education law conference this fall.

According to the Department’s notes,

The proposed regulations also would remind borrowers submitting affirmative or defensive claims that if the borrower receives a 100 percent discharge for the loan, the institution has the right to withhold an official transcript for the borrower, as has always been the case in instances in which the borrower has been awarded student loan discharge through false certification, closed school or defense to repayment discharge.

Sounds like this issue is pretty cut and dry to the Department: schools have always had the right to withhold an official transcript after a discharge.  However, the problem is that I cannot figure out where the Department is getting this assertion from.   And, despite no obvious evidence to back it up, this claim is being used by the Department to threaten scammed student borrowers, discouraging them from obtaining relief.

There are no rules or regulations about transcript withholding in the federal statutes or code of regulations.  Moreover, there is no mention of transcript withholding in the federal student loan master promissory notes, the contracts that govern the student loans that might later be subject to discharge.

Indeed, withholding a transcript has always been seen as a state law issue, one governed by the relationship between the student and the school, not the relationship between the student and the Department of Education.  Transcript withholding only occurs when a student defaults on a debt owed directly to the school such as unpaid library fees or a tuition bill that was never covered by student loans.

Does the Department of Education think that students will end up owing a debt directly to their school when they obtain a discharge on their student loans?  It’s true that the Department of Education is able to seek reimbursement for discharged student loans directly from the school.  For example, when ITT Tech went into bankruptcy, the Department of Education made a claim on the bankruptcy estate for more than $230 million to cover closed-school discharges and borrower defense discharges received by ITT Tech students.

In other words, does the Department of Education think that after paying back the Department of Education schools like ITT Tech have a corresponding claim against the individual borrowers—the ones whose student loans were discharged because of the school’s own closure?  If so, there are some obvious issues with this theory.

This supposed debt is unlikely to hold up in court.  Borrowers would have state unfair and deceptive acts and practices claims.  And equitable defenses would seem particularly appropriate.  When a student is relieved of her obligation to pay a student loan because of her school’s bad behavior, she cannot then be saddled in turn with a debt owed directly to that same school.

Alternately, what if the Department of Education is merely claiming that schools always have the ability to withhold official transcripts and they can choose to do so after a borrower obtains a discharge?  Again, this would be incorrect.

In 2009 the Seventh Circuit addressed a transcript withholding case after a student’s loans have been discharged in bankruptcy.  The Court held that “providing a transcript is an implicit part of the education contract” and that the student had a right to the transcript because, even though she hadn’t paid her school fees directly, the obligation to pay the debt had been discharged.  This case does depend on the state property law at issue, but it demonstrates that the Department of Education is misleading borrowers if this the grounds on which it claims that all schools have always had the right to withhold a transcript after a discharged student loan.

To be honest, I’m not entirely sure what the Department of Education was referring to when it claimed that schools could withhold transcripts after a borrower obtained a student loan discharge.  I have never heard of such a case happening and cannot think of a theoretical basis for it to be true.  Nevertheless, they repeat the assertion 5 times in the notice of proposed rulemaking.  At this point, I have to conclude that the Department is misleading the public to support their agenda of discouraging discharge applications.


Student Loan Support as a Human Resources Benefit

Top employers are increasingly offering student loan support as part of their benefits package.  Student loan resources and one-on-one consultations can seal the deal for prospective employees in particularly tight labor markets like technology.  Non-profits may also want an in-house resources available to make sure their employees will qualify for Public Service Loan Forgiveness.

Maurer Law offers a suite of customizable services for employers, especially those who want to offer a student loan benefits package that goes beyond a partnership for refinancing.  In fact, offering employees private refinance options without additional context may push them towards giving up federal protections that employees will later regret.

By arming employees with the best information possible for how to handle their student loans, employers can ease stress and let their top talent focus on the work that truly matters.


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Contact Maurer Law LLC if you would like to learn more.



Is your transcript being withheld because of student loans? Here’s what you can do.

Maurer Law LLC always offers a free evaluation of transcript cases and takes a dedicated number of pro bono transcript cases each month.  You can reach Maurer Law through our contact page.  

Having your official transcript withheld because of student loans can be a huge headache.  Without an official transcript, you can’t get the job or complete the degree you need.  And without the job or the degree, you can’t make the money to pay off your loans.

This Catch-22 is trapping more and more people.

In fact, the Ohio Attorney General’s collections unit has more than 300,000 active university accounts — that’s almost 3% of the entire population of Ohio.  And many of those collections can result in a withheld transcript.

Unfortunately under current law a university does have the right to withhold your transcript in many circumstances.  If you are caught in this situation, there are a few things you can do:

1. Talk to your employer or new school about accepting an unofficial transcript

Under federal education records law, you are entitled to an unofficial copy of your transcript, regardless of the status of your student loans.  Talk to your new employer or new university about accepting an unofficial transcript instead.  If they’ll accept it, make a written request for your unofficial transcript from your old registrar’s office, being sure to cite the Federal Education Rights and Privacy Act (FERPA) in your letter.

