What HR and Benefits leaders need to know as federal student loan repayment resume
It's been a long time coming, but it's actually here. The federal student loan provisions of the CARES Act will expire on August 30, 2023. This means that after a pause of over three years, those monthly payments and interest will
What you'll learn:
- How the resumption of federal student loans impacts the workforce
- Employee populations most susceptible to a bumpy onramp of their federal student loans
- Case examples of how organizations are designing and delivering student loan benefits for the new workforce realities
Julia Fern (00:07):
Hello. Good afternoon everyone. I have the privilege of speaking during lunch, so if you didn't know that you were going to hear a little bit about student loans today over lunch, get excited. My name is Julia Fern. I am a director on the SoFi at Work team. I'm a local here to San Diego. While my day job includes leading our large complex partnerships within our SoFi at work business unit, I do liaison with brokers and consultants as they find the best fit solutions to fit clients' financial needs. So I promise I will not take up our entire lunchtime spend about the next 20 to 25 minutes or so talking about this complex landscape of student loans and not only how it affects our employees, our family and friends, if we have children of our own that we are considering helping them on this broader, how do we finance an education journey? My hope today is to demystify some of what you may have heard out there and also what companies are doing as payments are set to resume in a few short days. So if you have questions after day after the presentation today, stop by the booth, but I promise I will leave ample time for the important conversations that are happening over salad and lunch to resume before we get into the next session.
(01:36)
There we go. So the less exciting but no less important legalese, we can check that off the list. So if you're not familiar with SoFi, our mission is to help people realize their dreams through financial independence. It doesn't mean being rich, but it does mean making your money work for the life you want to live. So that may sound pretty aspirational. And how does that relate to the benefit space? Our business unit, SoFi At work, we deliver financial wellbeing solutions. So mostly that includes employee financial benefits to employers large and small across the country. We specialize in student debt solutions and education financing more broadly. We are a digital bank as well. So whether it be a direct contribution to student loans or payroll deduction to a 529 plan more about our solutions at a later time. But let me see if we can get this pointer working a little bit. There we go. So more about our solutions later today I really want to focus on educating you in this broader landscape and why this is going to matter to our employees. There we go. So what we'll do is we'll highlight the latest on student loans, a view into the footprint of this debt pool and what that really means when it comes to who it impacts. And I'll also talk about some ideas for how to communicate to employees and helping them prepare. And last but not least, how SoFi can help if you aren't already familiar with us.
(03:17)
So let me begin with giving you a little bit of a flavor for how federal student loans affect our employees. At a high level, you may be thinking this doesn't really affect my employee base or it does a lot, so let me just give you a snapshot into that footprint.
(03:35)
So current states student loans are the second largest form of consumer debt surpassed only by mortgages. That accounts for almost $1.8 trillion in debt, and the bulk of that is held in federal student loans. So to give you a snapshot, it's over 90% of the total pool are held in the federal category. So what this means is that almost 44 million Americans hold student loan debt. As you think about the employer landscape, the rough math I always like to think of is it's probably going to affect about 15 to 20% of your employee base. If you work in the healthcare or hospital sector or another industry that has a highly educated group, that may skew a little bit of higher if you're in a manufacturing organization, that might skew a little bit lower. But with that said, I do want to emphasize if it's not your employees, they may be considering how is this going to affect my children? Do I have a spouse or a friend or family member who does have student loans, someone in the nonprofit space? So again, while we say that roughly 15 to 20% of our employees are going to have student loan debt, know that financial wellness is certainly a family conversation and this is going to impact almost 44 million Americans who hold federal student loan debt.
(04:52)
So as we think about how this breaks down, and hopefully those of you who come from the broker space, you not surprised that I was a former HR consultant in here. So I love getting a real snapshot of how this breaks down. As we think about our employee demographics, the reality is that first generation college students are three times more likely to be behind on payments compared to their peers. And if we look at the breakdown by race and ethnicity, you'll see a similar trend for Hispanic and black borrowers compared to their white counterparts. What you can see is, let's be honest, this isn't an even playing field to start. And as we think about both our current population as well as our future workforces, it's really important to understand where this disproportionately is going to impact our workforce in ways that we can actually think about addressing in a programmatic sense as we look at this by age bracket.
