The Employer Participation in Repayment Act (H.R. 1043), which is cosponsored by a bipartisan group of 100 House members and a companion bill (S. 460) was reintroduced in the Senate with 18 cosponsors. The legislation would allow employers to give tax-free student loan assistance up to $5,250 a year per employee, the same amount that Section 127 of the tax code now treats as tax-exempt for employer-provided tuition assistance. Why is this important for employers? A Federal Reserve study found that student loan debt has increased 96 percent since 2010, which signals that more people entering the workforce are graduating with significant student loan debt. The latest data from the Federal Reserve shows that more than 44 million people collectively owe $1.5 trillion. About 65 percent of the current student loan debt belongs to people under age 40, and seven out of ten new college graduates owe, on average $37,172. A recent AARP Public Safety Policy Institute report showed that people age 50 or older owe 20 percent of the $1.5 trillion in U.S. student loan debt. These numbers far exceed what it was in the past and trend lines show that this is not going to go away anytime soon.
Employers are starting to step in to assist workers pay their student loan debts and at the same time are attracting top talent. However, currently an obstacle to providing student loan debt repayment as a benefit is that the payments are considered taxable income for the employee, and employers cannot claim a deduction for the payments made, like they are able to do with tuition reimbursement assistance under Section 127. According to a Society for Human Resource Management (SHRM) 2018 Employee Benefits survey of more than 3,500 HR professionals, only four percent of organizations offered taxable financial aid to help employees repay student loans. In contrast, about half of the organizations surveyed provided tax-exempt undergraduate or graduate educational assistance or tuition reimbursement programs. However, employers who help their employees to pay down their student loan debt report that it boosts morale and productivity as it reduces the employees overall stress level which may have a direct impact on job performance. In addition, organizations who assist their employees with reducing their student loan debt are contributing to reducing the overall national student loan debt and are aiding in moving closer to solving the student loan debt crisis in our country.
Some options that organizations are implementing to help employees manage their student loan debt include:
- Student loan repayment plans where employers make monthly contributions to a loan servicer, as long as the employee continues to make regular payments to the same servicer.
- Paid time off trades, allowing employees to use their paid time off to pay down student loans.
- Contributions to an employee’s 401(k) if the employee puts a certain percentage of his or her pay toward the student loan debt.
- Paid tuition to a selected university, either online, inhouse, or at the university’s location, for programs that give students the degrees or skills that meet the organization’s needs.
- Traditional tax-free tuition reimbursement programs, e.g. payment for tuition, books, lab fees, etc.
While the idea of assisting employees with their outstanding student loan debt is new, the most popular option for employer’s seems to be making payments directly to the employee’s loan servicer, as long as the employee continues to make their regular payments. The results are the simplest to understand as it is basically cutting in half the time that it would take for an employee to repay the loan.
Paid time off trades, or allowing employees to use their paid time off to pay down student loans may cause a different problem. Employees who do not take time off from their workplace often times become burned out and unproductive. In addition, allowing employees to put an unlimited amount of paid time off toward a loan payment may get expensive for an organization. So, for employers who implement this option, it would be best to put a cap on the amount of paid time off that an employee is able to trade for student loan debt payments. Creating that balance between repayment of the student loan debt and taking paid time off is important.
Some employers are starting to assist employees who contribute at least two percent of their pay to their student loans through payroll deduction with a matching 401(k) contribution. Employees may receive an amount equivalent to the organization’s 401(k) match, e.g. five percent, seven percent, etc. of the employee’s compensation deposited to their 401(k) accounts, even if the employee doesn’t contribute to their 401(k). The result is that an employee’s student loan is reduced significantly while the organization continues to make contributions to a 401(k) account without requiring the employee to contribute. Thus, the employer is saving for the employee’s retirement while the employee is paying down their debt.
Employers who wish to implement a student loan debt repayment benefit within their organization should start slow. Maybe start by contributing $50 a month and then once participation increases, increase the monthly amount to $100. Understanding what is good for both the employee and the employer may take time and a bit of trial and error. Employers also need to clearly outline the pros and cons of the option that they are implementing and should keep it simple. Employees need to understand that for now, the employer’s student loan debt payments result in taxable income. This should not be a surprise when the employee receives their annual W-2 statement. In addition, employers need to promote the positivity of the new benefit and have shared accountability with each employee. Employees should be required to continue to make their payments and also understand the benefit that their employer is providing for them. Example: If the employee’s student loan debt is $31,000 and they are paying it off over ten years at a six percent interest rate, the extra $100 per month that their employer is paying is going to help them save $11,000 in principal and interest, and get the debt paid two years faster.
While student loan debt programs are important for employers to embrace in order to attract and retain the best and the brightest talent during a record low unemployment period, they must also realize that for families, the burden of student loan debt impedes their employee’s ability to save for other purposes, such as for a home, retirement, or their children’s education. So, the foundation for any student loan debt repayment program should start with providing employees with financial counseling and money management resources, such as training, online applications, etc. Employees don’t always understand the best options for repaying debt, saving for retirement, etc., and organizations can start by providing these resources inhouse as part of their benefits package. Whether the employee is just starting their career or has been working for years, organizations who provide employees with the appropriate financial education to aid them in managing their own finances will see more productive and happy employees, and the investment from the organization will be surprisingly very low.
For additional information about student loan debt repayment options and how they may impact your organization, please contact us at www.NewFocusHR.com.
Written by: Kristen Deutsch, M.B.A., CCP