“My job is basically to pay off my student loans.”
That was a 20-something I know talking about his five-figures of student debt. Financial benefits at his company are all focused on savings, he said. But he can’t even think about putting money aside until he pays off his college loans. Millions are in the same boat.
Financial wellness benefits already reach your savers. Now, new tax laws make it possible to offer benefits that reach the indebted, too.
Just as with 401k contributions, employer payments to student loans are now tax free, thanks to the COVID-19 relief bill that includes up to $5,250 per employee annually.
The news has generated a lot of interest and questions.
Here’s what we’ve been hearing:
Shouldn’t I be focused on employees’ retirement? Here’s the thing: student loan repayment is about retirement. People like the young man above often can’t even think about saving for the future. So traditional approaches like 401ks miss them completely because they often don’t have the disposable cash at the end of the month to contribute. Paying student loans provides equity for a population that might otherwise be left out. And once freed from debt obligations, the same people will have money they can put into 401ks or other traditional savings.
Can I really make an impact? Quite a big impact, actually. The goal isn’t to erase debt, but to speed repayment. And because your payments will be made alongside employees’ monthly minimum obligation (not instead of), you’ll be paying toward principal. So even nominal contributions tackle debt in three ways: they knock down the amount of the loan, shorten the length of payment, and so decrease the interest it will accrue. That’s a big deal. To employees feeling like payments are going to last forever, seeing the finish line faster (or at all) is huge.
But if they’re still making payments, how does that help their budget? If you set it up right, it helps a lot. That’s because, for the indebted, a big part of the student-loan crisis is the futile feeling that they’ll never get out from under it. If you offer education financial experts alongside your payments, you help people get a handle on it, whether that means refinancing, consolidating, or simply budgeting better. So, even as they continue making their payments, what felt like an unconquerable task looks completely manageable. That’s huge.
Why not just raise an employee’s salary? You could. But you’d end up with a payroll tax – and your employee would get taxed for extra income. So not only is student loan repayment something your employees are going to love; it’s also a great use of budget, with double the tax advantages (no payroll or income tax). Add that to reduced interest and shortened life of the loan (see above), and you’ve magnified the value of your investment. But to get the benefits, you have to make sure you’re following the rules. Which leads us to…
So do we just cut our employees a monthly check? Not exactly. The tax-free amount of $5,250 is shared by both tuition assistance and loan repayment; it can be used for one, the other – or a combination of both. That’s a tall order to manage separately by hand and still maintain the tax-free status. Plus you run the risk of costly errors and/or a poor employee experience. Ideally, you’ll want to manage education and loans on one platform that can give you a report showing exactly what’s being used where. Then you end up with a low-maintenance benefit that delivers great returns.
The final question we hear is often about timing – when should we launch? One part of the answer is that the student loan crisis isn’t getting any better. And in this year of financial uncertainty, the surprise of a student loan benefit can only boost employee morale.
But the other answer is that SHRM says the tax-free status is cranking up interest. Estimates expect the benefit to grow 300%.
Employers on the front end of a benefit always have an advantage. And it’s always better to be first than to play catchup.