(05:48)
Now, I think some of you may not be surprised to learn about this. Some of you this may be interesting, older borrowers are actually representing an increased of federal student debt, both in terms of the number of borrowers and the total amount that they owe. So hopefully this dispels a common myth that I hear, and perhaps some of you have been in leadership conversations where you've had someone from the c-suite saying, well, this is really only an under 35 crowd problem. The reality is that older borrowers still have student loan debt and or have taken out what we call parent plus loans or federal student loans on behalf of their children in order to pay for education. What's not listed here, we all know the cost of education is continued to rise astronomically. Even parents who are strong savers may have not been able to save for the true cost of college.
(06:39)
So all that to say, if we think about where this impacts from a geographic perspective, California, I'm a local here to San Diego, we know it's a very expensive state to live in, but it is in fact not at the top of the list When we think about states with the highest concentration of borrowers with high balances, so the three at the top, Washington DC, Maryland, and Georgia. I know the color coding is a little bit tricky to see, but the purples are those, excuse me, the purples are those kind of at the highest end in terms of concentration, these colors are only about a $6,000 difference. So as we think about dark purple, magenta, white and then blue, you can see that this is not going to be just a geographic footprint concentrated in California or the Northeast. We see borrowers with high concentrations across the country, and we know in a geographic diverse workforce, particularly if any of you're in the tech sector, we know employees can be everywhere. So hopefully that gives you a flavor of who this impacts and dispel some of the myths that we hear in terms of it's just the younger ones who are coming out of college who are holding this debt.
(07:58)
The reality is that we know refinancing can make a big difference. But what I want to emphasize here is a little bit of the back of the envelope math when it comes to the rising interest rate environment. Now hopefully this is easy to see, but the takeaway here is that if you, for example, have a $75,000 student loan balance, you can look at the interest saved between a 4.74% interest rate and a 5.99% interest rate that could run up to $8,500 across a 15 year loan term. So without getting anyone too caught up in the math, the reality is that in the rising interest rate environment, borrowers are going to end up spending a lot more than that original loan if we're not looking at this from a financial wellness perspective. So Morgan, on the refinancing front, but I just wanted everyone to have a quick back of the envelope math in terms of what the impact and what this could mean because the numbers are going to be very big and very complex for borrowers who have not been looking at this for the last three and a half years, which I'll get to in a moment.
(09:01)
So let me bring this back to the three things that have happened this year, and particularly the focus on the legislative updates. So in terms of what has happened this year and how this impacts our employees, if you're interested on getting the cheat sheet, we will happily send you a copy of both this deck as well as what I call the regulatory rundown. Just stop over at the SoFi booth, come grab me after the presentation. This is a summary of everything that's gone on the last four years in student loans and we recognize that at SoFi we are much closer to this than most. So especially if you have a CEO or a CFO who just wants the summary, a chronological order of what's happened, happy to send you what we call our regulatory rundown. But coming back to 2023, there have been three things that have happened this year.
(09:54)
One, the end of cares, which if you haven't been paying attention, this is the act that was passed in March of 2020. It paused payments and waived interest on federal student loans for the 40 plus million Americans with federal student loans. So I'll talk about the end of that and what that means. Number two is the Supreme Court ruling on forgiveness. So that'll bring us to the next slide in just a moment. And number three, secure 2.0. There are some fantastic experts in the room who will know far more about the couple dozen provisions on secure 2.0, but I'll highlight a couple key areas as well as some examples of programmatic responses that we've seen this year from employer partners. So number one, the ruling on forgiveness. So what happened was the plan was to forgive between 10 and $20,000 of debt for federal borrowers.
(10:48)
What happened was that six conservative states sued the administration saying this was too expensive to the government to do, and in fact, Biden, you don't have the authority to do so. Back in June, the decision was made by the Supreme Court that said Biden in fact does not have the authority to do this without congressional approval. So following that decision, the administration responded in three quick actions, which you can see kind of a little skewed, but on the bullet points here. So number one, they're not done pursuing forgiveness, but they're continuing to do so under the Higher Education Act. The reality is that this could take months or more likely years to do so, which really came as a gut punch for many of the borrowers who were really hoping for that bit of relief before payments. Resume number two is the announcement on what we call the save plan.
