Tuition Reimbursement: What MBA Applicants and Students Need to Know

What’s Tuition Reimbursement?

Along with health insurance coverage and work-from-anywhere options, tuition reimbursement is one of the most valuable perks in any employee benefit plan. Those reluctant to take on student loan debt often consider this option to be particularly attractive.

Among American companies, tuition reimbursement is fairly prevalent. According to the Georgetown University Center on Education and the Workforce, United States corporations spend about $28 billion annually on this benefit. Plus, in 2019, 47 percent of employers nationwide offered undergraduate or graduate school tuition assistance to their employees.

Until just recently, this term referred to the practice of companies’ reimbursing employees for education expenses when they enrolled in courses. Employees traditionally would pay the tuition charges out of their pockets at the beginning of the term, pass their course, and then submit documentation to their company to receive their reimbursement.

However, in recent years the “reimbursement” portion of this term has turned into something of a misnomer. That’s because increasing numbers of companies now pay the universities directly. That way, their employees don’t need to incur financial hardships or credit card interest charges because under these “no cost” options, they no longer pay the tuition themselves, which makes it easier for those employees to access the benefits. That’s why the more modern term “tuition assistance” appears to be gaining popularity as a recent trend.

Typically, job candidates negotiate this tuition reimbursement benefit with their potential employers before accepting employment offers. That’s why potential MBA candidates need to understand what kinds of reimbursement options may be available from a potential employer, if they enroll in business school while working for that company.

This is also a benefit that a small proportion of MBA students negotiate as part of compensation bonus packages accompanying job offers upon graduation. For example, employers awarded about 5 percent of graduates from a recent class at the MIT Sloan School of Management a tuition reimbursement benefit with an average annual value of about $35,000.

Typical Eligibility Criteria for Tuition Assitance or Reimbursement

If ever there was a corporate policy where it was critical for potential employees to read the fine print, tuition reimbursement is certainly one such policy. Critics warn that without a comprehensive prior understanding of these programs’ restrictions, limitations, and exclusions, nobody should ever apply for a job at a company with one of these plans just so that later on, as a graduate student, they can take advantage of a tuition reimbursement.

Here are a few of the typical criteria that research for this guide revealed. At many companies, eligible employees must:

• Limit the courses they select to those which are job-related, from accredited institutions, from specific courses or academic programs, or at designated partner universities.
• Have worked for the company for a minimum time interval before the firm will reimburse their educational expenses.
• Continue to work for the company for a minimum time interval after they complete a course or a program. Otherwise, the firm may require them to refund all or a portion of their reimbursed tuition to the company should they leave early.
• Earn a minimum letter grade in classes with reimbursed tuition of a “B” or better or a 3.0 grade point average on a four point scale, meaning that the employee only recoups their funding if they achieve a stipulated level of academic success.
• Have not exceeded either the yearly or lifetime tuition reimbursement budget limits set by the employer.
• Receive approval from their supervisor. Some Tier 1 banks also require employees to have earned at least a minimum satisfactory evaluation score from their manager on their most recent performance review, not be enrolled in one of the company’s performance improvement programs, and not be on probation.

Policies like these might be one reason why more employees don’t take advantage of the tuition reimbursement programs to which they’re entitled. For example, the IFEBP study also found that at many companies offering such education benefits, only about five percent of employees take advantage of them.

More recently, a 2021 survey of Fortune 500 employees conducted by the management consulting firm Bain & Company found that only 25 percent of the respondents had ever started an application for a tuition reimbursement benefit—and only 2 percent actually participated in these programs.

Furthermore, a 2021 study from the University of Nevada reports that historically, only two to ten percent of employees ever use tuition assistance programs. “These programs are based on outdated models in which too few employees participate,” the authors conclude.

What Tax Consequences Exist?

A common annual per-employee limit reimbursed by various tuition assistance programs is $5,250. That’s because §127 of the Internal Revenue Code permits businesses to claim that amount every year as a tax deduction for each one of their employees who enrolls in such programs.

At the same time, the Code also allows employees to claim up to that same amount in tuition reimbursement, $5,250, tax-free every year from their employer. In general, that means employees never need to declare that reimbursement on their federal income taxes so long as it doesn’t exceed that cap. Furthermore, under §127 the tax-free education assistance funded by employers can also cover textbooks, as well as certain kinds of supplies and equipment in addition to tuition and fees.

Typically, any tuition reimbursement a student/employee receives in excess of that ceiling will be included as taxable income. However, when the taxpayer can claim the amount as a deductible business expense that’s job-related, the reimbursement may not necessarily be taxable. That’s because it would then qualify as a working condition fringe benefit under Code §132(d).

What Financial Aid Consequences Exist?

If tuition assistance provided by the employer isn’t sufficient to pay the total costs of the courses an employee enrolls in during a given year, financial aid such as loans might help cover the shortfall.

Although tuition reimbursement benefits should never prevent a student from winning approval for other types of financial aid, they might limit or decrease the amounts of some forms of financial aid for which that student may be eligible in certain instances. Nevertheless, should the alternative entail taking out loans, it would almost always make prudent sense to take advantage of the employer’s tuition reimbursement program.

Hidden Career Advantages

An underreported and underappreciated fact about tuition assistance programs is that they can yield rapid and potentially significant career advantages for their enrollees.

The Lumina Foundation, a higher education advocacy group based in Indianapolis with a $1.4 billion endowment, commissioned Accenture to conduct a series of tuition reimbursement program evaluations. Analysts focused on two firms with relatively lengthy tuition reimbursement histories, Cigna Insurance and Discover Financial Services.

The investigators learned that average earnings among employees in Cigna’s reimbursement program soared by 43 percent over 36 months. When compared with nonparticipants, those employees also displayed a 10 percent higher probability of earning promotions, along with an 8 percent greater likelihood of staying with the company.

At Discover Financial Services, the results were even more striking. Program enrollees at that company benefited from a 21 percent higher probability of winning promotions and earned salary increases 40 percent higher than nonparticipants.

What’s in It for the Employer?

Finally, a cynic might argue that the generous tax deduction amounts to the main incentive for employers to offer tuition reimbursement programs. After all, Washington policymakers have enabled employers to offer a coveted employee benefit without paying any additional out-of-pocket costs for many employees each fiscal year.

However, research suggests that the factors that motivate employers to offer these programs might be more complex. A 2002 study by Dr. Peter Cappelli, a management professor at the University of Pennsylvania’s Wharton School, found that reimbursement programs enable companies to attract better quality, better educated, and ultimately more productive employees than they could hire. Even without the tax breaks, those workers’ superior productivity makes it economically feasible to pay for their tuition.

Additionally, turnover is expensive. “When we lose employees, it’s a huge cost to replace them,” said John Eshleman, the benefits director at the Memorial Hermann Health System in Houston. “We’d rather invest that money to keep people.”

Educational assistance programs provide an outstanding solution. Tuition reimbursement tempts employees to stay with the company longer while they take advantage of this benefit, potentially extending their tenure with the firm over several years as they work towards an advanced degree like an MBA or PhD. Because of these programs, employers save substantial costs they would otherwise spend on searching for and hiring replacements for departing employees.

Furthermore, although educational assistance programs help to attract and retain all kinds of employees, they also provide a particularly effective incentive that helps attract younger workers who appreciate and value the opportunity to grow in their careers. And since tuition reimbursement programs usually attract the most productive contributors, participation in these programs distinguishes the enrollees and makes it easier for the companies to identify star performers who possess superior capabilities.