How Student Loan Repayment Employee Benefits Work
In this age of the “great resignation” and war for talent, companies of all shapes and sizes are trying new and innovative ways to retain their employees. One tool employers are using? Student loan repayment benefits.
Let’s break down how this increasingly popular incentive works at different companies and things for you to consider as an employee.
If you’re more of the video type, check out the YouTube video above!
Why are employers offering this benefit?
We all know that student loan debt is a ridiculously massive problem in this country. Over 43 million of us out here - that’s 1 in 8 Americans - owe a collective $1.6 trillion of debt. And that’s just federal loans. A 2021 high school graduate could expect to borrow $38,147 for their bachelor’s degree, according to a May 2021 NerdWallet analysis of National Center for Education Statistics data.
And this isn’t just a Millennial or Gen Z problem. Student debt impacts all age groups. According to a Fidelity study, fifty-nine percent of millennials have student debt, in addition to 34% of Gen-Xers and 29% of baby boomers.
79% of respondents say student loans impact their ability to save for retirement, with 69% reporting that they changed their retirement plan by lowering or stopping their contributions or by taking loans or hardship withdrawals.
On average, participants with student debt contribute 6% less to their retirement accounts than individuals without student debt. Imagine the compounding effect of that wealth over the span of an entire career! On a personal note, I just increased my retirement contributions for the first time in 4 and a half years as we get closer and closer to achieving our debt reduction goals.
Not only this, 66% of survey respondents reported that student loans impact their ability to save for a home or pay for everyday items.
49% say student loans impact their ability to plan for life events, such as getting married or having a child. And not going to lie, that part’s true for us as well!
The burden of student loans is not just financial but also emotional. Employers are waking up to this fact and doing something about it.
According to an October survey by the Employee Benefit Research Institute, nearly half of employers — 48 % — currently have or plan to offer student loan debt assistance as a benefit. That’s up from 32% in 2018.
How exactly does this work?
There are two broad categories of this benefit: direct payments and contribution matching.
With contribution matching, employers will tie matching contributions to your retirement plan to your student loan payments. For example, a company might say that if you put X% of your pay toward your student loans, we’ll contribute y% to your 401k account as an incentive for employees to tackle two major, often competing priorities: paying down student loans and investing for retirement.
With direct payments, companies make payments directly to employees’ student loan servicers, typically in the form of a flat dollar amount each month and usually utilizing a third-party servicing company such as tuition.io to process the payments. Fidelity, Google, and New York Life are three such companies that offer this type of benefit.
One reason we decided to do this video is because Akeiva’s employer recently began offering a student loan benefit. They pay $100 a month for each student who enrolls in the program. $100 may not seem like a whole lot of money to some, but it can add up! Take an employee with a $26,500 student loan balance, for example. A $100 a month repayment benefit would help the borrower pay off that debt about three years earlier and save more than $10,000 in principal and interest over ten years, according to EBRI. That assumes the employee makes regular minimum payments on the loan with a 4% rate and a 10-year term.
Do I have to pay taxes on this money?!
You’ll be glad to hear that the answer is NO! (at least not until 2026). Let me explain.
Y’all remember those stimulus checks that most of us got during the pandemic? Well, within that stimulus package passed in March 2020, also known as the CARES Act, there was a provision that allowed employers to offer student loan repayment as a tax-free benefit up to $5,250 per year. That was only valid for the year 2020. Then, congress passed additional COVID relief in December 2020 through the Consolidated Appropriations Act that extended this benefit through the end of 2025. Now, is congress going to keep this up? Who knows. We feel pretty optimistic about those odds, but of course, we don’t control the government, so don’t take our word for it!
One important caveat is that this $5,250 limit is a combined limit for student loan payments and any tuition reimbursement benefit your employer might have, so keep that in mind. You also can’t include the interest covered by your employer’s contributions when trying to claim the Student Loan Interest deduction on your tax return.
How do you feel about student loan repayment benefits? Does your employer offer it? If you have student loans, would having this type of benefit be a significant factor in keeping you at a job or attracting you to a new one? Let us know in the comments!
We dive deep into tackling debt repayment and so much more in our program, MONEY 180™, so if you’re interested in learning more about that, go on and check it out!