With 40 million Americans carrying over $1.2 trillion in student debt, it is not surprising that experts have identified student loan repayment as a hot new employee benefit. “Student loan debt is a huge issue in this country when you consider students typically graduate with four loans outstanding with an average debt load that ranges from $30,000 to $40,000,” says Bruce Elliott, manager of compensation and benefits at the Society for Human Resources Management.
PwC ‘s US and global talent leader Mike Fenlon says that the heavy student debt load nationwide is having an enormous impact on both younger workers and the economy. “Millennials tell us they’re living longer at home. They are delaying major life decisions like marriage and having children. They are putting off major purchases like cars. They’re not saving for retirement,” he says.
Quote“Student loan debt is a huge issue in this country when you consider students typically graduate with four loans outstanding.”
Furthermore, financial literacy research conducted by The Global Financial Literacy Excellence Center at George Washington University and supported by PwC reveals that to meet student loan payments a significant number of millennials are engaging in risky behavior. “Many are overdrawing checking accounts. Over 50% are carrying credit card balances. There is also heavy use of what we call ‘alternate financial services,’ like pawn shops, penny loans and tax refund advances,” says Fenlon.
As a result, PwC recently decided that, beginning July 2016, the company will contribute $100/month ($1,200/year) for up to six years (a maximum of $7,200) to help non-management employees pay down their student loans.
Based on modeling done by the company, this will take two or three years off the life of a loan and equate to $10,000 because both principal and interest will be reduced over the period. Fenlon won’t know for sure how much the program will cost PwC until the benefit registration period is over in several months.
“We’re a millennial organization. The average age of our employees is about 28,” he says. “Just as we have to innovate in business overall, we have to offer benefits that have the most value that will engage our employees.”
PwC has retained the Boston-based company Gradifi to administer their program. Gradifi’s CEO Tim DeMello started the company in early 2014 and developed a proprietary technology platform. “We approached PwC to be our first client. They were very interested because they have 46,000 employees in the U.S. and they estimate about 15,000 have student loans,” he says.
DeMello identifies several reasons why it makes sense for PwC to outsource their student loan repayment program. “Our fees range from $3 to $5 per employee so it’s really economical for us to run the PwC Student Loan Paydown Program,” DeMello says. “The other factor is the backend. We have a direct relationship with over 300 student loan service providers.”
At the other end of the continuum, LendEDU, with a staff of only six, recently announced it will pay down $2,400/ year of student loan debt for current and future employees with no maximum and administer the program in-house. They expect to double their workforce over the next year.
The company, which offers a marketplace that helps people find student loans or re-financing quotes in one place, was founded by two 20-year old University of Delaware students in early 2014. “Student loans are our business and I have about $50,0000 in student debt myself,” says CEO and co-founder Nate Matheson. “We see this as both an attraction and a retention tool so we are not capping the total available pay down.”
Elliott notes that only three percent of organizations responding to SHRM’s 2015 benefit survey reported that they offer student loan payments as an employee benefit, but DeMello says he has over 100 more companies interested or participating in pilot projects.
“We are working with organizations of all sizes. A big part of our business is in the knowledge worker space including tech companies, law firms, medical professionals, insurance companies and financial services,” he says.
When it comes to plan design, DeMello says, “we are seeing step programs where if employees stay with the company for 18 months they may get $100/month for the first year and a half plus a $1,000 bonus at the end of the period. In some cases companies use student loan pay downs as referral bonuses if an employee brings a new hire into the company.”
Gradifi also recently signed a partnership with a U.S. bank so they can offer student loan refinancing to employees of client companies. “Basically what happens is students apply for loans when they are 18 years old and don’t have a credit rating so they sign on to an 8% or 9% interest rate. But we can help a 24-year old with a $64,000/year job at PwC negotiate a much better rate,” says DeMello.
While refinancing student loans to reduce interest costs may seem like a slam dunk, Adam Potter, president of SimpleFi, a company that offers financial wellness benefits to employers including education and counseling, says only one in four people is a good candidate for refinancing because by doing so they may forfeit valuable privileges offered by federal student loans.
“For example, federal student loans are typically repaid over 10 years but the repayment period can easily be increased to a 20 or 25 year amortization period using a brief online application. Other options are also available including a graduated program where payments go up as earnings increase,” Potter says. “Because loans are forgiven after 10 years for anyone employed in the public service, public health or education, it makes sense for these people to negotiate a longer repayment program and stick with the original lender.”
SimpleFi has also recently expanded its services to administer student loan repayments for employers. “The first thing we do when we bring a company on board is to identify all the employees who have student debt and register them, because the employer wants to know how much and how long they will be paying for each person,” says Potter. “Then we set up a payment plan for the employer, invoice them, including our service fee, and make monthly payment to all the lenders.”
But for both employers that want to offer student loan repayment as an employee benefit and companies like Gradifi and SimpleFi that administer these programs, the elephant in the room is that at the present time, student loan paydowns are a taxable benefit.
The good news is that there are currently several bills before Congress, including the Student Affordability and Relief Act (H.R. 4363) introduced by Congressman Austin Scott (R-GA) that would provide a gross income exclusion for amounts that employers pay on employee student loans, and two bipartisan bills recently introduced by U.S. Sen. Mark R. Warner (D-VA). The Dynamic Student Loan Repayment Act also supported by Sen. Marco Rubio (R-Fl) will make it easier for students to enroll in federal income-based loan repayment programs. The Employer Participation in Repayment Act will help employees with student loan debt by allowing their employers to contribute up to $5,500 pre-tax to their employees’ federal or private student loans.
“Since the bills are supported by both parties I hope they will pass quickly,” says DeMello. “Tuition reimbursement by employers is not a taxable benefit, so to be consistent it only makes sense for the tax treatment of both tuition reimbursement and student loan repayments amount to be treated in the same way for tax purposes.”
Quote“Tuition reimbursement by employers is not a taxable benefit, so to be consistent it only makes sense for the tax treatment of both tuition reimbursement and student loan repayments amount to be treated in the same way.”
Employers, employees and companies administering student loan repayment programs are not the only stakeholders when it comes to eliminating student debt. A survey released in late 2015 by Iontuition Inc., a company that offers employers student loan management benefits, reveals that 55% of individuals with student loans would rather the amount they are paying for healthcare go towards their student loan debt. Similarly, 49% of respondents would prefer student loan contributions over a 401(k) plan.
These findings are reinforced by data from the LIMRA Secure Retirement Institute confirming that millennials with student loan debt are saving at a lower rate. In fact, LIMRA researchers calculate that a 22-year old who begins his or her career with $30,000 of student loan debt could reach retirement with $325,000 less than a peer who is not burdened by an education loan.
As a result, healthcare insurance companies and 401(k) plan providers have their eye on funds freed up when student loans are paid off as a future infusion of cash for their programs. “The challenge is once employees have another $200/month available, how can that be transitioned to a 401(k) strategy,” says Potter.
“I often get asked why employers don’t just increase base salary instead of going to the trouble of paying down student loans. The answer is that for the dollars spent, student loan repayment is much more likely to enhance employee engagement and productivity,” Elliott says.
Fenlon agrees. He says the reaction to the announcement at PwC has been fantastic. “Our employees tell us they are inspired by this program. They are proud that the firm is taking on a complex, big issue in our society that matters to their friends and family even if they are not carrying similar debt. We’ve also received tremendous feedback from students and faculty on campus.”
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