Employers cautioned on student loan repayment programs
As a member of the baby boom generation, I was able to graduate from college debt-free. It was all thanks to reasonable tuition, part-time jobs, work-study and more than a little help from my dad. Unfortunately for most millennials, a debt-free graduation is out of reach. Today, 69% of graduates leave college with an average debt of roughly $30,000. Student debt is now the second largest liability on household balance sheets, surpassed only by home mortgages.
According to a study by Pew Research in 2016 the millennial generation (ages 18-34 in 2015) now numbers 75.4 million people, surpassing the 74.9 million baby boomers (ages 51-69 in 2015). It goes without saying that millennials are increasingly important to corporate America’s workforce needs.
As a result, employers are seeking new ways to attract and retain millennials. Among them are benefits programs that help employees manage their student debt burden. These programs include counseling, vendor assistance in consolidating debt, debt repayment matching, and even employer-provided loan repayment allowances. A recent Willis Towers Watson survey showed that 4% of employers currently have student debt refinancing programs, but by 2018, that number could grow to 26%.
Not only has this growing interest given rise to a spectrum of new programs, new vendors also are emerging, eager to provide services to employers. The new programs also have given rise to questions about regulatory and tax consequences.
The appeal and challenges
The direct appeal of student loan repayment programs is obvious, but it turns out that these programs can pay off with advantages in other areas. For example, the programs can:
- Reinforce employers’ broader financial well-being efforts;
- Provide opportunities to connect to the social concerns of millennials;
- Help employees understand their overall debt obligations and how to manage them; and
- Create a “halo” effect with employees without student debt who see their employers adopting innovative ways to address the needs of a more diverse workforce.
Student loan programs are not without their challenges. One is finding and vetting vendors with programs that can help; another is navigating regulatory and tax questions.
On the vendor front, a host of third-party vendors has emerged to support employer efforts in this space. Services offered include Web-based educational and financial modeling tools, counseling to match employee needs to the best options for consolidation or restructuring, payroll deduction facilities, and employer matching or allowance arrangements.
However, employers should proceed with caution. These vendors are new and often lack a proven track record. There is a potential for administrative risk due to newly developed administrative systems and recently trained staff as well. For employers with significant vendor credentialing requirements and/or rigorous data security standards, these vendors can be challenging.
On the regulatory and tax front, employer contributions to repayment of student loans are considered taxable income to the employee but are deductible as a business expense to the organization either as employee wages or as a fringe benefit.
There is active lobbying underway by vendors to allow employer contributions as a tax-free benefit to employees, much like health coverage. In the interim, however, employers should recognize this tax status and also be aware of potential conflicts with state law.
Putting it all together
Even with these challenges, employers have a lot to gain by considering student loan repayment as a new category of employee benefit. Programs that provide counseling, modeling tools, and refinancing assistance carry the smallest potential risk. Matching and allowance programs are necessarily more complicated due to the payroll deduction facilities, concerns about state laws, and the manner of employer subsidy.
For employers seeking to creatively enhance their benefits portfolio in a highly competitive market for young talent, student loan assistance is an opportunity to compete in a new way. And it solves an overwhelming issue for a key workforce segment in the wake of fast-rising boomer retirements.