Today’s guest blogger is Peter Marcia, CEO of YouDecide, a voluntary benefits outsourcing firm.
You can’t escape the headlines about a new financial concern unraveling in the U.S.: student loan debt. While the 2008 financial crisis fueled by a subprime mortgage bubble is a not-so-distant memory, many are becoming increasingly troubled by the constant bombardment of news about outrageously high student loan debt and whether this may contribute to a new crisis.
According to Student Loan Hero statistics taken from the Federal Reserve in May 2018, student loan debt was topping out at about $1.48 billion, up from $1.4 billion at the end of 2017. Delinquency is at 11.2%, and the average monthly student loan payment is $351. Student loan debt is the second-highest category of debt, only trailing mortgage debt and exceeding U.S. credit card debt by $620 billion.
This is a huge financial problem that needs to be addressed, and what better place to attempt to manage it but the workplace?
As might be expected, student loan debt has many economic implications for the borrower: delayed savings for retirement, lack of an emergency fund nest egg and delayed buying of big-ticket items such as cars and homes. Employers are not blind to this plight and are starting to take action.
Many employers are prompted to evaluate student loan debt solutions as an employee benefit by news headlines, grassroots requests by certain employee groups and individual employee feedback. Also, as part of their annual employee benefits review, benefits managers may be seeing a decline in participation in some of their benefits programs and as a result, conduct an overall review of employees’ overall financial wellness.
A growing impetus is a shift in workforce dynamics; Baby Boomers are retiring and Millennials are taking their places. In many industries, there is a war for talent because the employee pool is decreasing. Employers recognize that to attract and retain employees, they need to appeal to professional Millennials’ needs. In many cases, this is to provide benefits to help manage student debt.
If an employer chooses to provide a student loan debt benefit, where should the employer begin? There are several options for an employer to follow to provide student loan debt support, ranging from no cost to expensive.
We need to remember that oftentimes when an individual applies for a student loan, they have no credit rating, so the loans are provided at a higher interest rate. One option that an employer can pursue is to offer access to student loan refinancing lenders.
These lenders consult with the student loan borrower and evaluate whether refinancing is appropriate and, if so, what the new interest rate and term will be. Refinancing a federal loan is not appropriate in all cases because certain protections can be lost, so if this option is adopted, make sure to vet that the student loan refinancing organization has a capable consulting approach so the counselor can educate and evaluate if refinancing is a viable option.
For employers who have procured a budget to do more, adopting a student loan repayment plan is a viable option. There are many outstanding vendors in this space who will partner with an employer and help develop a plan that is designed to meet the objectives of the employer.
For example, if the emphasis is on recruiting talent, the plan can be structured to use the sign-on bonus towards student loan payments—these can be paid over time. If the focus is to retain talent, a plan designed to increase monthly payments over time may be more effective. In these cases, the employer might provide $100 per month towards the loan principal for the first year of service and then increase it to $150 in the second year and then $200 in the third year.
These organizations can also analyze your workforce to determine what a company’s potential financial exposure might be. There are many vendors in the market, so employers may want to work with a trusted consulting company to perform the request for proposal and analysis to identify a student loan repayment partner.
In all cases, it is important to know that these student loan debt benefit payments are taxable: the employer will pay Federal Insurance Contributions Act (FICA) taxes on these contributions, while these payments are treated as ordinary income to the employee.
Recent activity that has captured attention involves linking 401(k) plans with student loan payments. On June 26, 2018, Abbott Laboratories released a press statement announcing their new “Freedom 2 Save” program. This was initiated by Abbott to recognize the financial challenges facing their young professional employees who advised management that they were having difficulty saving for retirement.
The response was the Freedom 2 Save program, which allows “full-time and part-time employees who qualify for the company’s 401(k) plan – and who are also contributing two percent of their eligible pay toward student loans – to receive an amount equivalent to the company’s traditional five percent ‘match’ deposited into their 401(k) plans. Program recipients will receive the match without requiring any 401(k) contribution of their own.”
The second headline-grabber occurred on August 17, when the IRS released a private letter ruling of an unnamed company allowing that company to amend its 401(k) plan to allow employer contributions of up to 5% to individuals who contribute at least 2% of their income to their student loans. The employee does not need to contribute to the 401(k) plan in order to receive this match.
This recent IRS private letter ruling may cause more employers to think more creatively about addressing student loans. In the meantime, current news continues to report on employers in all different industries adopting some measure of response.
Does your employer offer any student loan debt benefits? Can you think of other benefits related to student loans that you’d love to have? Let us know in the comments!