(11:39)
It's an income-driven repayment plan for federal borrowers. And essentially what this does is if you earn less than what you owe, so let's say you earn $60,000 a year, but you owe $120,000 in student loan debt, it's really challenging to make those payments. So this income-driven repayment plan got a little bit of a facelift and allows you to peg a portion of your income. It used to be 10%. They're lowering that to 5%. There's some more nuances here that I'm happy to speak to. SoFi is not a federal student loan servicer, but again, we're intimately involved in this space, so happy to speak more to that. It can be a really positive program if an employee is trying to figure out how do I repay these student loans in a way that reflects how much I'm making. And number four, we'll talk about in just a second before we get to the public service loan forgiveness, but there's going to be an on-ramp period to repayment.
(12:36)
We certainly don't recommend leading with that in your communications, but what it's designed to do is most borrowers have not made payments across the last three and a half years. So it means if you can't make payments, interest will continue to accrue, but there's a little bit of a softer landing in terms of some of the penalties that borrowers will receive if they are not making those payments on time or in full. But all that to say is we don't want to lead with that in education because we want to make sure that our employees are prepared for those payments. Again, so anyone in the room work for a nonprofit or 501 C three public service loan forgiveness. Okay, great. Happy to talk more about that, but I'll skip over in the interest of time and relevancy for this group. The takeaway, if you have heard about this is what the administration has done is really created an opportunity where eligibility and I would say modernization of this program has had a really big impact. So it's made it a lot easier, or I should say not a lot, just simply easier because between April of 2021 and April, 2023, the number of borrowers who have been discharged and their balances discharge has been really substantial, but can talk more about that offline.
(13:53)
Great. So that last but not least, secure 2.0. So a couple dozen things that have changed in retirement laws. So this gives plans sponsors quite a bit to evaluate in terms of how their plan could and should work in years to come. Like I mentioned, there are experts in this room far more intimately involved in the nuances of secure 2.0. But the biggest one that I wanted to call out and help clarify is on the matching contributions for student loans. So for those of you who are familiar with what we know as the Abbott Labs model, this is a program that they got a private letter ruling a few years back in order to build a program that allows them to match dollars into an employee's 401K plan based on that employee's student loan payment information. So what they had found was that a decent large percentage of their population was in fact not participating in their 401K plan because they were so burdened with student loan debt that an employee couldn't pay both their student loan and money into the retirement match.
(14:56)
So secure 2.0 allows this program to be run for companies without having to get that private letter ruling. So if you have a population of employees who are paying off their student loans and the reason they are not participating into the full extent of the retirement plan is because of that student loan, this allows employers to consider student loan payments as a qualified contribution as if they were putting those dollars into the 401K or 403B. So it's a long way of saying it allows you as a plan sponsor to then put those dollars into an employee's 401K plan to allow them to get the full match. What I do want to caveat is this is not instead of a student loan payment, this is simply employers being able to put dollars into a 401K plan so that an employee isn't having to make the trade off between do I pay my student loan or do I contribute to retirement?
(15:57)
So I want to make that very clear because while there's been a lot of appetite and interest for how employers can build a program like this, it is not an instead of, it is simply so we don't have to make those trade-offs. The reality is that it will only impact about one to 2% of your participants, though it's a relatively small bucket, but it can be really meaningful if that's the barrier that employees are trying to overcome. I've read quite a few statistics out there in terms of millennials who are delaying retirement planning in order to pay off their own student loans or plan for a child's future education needs. So just from a programmatic consideration. So by far, this has been the program that's most discussed at SoFi and we've been a leader in the student loan space for a while. And again, happy to talk offline if you've got more questions about is this or is this not a good fit?
(16:47)
But the reality is that it's now an option for employers out there as you think about programmatic responses. So all that to say is, well, what do we do about this and how can we actually help prepare our employees for the resumption of federal student loan payments, which comes back to the end of the CARES Act. So what I do want to highlight and put this in context for just a moment while we've been talking about student loans, if we take a step back and think about the reality of where our employees are, student loans can be a big part of finances, but there's so much going on as it relates to inflation. The stock market, if anyone's had to fill up gas recently, like I did last night at $6 and 59 cents on my way home, how to pay bills, we really want to be empathetic when it comes to communication.
(17:39)
It's not just a, well, this is a bill you signed up for, it's now due. Well over 90% of borrowers have taken advantage of the last three and a half years of and not made those payments. It's not been due. It has been accruing with 0% interest. So we need to be empathetic to everything else that's out there. With that said, the pause has been a really great credit building exercise for employees, but it also may have been what I consider a lifestyle creep, and we want to make sure that we're helping provide some guidance in terms of how they can ease into this in a way that's going to help them be set up for financial success.
