Options for Providing Student Loan Repayment Benefits Increasing

Student loan debt continues to climb, yet few plan sponsors are offering features to mitigate—or at least assist with—the cost. 

Even as a recent TIAA-MIT AgeLab study finds 73% of student loan borrowers delay maximizing retirement savings to pay off their debts, the 2019 PLANSPONSOR Defined Contribution (DC) survey reports only 2.6% of employers are offering student loan repayment or reimbursement programs to assist with higher or continuing education costs. The highest number—49.7% of employers—said they do not offer any assistance with higher education expenses.

This absence of student loan features is troubling, and as more and more employees are postponing major life changes—from purchasing property to starting a family—to quiet their debt, according to a 2019 Mercer report, the need for student loan benefits is ever-growing. The study argues that providing these types of programs can be key to attracting and retaining a workforce.

So, it comes as no surprise that the growing number of student debt across the United States, at $1.7 trillion, has bumped student loan features to one of the highest sought out benefits by employees, says a 2019 Mercer report. Pending legislation is targeting the nationwide issue, one being the Employer Participation in Repayment Act bill, which permits employers to contribute up to $5,250 tax-free to an employees’ student loans. Another bill, reintroduced at the end of 2018, would allow employers to match contributions to their workers’ 401(k) or 403(b) accounts, as if student loan payments were salary reduction contributions.

As plan sponsors see an amplified popularity in these programs, some are planning to provide new features to their employees during the 2019 open enrollment period, says a survey by Employee Benefit Adviser.

“Student loan programs are trending right now, but they still rank the lowest among the benefits companies currently provide, because they are a newer benefit,” says Allison Wendelberger, national sales director at Voluntary Benefit Advisors (VBA), in the survey. “Advisers should be going to their clients and saying, ‘Hey, a lot of companies are starting to offer student loan assistance, and I think it would be a wise thing for you to look at this.’ It’ll be interesting to see where it ranks five years from now.”

Neil Lloyd, head of U.S. Defined Contribution and Financial Wellness at Mercer, says plan sponsors concerned with the costs of offering a student loan repayment program can look to refinancing or 401(k) matching. Refinancing allows employers to add a credit to the loan account and establish new repayment terms and better interest rates for borrowers, whereas student loan 401(k) matching authorizes plan sponsors to match an employee’s student loan contributions, and instead, apply it to the worker’s 401(k) account. However, Lloyd says matching dollars into a 401(k) account can become quite difficult if an employee pays off their student loans aggressively.

In 2018, the IRS released a Private Letter Ruling, approving student loan repayment (SLR) non-elective contributions. Plan sponsors could amend their 401(k) plans to offer student loan benefit programs, in which the employer would add a non-elective contribution on behalf of an employee, as long as the employee is contributing to their SLR non-elective contribution. So while the Private Letter Ruling was directed only to the taxpayer—in this case, the plan sponsor—who requested the program, this does give employers a hint at where the IRS stands and what could be permitted for their workforce.

Another option employers have are student loan direct payment platforms, where plan sponsors will agree to make a payment towards a student loan for a fixed period. Yet, most employers dislike the payment platforms on the basis that it is taxable to workers, and costly, too.

“When you offer a refinancing program, it doesn’t cost much. But with student loan direct payments, you might need to get a budget approved,” Lloyd says.

While the above options are current selections for plan sponsors today, Thompson encourages employers to access their workforces and understand what type of benefit or feature could be best for them.

“One thing that is true across all employers, is that all have a unique plan design,” he says. “There is something that each of them do that is unique for their workforce.”

New approaches to student debt benefits

At Tuition.io, plan sponsor clients are already introducing innovative approaches to student loan repayment benefits. Recently, the firm partnered with Montefiore St. Luke’s Cornwall (MSLC) on a benefit allowing employees to convert paid time off (PTO) days to student loan repayment dollars.

“We were already talking about student loan benefits, and we started wondering, ‘What would you think about letting employees use their PTO days?’” says Scott Thompson, CEO of Tuition.io. “If these employees use this opportunity to contribute as much as they can, they can seriously downsize their payments over a period of time.”

As part of the program with MSLC, eligible employees have two days every year to exchange 30 to 75 hours of PTO towards student debt, including any federal or Parent PLUS loans, at a maximum of $5,000 annually. Where fees can typically discourage plan sponsors from offering student loan repayment programs in the first place, PTO days are already paid for by the sponsoring company, so employers don’t have to worry about costs.

“As you accrue PTO, it’s expensed by your employer. [The employer] is not taking additional cost to administer this benefit; you’re just allowing the individual to use it this way,” explains Thompson.

The program, Thompson says, advances the PTO feature to include parents. Parent employees and their children can register an account on Tuition.io, and if they have unused PTO, can qualify to utilize those days towards student loans. Even grandchildren can benefit from the feature, says Thompson.

eduassist.me launched a new business model and software platform to help companies take care of their lower- to mid-paid employees to relieve them of Federal student loan default and/or enroll them into affordable Income-based Repayment programs, as low as $0/month.

“What sets us apart is our core mission to help change lives with a faster, more dramatic, cost-effective solution instead of just making extra payments towards a student loan or shaving off a few dollars a month with a loan refinance”, said Lois Preister, head of the Loan Processing Department at Carlsbad, CA-based eduassist.me. “Our unique philosophy is not to pay off the loans faster, but to immediately help reduce loan payments, as much as possible, so that the balance is forgiven with Federal programs.”

Default borrowers are charged an 18% penalty, hundreds or thousands of dollars in collection fees are added, and a very damaging rating on their credit reports. By assisting people to get out of default and/or enrolling into a minimal payment, it can be a life-changing and life-long solution to free employees of the trap of student loan default.

Student loan default isn’t just a “Millennial problem” it’s everyone across the board in their 40’s and 50’s, for themselves, and/or Parent Plus loans for their kids, eduassist.me says.

Retirement planning and investing firm FOCUS4Financial (F4F) has teamed up with Thrive Flexible Matching to offer a new employee student loan repayment benefit.

The Thrive Flexible Matching student loan debt solution looks to combine an employee’s contribution and employer match from the company’s 401(k) or 403(b) plan, allowing eligible employees to reallocate shares of their retirement planning contribution and company match towards their student loan debt, according to F4F. Once adopted, workers can control how their retirement funds and company match are allocated, either exclusively towards their retirement savings or student loan debt, or a combination of both.

Offering programs, features, and even education to address student loan debt can benefit the workforce, the plan, and the employer.  “If it helps them to be in a better place financially, incentivize the employees to use it,” Thompson states. “It’s good from every direction. Good for the employer, good for the employee, and for the big issue of student loan debt.”