2. Negotiate a payment plan

Withholding the transcript is always at the discretion of the university.  There are no laws mandating that a university withhold a transcript.  As a result, some universities may be willing to release your transcript if you speak with them and enter into a payment plan on your loans.

3.  Consider bankruptcy 

If you are already considering bankruptcy, mention that your transcript is on hold when you speak with your bankruptcy attorney.  Because withholding a transcript is a method of debt collection, universities are generally not allowed to continue holding onto your transcript once you file a bankruptcy petition.

Of course, entering bankruptcy is a big decision and should not be entered into lightly.  A bankruptcy attorney can help you help you assess whether bankruptcy makes sense for your overall financial health.

Maurer Law LLC does not offer bankruptcy evaluations, so if you are considering this route, you may want to reach out to a bankruptcy attorney.

4.  Speak with an attorney

There may be other options for you to consider depending on your exact circumstances. Maurer Law LLC always offers a free evaluation of transcript cases and takes a dedicated number of pro bono transcript cases each month.  


In honor of Teacher Appreciation Day, some thoughts on teachers and student loan debt

Teachers are some of the lowest paid professionals in the country.   According to the National Education Association, the average starting salary for the 2016-2017 school year was $38,617.  In Ohio the average starting salary was even lower at $35,249.

At the same time, a focus on credentialing within teaching has lead to many teachers having to take on more and more debt to get advanced degrees.  According to a 2014 report authored by Jason Delisle when he was at the New America Foundation the average Masters of Education student has $8,879 more in debt than MBA graduates, coming in with an average loan debt of $50,879.

Yes, there are some specialized forgiveness programs for teachers.  One program covers FFEL and Direct Loans while Perkins loans have a separate loan forgiveness program.   Some teachers may be eligible for public service loan forgiveness.

These forgiveness programs don’t fix the problem that we are expecting teachers to take on too much debt for too little pay.  That’s why I support efforts to increase teacher pay and reign in the cost of tuition.


Refinancing vs. Consolidating

“Should I refinance my loans? Should I consolidate my loans? What is the difference between the two?”

These are some of the most common questions I get whenever I talk to somebody about their student loan debt.  These terms are thrown around somewhat loosely, but they mean very specific things and it’s important to know the difference.

Refinancing is swapping out your current set of student loans with new, privately-held loans, often at a lower interest rate.  If you are refinancing federal loans into private loans, you will save on interest but you will lose federal benefits along the way.

The process is similar to refinancing a mortgage.  You have your existing loans (usually federal loans) at a certain average interest rate.  Because these are federal loans, you have the whole suite of federal benefits including deferment, forbearance, income-driven repayment options, and possibly even public service loan forgiveness.  By refinancing, you have a third party private company pay off your existing debt to the government, leaving you with a new debt owed to this third party, likely at a lower interest rate.

Unlike others in the student loan industry, I do not maintain any financial or business connections with any private refinancers.  I never recommend one private refinance company over another to my clients.  In fact, I rarely recommend private refinancing unless my client has a high risk tolerance and has a high-earning job that will allow them to pay off the loans on a short time horizon.

By contrast, consolidating your loans refers to the simplifying of all your federal loans into one or two consolidated federal loans.  You will not save on interest but you will keep your federal benefits.

Consolidation is a term of art in the world of federal student loans.  It refers to the process of simplifying all of your federal loans.  Unless you have some very old variable-rate federal loans, you will not get a lower interest rate — your new consolidated loan will merely have the weighted interest rate of all your previous loans.  But you will end up having to make only payments to a single servicer.  If you have federal student loans scattered across many companies, this can make your monthly bill-paying much easier.

Consolidation is very useful for student borrowers.  Sometimes borrowers have loans like Perkins loans that are not eligible for income-driven repayment plans.  By consolidating a Perkins loans, you make the entire loan balance eligible for the repayment plan of your choice.  Moreover, a consolidated loan is a Direct Loan, which means it is eligible for public service loan forgiveness.  This also make consolidation appealing to borrowers who have non-PSLF-eligible FFEL loans.

The one thing to be careful about is consolidating a Parent PLUS loan.  Always get advice from an expert before you consolidate a Parent PLUS loan with your other federal loans.  Consolidated loans that repay a Parent PLUS loan have a variety of limitations and you could be losing benefits on all the loans in the pool.

To summarize: refinancing is creating a new loan with a private lender.  You may save interest but you will lose federal benefits.  Consolidating is just creating a new federal loan to simplify your old federal loans.  You will not save on interest, but you can keep (and sometimes even get new) federal benefits.