Tax Byte
Department of Education Announces Resumption of Federal Student Loan Collections – PTO-for-Student Loan Payments is An Emerging Trend
The U.S. Department of Education announced that its Office of Federal Student Aid (FSA) resumed collections on defaulted federal student loans beginning Monday, May 5th, 2025 (DOE Press Release Apr. 21. 2025). This marks the end of a collections pause that has been in place since March 2020.
Key Statistics and Timeline:
- 42.7 million borrowers currently owe more than $1.6 trillion in student debt
- Only 38% of borrowers are current on their loan payments
- Nearly 10 million borrowers could soon be in default, representing almost 25% of the federal student loan portfolio
- The Treasury Offset Program (a program that uses payments like tax refunds or Social Security benefits to repay outstanding debts) will restart on May 5th, 2025
- Administrative wage garnishment notices will begin later this summer
- Guaranty agencies will be authorized to begin involuntary collections on FFEL Program loans
PTO-for-Student Loan Payment
A notable development is the growing trend of employers allowing employees to convert unused paid time off (PTO) into student loan payments. Companies like Goldman Sachs Ayco are pioneering this approach, leveraging provisions in the SECURE 2.0 Act of 2022.
Tax Implications for Employees
When advising clients who participate in these programs, remember:
- PTO Conversions are Taxable Income: When PTO is cashed out for student loan payments, the amount is considered taxable wages under IRC §61(a), regardless of whether funds go directly to the employee or to a loan servicer.
- No Special Deduction: Unlike qualified education expenses, student loan payments made with PTO-converted cash do not qualify for additional deductions beyond the standard student loan interest deduction (capped at $2,500 annually with income phaseouts).
- Form W-2 Treatment: These payments must appear on employees’ W-2s and are subject to normal income tax withholding, FICA, and FUTA taxes.
- Employer Matching: Under SECURE 2.0 §110, the PTO conversion payment will also allow for employer matching to most retirement accounts.
Tax Implications for Employers
For your business clients implementing these programs:
- Plan design and administration: Employers must structure PTO-for-loan programs in a way that complies with Section 125 (Cafeteria Plans) and ERISA if integrated with other benefits. Proper documentation and third-party administration are strongly advised.
- Payroll tax responsibilities: Employers must withhold income and employment taxes at the time of PTO conversion, just as they would with a traditional PTO cash-out. Additionally, if payments are made directly to loan servicers, documentation must show the amounts and intended use.
- Potential compliance issues: Programs that appear to target only student loan holders may raise nondiscrimination concerns under Code §125 or §105(h). Plan design should be reviewed for parity and compliance.
Looking Ahead: Regulatory and Legislative Updates
Though Congress has not yet acted on further relief, ongoing bipartisan support for student loan repayment assistance programs may lead to expansions of tax-favored treatment. The IRS has issued limited guidance to date, but further clarity may come via Notices or Revenue Procedures.
Advisors should also monitor developments from the Department of Education and Treasury, especially around garnishment policies, hardship relief, and reporting standards.
Borrower Resources and Support
The Department of Education is launching a communications campaign to help borrowers understand their options, including:
- An enhanced Income-Driven Repayment process
- The new Loan Simulator tool
- AI assistance through “Aiden”
- Extended servicer call times
Information for borrowers seeking to exit default will be available at StudentAid.gov/end-default.
References
- Internal Revenue Code §61, §125, §221
- SECURE 2.0 Act of 2022, Division T of the Consolidated Appropriations Act, 2023
- U.S. Department of Education Student Loan Updates (April 2025)
- IRS Publication 15-B (Employer’s Tax Guide to Fringe Benefits)
- Newsweek, “Student Loans: Some Borrowers Ditching PTO to Get Payment Boost,” April 18, 2025