02 Aug Student Loan Benefit Programs: A Primer for Employers
When it comes to financial wellness, one hot topic is student loan repayment assistance. According to the 2019 Employer’s Guide to Financial Wellness1, 36 percent of struggling employees want some form of student loan repayment as an employee benefit. However, according to a 2019 International Foundation of Employee Benefits Plan survey2, just 4 percent of companies currently offer such a plan with only 2 percent considering a repayment benefit.
What Is Student Loan Repayment Assistance
The term “student loan repayment assistance” is a catchall phrase for programs put in place by employers to help their employees pay off student loan debt. This can be done over a period of time via matching or flat contributions. The longer an employee works for a company, the more the debt decreases, though most companies have a monthly or yearly cap on the amount of assistance given. Currently, many repayment assistance programs are not tax-deductible due to Section 127 of the tax code. This section states that the only way student loan debt repayment is tax-deductible is if the former student is paying it off themselves. When an employer helps out, that money becomes taxable income. However, there is a bill called the Employer Participation in Repayment Act that has been introduced to the Senate to change this law. If passed, employers will be able to contribute up to $5250 to each employee every year.
Saving for Retirement While Paying Student Debt
As a way around the tax issue, Abbott Laboratories sought and received IRS permission allowing it to treat student loan repayments as an eligible 401(k) contribution, meaning a company match is possible. In this way, the employee pays off their own student loan while the company helps them save for retirement – all tax-exempt. Abbott’s plan, called the Freedom 2 Save Plan, is for employees who:
- Qualify for the company 401(k)
- Spend 2 percent or more of their income on student loan repayments
- Employees receive the company’s 5 percent match as a 401(k) contribution.
According to their calculations, an employee making $70,000 per year will have $54,000 more in their 401(k) after 10 years than if they didn’t use this program. Unfortunately, at this time, what is now known as the Abbott letter isn’t sufficient to allow other companies to follow suit. The trade group ERISA is asking for guidance from the IRS so that other companies can offer this benefit to their employees.
Why Do Employers Want to Offer This Benefit?
There are two main reasons that employers hope to offer this benefit to employees once it is a tax-free option. The first is that such a benefit is a great tool to attract and retain employees. Nearly three out of four employees have trouble finding skilled candidates for open positions, and nearly half of employers are concerned about finding the right employee. With skyrocketing education costs, young employees are looking for a way to manage their student loan debt. Offering them a painless solution is a great recruitment tool. The second reason has to do with lessening the financial stress of employees. According to the PWC 2019 Employee Wellness Survey, 67 percent are stressed about finances:
- 49 percent have trouble meeting monthly expenses
- 45 percent have less than $1,000 saved for emergencies
- 59 percent carry balances on credit cards
- 1 in 3 use credit cards to pay for monthly expenses because they can’t afford them otherwise
- 50 percent of employees have delayed contributing to their retirement accounts, in addition to delaying life events like marriage, having children, and buying a home
Financially stressed employees have a negative impact on business
The same PWC survey found that 35 percent of employees are distracted at work due to finances, and of those, half spend three or more hours each week at work dealing with their financial situation. All of this leads to $500 billion in lost productivity costs to U.S. employers. This is part of the reason why it’s crucial to integrate your student loan benefit program with a Financial Wellness Program. The average employee needs to save well over $1 million to retire comfortably. Unfortunately, most have no idea how to get there. A financial wellness program, in conjunction with a student loan repayment benefit, helps employees know what to do beyond simply making monthly payments. With the right employee financial wellness program, employees can:
- Use financial planning tools and calculators to create a financial plan of action
- Access education materials about budgeting, financial goal setting, and debt management
- Speak to a financial advisor to devise a savings strategy based on individual goals
- Understand the benefits of saving for retirement early due to the effects of compounding interest
- Learn about federal loan repayment and forgiveness programs in conjunction with the employer-sponsored repayment benefit
Best of all, 73 percent of employers offering financial wellness programs see an increase in employee retirement readiness. Offering a financial wellness program allows employees to learn to become financially stable while reducing financial stress and allowing them to focus more fully on their job. It’s a win-win situation.