The challenges borrowers face paying off their student loans have become so ubiquitous that a robust industry has developed around employers helping their workers pay down those debts.
As America’s $1.5 trillion student-loan problem has continued to grow, employers are trying to make a dent, by offering to make a contribution to their workers’ student loans.
The latest evidence: Empower Retirement, one of the nation’s largest 401(k) managers, is introducing a suite of programs employers can offer to their workers to help them manage or even pay down their student debt. Through a partnership with CommonBond, a student-loan refinancing company that got into the business of helping employers pay down their workers’ student loans in 2016, the new benefits have the potential to reach Empower’s client base of 38,000 firms.
Education assistance benefits — a category that includes employers helping to pay tuition and student loans — has the potential to become “a staple benefit, much like health care and retirement, in particular as we continue to see the number of Americans impacted by student-loan debt increase,” said Chatrane Birbal, the director of policy engagement at the Society for Human Resource Management, an association representing the human resources industry.
Why employers want to offer this benefit
Indeed, as America’s $1.5 trillion student-loan problem has continued to grow, employers have jumped in to try and make a dent, by offering to make a contribution to their workers’ student loans — say $100 a month, capped for a certain amount of time — as a company perk.
A whole industry of middlemen has cropped up to provide the technology and platforms employers can use to help pay off their workers’ student loans. In addition to CommonBond for Business, the unit of CommonBond partnering with Empower, companies like Gradifi, which First Republic Bank bought in 2016, Fidelity and Tuition.io are also in the business.
With roughly 70% of bachelor’s degree recipients graduating with student loans, an offer to help pay off student loans can be an effective tool for recruiting and retaining top talent.
Of course, employers aren’t just offering the perk out of the goodness of their hearts. With roughly 70% of bachelor’s degree recipients graduating with student loans, an offer to help pay off student loans can be an effective tool for recruiting and retaining top talent.
In a survey of 500 young workers conducted last year by American Student Assistance, a nonprofit focused on higher education finance, more than 80% of respondents said they would commit to their employer for five years if they helped pay off their student debt.
The perk comes with a big catch
Despite the benefits to both employers and workers and the robust industry available to administer this perk, it’s still only available at about 4% of employers, according to the SHRM. That may be because it comes with one major catch: unlike, say employer contributions to a 401(k), any student-loan help is still taxed as income.
David Klein, the chief executive officer of CommonBond, said his company’s partnership with Empower is evidence that the market isn’t waiting for lawmakers to change the tax treatment of these benefits before moving forward.
The service comes with one major catch: unlike, say employer contributions to a 401(k), any student-loan help is still taxed as income.
“The market is speaking,” he said. At the same time, Klein said some employers are still hesitant to offer the perk to their workers until the contribution is tax-free to workers. “Many companies have told us if the tax treatment can be changed, ‘I’m all in, but unless and until that happens I’m not,’” Klein said. He’s hopeful that as more companies offer the benefit it will push lawmakers in that direction.
A bill that would allow companies to contribute up to $5,250 to their workers’ student loans tax-free is pending in both the House and Senate. It has bipartisan backing in both bodies. Senator Amy Klobuchar, a Democrat from Minnesota, a 2020 Democratic presidential hopeful, is a co-sponsor of the Senate version.
In some ways, the current treatment of student-loan repayment mirrors the early history of now-ubiquitous benefits like the 401(k) and health care. The retirement savings plans were relatively rare until a Reagan-era tax-law tweak that allowed workers to put pre-tax income (and a company match) towards their retirement.
In the case of employer-sponsored health insurance, a tight labor market and worker demand helped fuel its expansion. During World War II, employers faced a labor shortage that was so worrisome to economists that they feared companies would push salaries too high and fuel inflation to compete for workers. In response, then president Franklin Roosevelt froze wages.
Student-loan repayment hasn’t achieved the ubiquity of the 401(k) or health insurance, but in the meantime workers at some companies can still access it.
Suddenly, one of the few ways business could compete for talent was by offering more generous health-care coverage.
Student-loan repayment hasn’t achieved the ubiquity of the 401(k) or health insurance, but in the meantime workers at some companies can still access it. Employers who are clients of Empower will be able to offer their workers three basic services through the CommonBond partnership. The first is a tool their employees can use to evaluate their student loan options, including programs like the income-driven repayment plans that allow borrowers with federal student loans to lessen their debt burden by tying their repayment amounts to their income levels.
The second is an opportunity to refinance through CommonBond with an opportunity for a cash bonus for the employee. CommonBond and other lenders that offer student loan refinancing regularly work with employers to provide incentives or discounts.
And finally, the opportunity for employers to incentivize student loan pay off in some way. That could be through a direct payment toward their student loan — which would be taxed as income — or by matching a payment the borrower makes on their debt with a contribution to their 401(k), allowing the benefit to remain untaxed.
For employees interested in taking advantage of these and other, similar perks there are a few things to keep in mind:
Do the math: Right now, any contribution a company makes towards a borrower’s student loan is taxed as income. Until lawmakers change the tax treatment of this benefit, borrowers should think of it basically as income when evaluating their compensation.
If an employer doesn’t offer student loan paydown, but is willing to pay a higher salary overall, it may be worth taking their offer, said Mark Kantrowitz, the publisher at Savingforcollege.com. “It’s just a different form of compensation,” he said.
Keep an eye on your student-loan bills: A 2017 report from the Consumer Financial Protection Bureau found that payments made by employers towards their workers’ student loans were tripping up student-loan servicers, the companies hired by the government to be the point of contact with federal student loan borrowers. That means borrowers should pay attention to how these payments are being applied and any changes that may result in their plans to pay off their student loans.
Any payments a borrower makes while his or her loan is in paid ahead status don’t count towards the 120 they need to qualify for Public Service Loan Forgiveness.
In some cases, any extra money beyond the worker’s minimum monthly payment pushed their account into “paid ahead status” — essentially a situation where the due date for a borrower’s next payment is more than a month later than when they overpaid.
Any payments a borrower makes while his or her loan is in paid ahead status don’t count towards the 120 they need to qualify for Public Service Loan Forgiveness, a program that allows borrowers working in public service to have their federal student loans forgiven after at least 10 years of payments.
In some cases, student-loan servicers have rejected payments from employers and sent them back with little explanation, the CFPB report found. In addition, student-loan servicers were ignoring special instructions for how payments from the employer should be applied — for example, to the principal of one loan instead of spread across multiple loans, only touching the interest — requiring the borrower to call up and reiterate the instructions.
Understand where the advice offered by your employer is coming from and perhaps consider independent advice: As is the case with the CommonBond-Empower partnership, it’s not uncommon for employers to strike deals with specific companies to offer incentives or discounts to refinance their student loans with those specific firms.
While it’s possible that product is your best option, it’s important to understand why it’s the one being offered. Does your employer have a partnership with a specific bank or lender? Perhaps seek independent advice on whether it’s right for you.
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