Tuesday, March 24, 2009

What can your pre-tax dollars do?

NERD ALERT - We're not talking cookies here (but if I could repay loans in cookies...)!

Allow me to digress from baking here while I try to work out this idea I came up with at school today. I'm sure someone else with much more influence than I have has had it too, but as grad students with a gazillion dollars in student loans (no, I'm not going to do the math, I don't want to know the real number) clearly we're looking for a way to not be in debt for the rest of our lives. Especially thanks to AIG and predatory lenders destroying the economy.

In class we were talking about social security and Medicare and 401Ks so this was a kind of related topic: Why can't we repay student loans with tax-free dollars? Example, like your flexible spending accounts, a chunk of money comes monthly from your paycheck and goes to health expenses. So in this proposal, the money you would be putting in the bank then sending back to whoever is managing your loan would go straight from your paycheck to the loan people, without setting foot in your bank account (or passing go or collecting $200 dollars). And you wouldn't pay taxes on the money that you're paying interest on. 

You don't have to pay taxes on that part of your wages. 
Less defaulting on loans - if you're employed you automatically are paying for your loans. 
Employers may find it attractive to include loan repayment as a benefit (which may decrease your salary).
Incentivizes college attendance. (A little bit.)

How exactly would this be managed? Does the govt need to set up one loan/repayment place so that employers aren't tasked with managing all of that hassle? (Or would this create new jobs!)

Thoughts? It seemed like a good idea to us in the lounge - those of us who actively need to plan how to get out of this kind of debt-up-to-our-eyeballs. 

Side note: did you watch Mama's Boys? It would have been the worst reality dating show I'd ever seen until that jerk on The Bachelor dumped his fiance on live TV. Anyway, there was this one very fake girl who had $130k of debt - and not the student loan kind. More like the fake tits and over spending credit card kind. Dealbreaker!

But maybe some serious and super-smart economist or Congressional historian can explain to me why this isn't working? (Dear Steven Levitt, if you were to post on my blog I would have a nerdgasm.)

Note, somewhere in this post I used have in 3 different tenses. In a row. And I think the sentence made sense. 


  1. As someone who has HALF of my paycheck going to student loans every month, this would be really effing nice.
    You need to call into one of those political shows and see what the "expert" on hand says.

  2. Great idea! I agree with Barb, you need to share this.

    I do have a slight disagreement with this.

    "Employers may find it attractive to include loan repayment as a benefit (which may decrease your salary)"

    It will not decrease your salary, but it still may help employers. If the payment would be tax free of Social Security and/or Medicare, the employer can benefit as well, as they won't have to pay as much. Just making it tax free from income tax would benefit just the student/taxpayer and employers would only have their pride knowing that employees are reducing their debt.

    As you may have guessed, I'm an accountant.

  3. Barb - those talking heads (or mysterious voices) may know a lot but don't have the influence to do anything about it.

    Tony - I admire your optimism, but this seems unlikely "employers would only have their pride knowing that employees are reducing their debt." They don't care that much. My point about that was if you're getting let's say $400/month that's going to loans, then the employer covers that, they can make the base wage lower for everyone to cover what they're going to have to put out to various employees (presumably more of the entry level too).

  4. Actually to be clear, I did not think pride would be enough for employers, which is why I suggested the SS & Medicare exemption as well.

    As for salary, your idea would be tough for others to swallow. Why should a debt free employee earn less just because there are employees on staff who have loans? At that point, the employer could be bias and hire grads from Ivy League or GW merely so they could apply pressure on the debt free's salary.

    Still a great idea that I would hope could come to fruition at some point. I'm happy to say I'm debt free, but I've been out awhile and only had to carry a couple of years after graduation.

  5. The federal student loan repayment program offers employee participants annual, lump-sum payments of up to 10k to help pay off federal student loans in exchange for a service commitment. What's really frustrating is that the government taxes this payment as an income bonus but, if you leave government before the end of your service commitment, you must repay the gross, pre-tax amount. Why is a federal benefit to assist payment of federal debt taxed as personal income? grrrr.

  6. I guess it is that time of the year for some grad students out there trying to get by. I graduated about 6 months ago and now I have to start paying back those student loans. So about a month ago, I inquired with my employer about pre-tax payments, but nothing so far. They are looking into for me, so you never know.