Q: I was recruited for my job with the promise that some of my student loans would be repaid by the agency I work for. I’ve noticed on my pay stubs that I am paying taxes on this. Is that correct?
A: First, congratulations on the job! To answer your question, the federal student loan repayment program does allow agencies to repay federally insured student loans as a recruitment incentive for job candidates. The program authorizes agencies to set up their own student loan repayment programs to attract or retain highly qualified employees.
Employees are not automatically entitled to a student loan repayment. Agencies have discretionary authority to repay certain types of federally insured student loans, so you must be an employee your agency really wanted to snag.
Now as to your question about taxes, although the loan payment is paid directly to the loan holder on your behalf, it is included in your gross income and wages for federal employment tax purposes. Consequently, your agency must withhold and pay employment taxes from your regular wages. The applicable employment taxes include federal income taxes withheld from wages (and, where appropriate, state and local income taxes) and the your share of social security and Medicare taxes. Tax withholdings must be deducted or applied at the time any loan payment is made. The agency may choose among several different methods for withholding taxes.
Be sure to note the implications of deducting taxes directly from a gross loan payment. For example, if your agency has approved a student loan repayment benefit of $10,000 and your tax deductions are $3,000, then the agency will make a loan payment of $7,000. The full $10,000 counts toward the maximum limitations (up to $10,000 per calendar year, subject to a cumulative maximum of $60,000 per employee).