HR Quick Take: Employer-Paid Student Loan Assistance Affects Unemployment | Dentons Davis Brown

Q: We have had to make some layoffs due to COVID-19. Several of our employees have agreements with us to help them with their student loans. How will ongoing student loan payments affect your unemployment compensation during layoff?

A: Generally, student loan payments will be included in the definition of “salary” and will be treated accordingly in determining whether an individual is eligible for IWD benefits and the amount of those benefits.

In Iowa, wages are generally defined broadly as “all compensation for personal services, including commissions and bonuses, and the cash value of all compensation in any medium other than cash …”

Also note that student loan payments made by an employer to or on behalf of an employee are treated as wages for federal and state income tax purposes.

Some exceptions may apply to the determination that student loan payments are considered wages:

  • Payments were made pursuant to a forgivable loan agreement that meets the strict standards for acquiring actual loan status.
  • Payments were made after March 27, 2020, pursuant to an educational assistance program that meets the definitions in Section 127 of the Internal Revenue Code. If payments are made through a contract, they may not be made under such a program, but they may be made both through a contract and under an educational assistance program.

Unless your agreement falls under one of the exceptions, IWD will include student loan payments as part of the employee’s salary when calculating the unemployment benefit the employee can receive. (The calculation of unemployment benefits was revised in a previous post.) The practical impact is that if you continue to make student loan payments to, or on behalf of, your terminated employee, your eligibility for unemployment compensation and the amount of that compensation may be affected.

Given how complex the rules are regarding forgivable loan agreements and the variety of factors that can affect this assessment, we suggest that you speak with your legal advisor about this matter. You may also want to rethink how your future student loan repayment arrangements are structured.

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