21 Feb Reducing Employee Debt With Student Loan Benefits
According to Experian, student loan debt in the U.S. hit $1.4 trillion in 2019, up from $1.33 trillion in 2018. Aggregately, student loan debt has increased 116% in 10 years. This is bad news not only for those mired in debt but also for the employers who hire them.
In a study by American Student Assistance, more than half of surveyed employees say they “worry about repaying their student loans all the time or often.” And per an article published by the Society for Human Resource Management, “When employees are distracted, they aren’t being productive.”
Soaring student loan debt and its ramifications on the U.S. workforce are motivating employers to find solutions.
A new paradigm: Student loan repayment assistance
In 2018, the IRS published a private letter ruling that approved an employer’s proposal to amend its 401(k) plan to include student loan benefits. Specifically, employees who are eligible for the company’s 401(k) and make a student loan payment of at least 2% of their salary via payroll deduction will receive a 401(k) match equaling 5% of their pay.
The private letter ruling, though limited to the organization that made the proposal, fueled widespread interest among employers. Now, some employers are partnering with student loan refinancing companies to offer student loan repayment plans. This benefit lets employers make contributions — on behalf of the employee — to the student loan servicer, regardless of how much the employee is repaying.
Employers typically make SLRP contributions on a per-month basis. Some companies limit the amount an employee can receive in student loan repayment assistance. Others have no lifetime cap.
The employer’s monthly contribution goes toward the principal balance, potentially trimming years off the loan. This can be a powerful retention incentive, especially for top performers with student loan debt.
High interest, low adoption
Despite high interest among employers, SLRPs have a low adoption rate. For starters, the program can be complicated for employers to administer and expensive to maintain — which is why it’s usually implemented by large organizations or tech startups that depend on exceptionally skilled millennials.
Second, student loan repayment assistance is currently treated as taxable income, which could put a damper on employees’ enthusiasm for the benefit.
Third, employers with SLRPs must be able to justify why they’re spending money on a benefit that — unlike tuition assistance — doesn’t improve the recipient’s skills.
That said, industry observers have great hopes for SLRPs, believing more companies will adopt them once the benefit gains tax-favored status.
A viable substitute: Financial education
Borrowers often take student loans without having real knowledge of how the loans work and their long-term impact. For this reason, employees will likely appreciate educational resources that can help them better understand their financial situation and student loan repayment options. This is a simple, low-cost way to assist employees with their student loan debt.
The bottom line is to keep in mind the needs of your employees when it comes to student loans.