Addressing Employees’ Student Loan Debt in 2020

Student loan debt skyrocketed in the past decade, topping $1.5 trillion among millions of Americans. The crisis has prompted U.S. employers to address it in their benefits programs.

“Employers are becoming more involved in offering [student loan debt benefits] in the workplace,” says Ashvin Prakash, director of Product Development at Ubiquity Retirement + Savings. “Similar to retirement benefits, we’re seeing an increase in employers who say, “come work for us, and we’ll help you pay down your student debt by making direct payments towards your debt.”

Legislators have made a point to address the debt crisis as well. Most recently, Senator Rand Paul, R-Kentucky, introduced S. 2962, the Higher Education Loan Payment and Enhanced Retirement (HELPER) Act, which would allow Americans to annually take up to $5,250 from a 401(k), 403(b), 457 plan or IRA—tax and penalty free—to pay for college or pay back student loans. Last year, The Retirement Parity for Student Loans Act was introduced. The bill would permit 401(k), 403(b), and SIMPLE retirement plans to make matching contributions to workers as if their student loan payments were salary reduction contributions. In early 2019, legislators introduced the Employer Participation in Repayment Act, which would permit employers to contribute up to $5,250 tax-free to their employees’ student loans.

Given the emphasis legislators have taken to combat student loan debt, the crisis is expected to be a hot button topic for 2020, especially given the upcoming presidential election. “We all know it’s a huge crisis, student loan debt is more than it’s ever been and it’s something a lot of people are struggling with,” adds Prakash. “It’s hard for me to imagine someone would overlook the impact this would have to their retirement security.”

Paying off student loan debt helps employees be able to save for retirement—some benefits allow for both at the same time—and more options for providing this benefit have been introduced. 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.

This type of student debt repayment program was approved in an IRS Private Letter Ruling issued in August of 2018 for employer Abbott. Because participants receiving a student loan repayment non-elective contribution can still make deferrals to the 401(k) plan and receipt of the contribution is not dependent on whether the employee makes deferrals to the plan, the IRS ruled the benefit will not violate the “contingent benefit” prohibition of the Income Tax Regulations.

Despite this, plan sponsors are still wary on offering these types of programs, due to fear of noncompliance, says Jeff Holdvogt, partner at McDermott Will & Emery. IRS Private Letter rulings apply to the plan sponsor requesting the ruling, and not to retirement plans overall.

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.

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.

Plan sponsors may also simply choose to educate their employees about the various Federal loan repayment and loan forgiveness programs. Working with a financial adviser or someone well-versed in financial services or partnering with insurance and retirement companies to add educational sessions can help increase overall comprehension, as most can provide a thorough analysis catered to ensuring participants are enrolled correctly and that their loans qualify, Randy Lupi, regional vice president at AXA Advisors, suggests.

In an Issue Brief published by the Employee Benefit Research Institute (EBRI), Neil Lloyd, partner and head of DC & financial wellness research at Mercer, explains choices plan sponsors have for offering student loan repayment benefits.

Nearly one-third of employers, 32.4%, offer or are planning to offer some student loan debt program, such as debt consolidation, refinancing or employer-paid subsidies, according to EBRI’s 2018 Financial Wellbeing Survey.

“Student loan debt is a hot button topic in the workplace,” EBRI says in its report, “How Employers Are Tackling Student Loan Debt.” “The percentage of American families with student loan debt has more than doubled since 1992, from 10.5% in 1992 to 22.3% in 2016.”

Additionally, “repayment of this debt can be challenging. In 2017, one-fifth of those with education debt were behind on their payments.”

Those employers that are focused on student loan debt are more than twice as likely than the typical survey respondent to have measured the financial well-being needs of their employees, including examining existing employee benefit data (68%), surveying employees (56%), holding focus groups (46%) and analyzing other quantitative employee data (45%).

Asked who is championing their financial wellness initiative, the most common source is human resources (55.0% and 60.0%) followed by a senior executive (21.0% and 17.5%) and a vendor (10.0% and 7.5%).

Indeed, quite a few vendors have introduced student loan repayment benefit offerings. For example, 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,” says Scott Thompson, CEO of Tuition.io. “It’s good from every direction. Good for the employer, good for the employee, and for the big issue of student loan debt.”