With the average new college graduate holding roughly $35,000 in student loan debt—and even more for those with a graduate degree—employers are looking for ways to help ease this financial burden. Although the Society for Human Resource Management’s 2015 Employee Benefits survey showed that just 3 percent of employers offer to help employees pay down their student loan debt, a growing number of employers have announced they will be offering this benefit in the future, and more are thinking about providing it.
“Student loan repayment benefits help with recruiting, retention, engaging employees and driving loyalty in ways that other programs do not,” said Chris Duchesne, vice president at EdAssist, an education benefits company based in Watertown, Mass.
Tax Issues Are Key
The most important thing to keep in mind about student loan repayment benefits is that they don’t receive preferential tax treatment. In other words, any amount paid to employees will be subject to income and payroll taxes.
Although Congress is considering legislation that would add student loan repayment to Section 127 of the Internal Revenue Code (which allows employee benefits to be paid with pretax dollars), only time will tell if this legislation will move forward.
Even without preferential tax treatment, student loan repayment benefits can be key to attracting and retaining top talent. In addition, student loan repayment programs are relatively easy to implement. Many of the vendors that support tuition reimbursement programs can help set up and administer loan repayment benefits.
When designing a student loan repayment benefit, the first decision an employer must make is how much to offer. These amounts can vary considerably. For example:
- PricewaterhouseCoopers (PwC) drew headlines when it announced it will offer $1,200 a year as part of its student loan paydown plan for associates and senior associates. “Over time, this may help reduce [employees’] student loan principal and interest obligation by as much as $10,000, and shorten [their] loan payoff period by up to three years,” PwC explains on its benefits webpage.
- Kronos, a Chelmsford, Mass.-based provider of workforce management solutions, will begin offering a more modest $500 a year to employees for student loan repayment, using some of the savings from changes to an open vacation policy that eliminates the need to pay for unused vacation.
- Natixis Global Asset Managementwill contribute up to $10,000 to every full-time employee who has outstanding Federal Stafford or Perkins loans. The benefit will consist of one $5,000 cash payment to employees after five years at the company, followed by annual payments of $1,000 distributed over the next five years. The Boston-based financial services firm’s 2015 study of retirement-plan participants found that 35 percent of Millennials said they don’t contribute to a company-sponsored retirement plan because they need to pay off student loans.
“Some employers go as high as $5,000 or $6,000 a year,” said Duchesne. Some offer student loan repayment “in lieu of sign-on bonuses, and others offer loan repayment funds as incentives.”
Employers also have to make design decisions about:
- Eligibility, which could be based on employee tenure, age of the loan or other criteria. Some employers are more expansive when it comes to eligibility criteria and allow employees to use this benefit for student loans they’ve taken out for their children.
- Frequency of payment (monthly, quarterly or annual lump sum).
- Caps on total benefits (annual or lifetime).
- Requirements to reimburse the employer if the employee leaves the company within a certain amount of time after receiving the benefit.
Kronos provides student loan repayment only for loans that employees take out to pursue a degree from an accredited college or university. “To determine the potential cost and impact of the program, we conducted an internal analysis to see which part of our workforce is likely to take advantage of it and how that might translate into better employee retention and attraction,” said Dave Almeda, the company’s chief people officer.
Because about 300 of its more than 4,000 employees take advantage of the company’s tuition reimbursement program each year, the company projected that a maximum of 1,000 employees might take advantage of the student loan repayment benefit. “We estimated on the high side,” said Almeda.
Other Ways to Help
Employers can offer a package in which student loan repayment benefits are a key feature but not the only option. “There are four buckets of benefits,” said Betsy Dill, financial wellness advisory leader with Mercer in Los Angeles:
- Information and counseling on how to manage student loan debt for the employees themselves or their children.
- Access to a student loan refinancing platform that allows employees to shop among different lenders.
- Subsidized student loan refinancing.
- Direct contributions to help repay student loans.
If the employee population is large enough, banks and other lenders may offer group underwriting for loan consolidation. This way, individual employees may get better interest rates and loan terms as part of the group than they might get on their own, said Dill.
Tuition Assistance Plus Loan Repayment
Employers can also consider integrating tuition assistance programs with student loan repayment benefits. Although the two programs have different tax treatments, they can be complementary. “Tuition assistance can help an employee gain new skills, competencies and tools,” said Duchesne. But “people often can’t or don’t take advantage of tuition assistance programs because of existing student loan debt.”
Student Debt Impacts Retirement Savings
A February 2016 study by the Center for Retirement Research at Boston College looked at the question of whether student debt—by reducing 401(k) savings and delaying home purchases—could have a big impact on retirement preparedness. Using the National Retirement Risk Index (NRRI), which measures the percentage of working-age households “at risk” of falling short in retirement, the analysis found that if NRRI households had started out with today’s student debt levels, the index would be 56.2 percent of U.S. households at risk instead of the already alarming 51.6 percent.
Joanne Sammer is a New Jersey-based business and financial writer.
Related SHRM Article
Boosting Younger Workers’ Financial Fitness, SHRM Online Benefits, updated September 2015