As the average student debt balance has increased and the amount of the workforce participants that hold student debt balloons, many employers have started to take notice of its effect on
In 2018 Common Bond commissioned a study of 1,522 employees in the 5 largest industries in the U.S. Seventy-two percent of employees surveyed had outstanding student debt. Seventy-eight percent of were currently holding student debt or had plans to take out student loans in the next five years. The survey also found that they wanted their employer to offer student loan resources and tools to help them evaluate their best options.
Other key findings were that more than 86% of employees (who have student debt or are planning to take out loans for a friend or family member in the next five years) said that they would be more inclined to stay at their current company if their employer-provided monthly student loan repayment assistance. Additionally, 85% said they would commit to staying “at least three years” or more because of this benefit. Another 41% of people said they would stay “until [their] loans are paid off.”
So how are employers to help? And what do employees and their financial advisor need to know about new student-loan related benefits?
More companies are partnering with private refinance companies, like SOFI, Credible, Common Bond and others. While the partnership doesn’t guarantee that employees will qualify for a refinance, the referral fee that these lenders generally provide to their marketing partners is usually used to reduce origination fees or lower the employee's balance. While providing employees with access to lenders may provide a benefit, the terms offered may be no better than their current federal student loans.
The ability to access private refinancing is generally most beneficial to student loan borrowers who have private loans, often at higher interest rates, and those that have great credit and higher incomes.
For most borrowers with federal loans, the private refinance option is a trap that could end up costing significantly more in the long run. In fact a study by Newamerica.net, a non-profit organization found only 15% of student loan borrowers would benefit from a private refinance of their student loans.
Important note to advisors: Once a borrower converts their loans from federal to private there is no reversing the decision. Anyone considering a private refinance should be certain because the decision is beneficial. The CSLP coursework explains how advisors would determine the value of private refinance and how to protect against the lost consumer protections if a private refinance is enacted.
A number of employers have identified the complexity of student loan repayment and determined that the best way to help is to provide employees with access to knowledgeable professionals that can help navigate the student loan landscape.
Employers like Dartmouth Hitchcock Medical Center and others will pay for consultation for their staff to meet with financial professionals that will explain different loan types, repayment options and how repayment can be integrated into their engagement with other employee benefits or personal finances. While this benefit doesn’t provide any direct monetary support for loan repayment, the ability to get assistance from a qualified professional can often provide more value than a refinance or monthly payment amount. Additionally, the advice provided works hand in hand with other benefits offered and often leads to additional engagement in other benefits.
By far the most desirable solution being discussed is the willingness for employers to make payments on their employee’s student loans.
Commonly referred to as “employer contributions” the benefit has been adopted by the likes of Banfield Pet Hospital, Fidelity, and many others. While the repayment assistance is desirable, there are some drawbacks that employees and their advisors need to be aware of.
The first is that the employer contributions are considered wages as far as the IRS is concerned. As such the benefit is no different than additional compensation being paid. While many providers promote the value of employee retention from employer contributions, the fact that the benefit is a fully taxable benefit that comes with all the increased costs of wages deters many employees.
Consider that a $100 a month student loan benefit is not enough to retain an employee when faced with a $5,000 a year salary increase elsewhere. In fact, a $100/mo benefit paid to an employee’s student debt could actually be harmful. For a borrower expecting student loan forgiveness, employer contributions above the required minimum amount are both increasing the amount they are paying and reducing the benefit of the discharged debt. Employees and their advisors anticipating forgiven debt would be best served by reducing the out of pocket loan payment expense through the employer contribution. This will avoid paying the debt that would otherwise be discharged.
Additionally, employees who anticipate Public Service Loan Forgiveness need to be careful with the timing of their employer contributions. The payments made by employers are done so on a schedule that is not aligned with the loan payment due dates and can often put a borrower in a paid ahead status.
Advisors that have gone through the CSLP coursework are well aware of the pitfalls of being in a paid ahead status, but this is something that benefit providers have not considered. In a worst-case scenario, employer contributions could effectively disqualify payments from counting toward PSLF. In this case, an employer who is trying to help may actually cause service time in the public sector to be voided due to their loan payments.
Other Employee Benefits
There are a number of other innovative ideas circling around student loans and benefits. A private letter ruling was issued for one taxpayer allowing them to make employer 401k contributions based off an employee’s student loan payments. You can read more about that here.
Other companies are taking unused paid time off at the end of the year and instead of paying those days as compensation and directing the wages to an employee’s student debt. What’s clear is that employers are showing signs of a desire to help. Unfortunately, like most things around student loan repayment, the solution is not simple, and the process of providing assistance needs to address different types of borrowers. Certified Student Loan Professionals know this, unfortunately, those in HR and most financial professionals or employees do not.
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