(18:19)
So what is the skinny, I apologize for the formatting here. There are two things. Interest on federal student loans resumed in September, which means that 0% interest is now back up to the normal interest rate that a borrower had. And number two, payments will become due in October, which is now. And this means that those nine times that this pause was extended that everybody keeps asking, are you sure it was codified into law with the debt ceiling that deal that was signed earlier in the summer? So the reality is, yes, those payments are due and it's been a long four years in terms of those pause. So let me just highlight a little bit about what's changed. This is a snapshot from part of the webinar and education series that we've been running with our employer partners this fall, and what it really does is cover what are the four things that I need to know as a borrower and employee as these loans resume?
(19:24)
Okay, so first and foremost, loan servicers are very likely to have changed. 4 out of 10 borrowers have had their loan servicer change. So there's been a lot of shuffling in this space. The good news is that loan servicers are consolidating, but the bad news is that borrowers may not necessarily know where do I make payments to? For some people it might be a password reset and for others it's actually creating a login for the first time. So really important if your HR teams are getting questions about that, where do I actually make payments to is sort of step one. Step two, deferred payments haven't hurt. And so if you've been participating in the federal pause, like I mentioned before, it's been a great credit building exercise. The account will continue to age, which has been a positive thing, but how do we help employees keep up on that positive momentum that they've seen?
(20:14)
It's making sure that there's a game plan for how do we make these payments on time and in full. And that brings us to step three. Like I mentioned before, we wouldn't necessarily recommend leading with this, but there is a temporary on-ramp period for the next year, which is designed to make it a softer landing for borrowers. Meaning you won't be penalized if you don't make a payment, a full payment on time, but interest will continue to accrue on any late or partial payments. Those also won't count towards income driven repayment plans. And then last but not least in terms of the public service loan forgiveness, which if anyone has questions on that, happy to address that. So those are really the three or four things that we've been emphasizing in terms of how employees can get ready for payments being due.
(20:59)
Another question we've been getting a lot from employees is clarity on the types of loans that they have, which we always recommend contact your servicer. SoFi is a private lender. So while we are part of the mix, we know that federal student borrowers are still going to make up the majority of those. That's where you might see Sallie Mae, great Lakes, Modgila. We need to make sure employees just know where to send the bills. That sounds very simple, but in this complex landscape, we want to make sure that the hard earned dollars are going to the right place and we're not making late payments to an unknown entity that, for example, might not be our loan servicer anymore. So feel free to aproach this. Again, if you want a copy of this. I know I have had a number of employer partners who are using this handy chart for employee communications. But all that to say it's time now to make a plan because payments are due.
(21:53)
Let me help explain this because well, I know we've talked a lot about communication. There have been some really interesting programmatic responses that we've seen employer partners do both when it comes to helping employees save generally, but also how might employees get ready for what has been a $0 payment to a $500 payment or more. We know that's going from having a car payment for example. So let me kind of explain what you can see here. So let's say you need to be making $500 a month payment towards your student loan bill. I might not have that saved away right now. So what can I do across, let's say a rolling four month period to get ready for that? So in this example, we're trying to help employees inch their way towards having that $500 a month ready by the time payments are due. Now, ideally we would've had this set, but let me explain the math that you can see here.
(22:50)
So if we're using an example of we get paid every other week, that first month, I am going to take $50 from each paycheck and put it into some kind of savings, whether it's a vault, whether it's a checking account that's there. By the time the next month I already have a hundred dollars in that account from last month, I'm now going to increase how much I am paying, paying into that to a hundred dollars each pay period. So at the end of second month, I'm now going to have $200 in you guys tracking with me. Yep. Hopefully some nods. Third month I'm going to increase that to $150 per paycheck into that account. So now I'm building that savings. So by the time I hit month four, not only do I have almost a full $500 a month payment in my account, but I have now inched my way forward into having $500 per month that now will be going towards that student loan bill.
(23:43)
Now in working with partner last week who saw this, they said, wouldn't this be great if an employee could do this for an emergency savings account? Yeah, that's great. So I just wanted to share this as an example of the different and kind ways in which some employers are really helping coach into what a programmatic response could be, not just around employee communications of how to prepare. So lots of different ways that we've seen it. Happy to help share that in the student loan landscape, but thought this was a value add to share. Alright, and last but not least, I know there are many familiar faces in the room. If you are an existing partner, there are some really great resources that are already on your partner landing page or directly available to your employees in their portal. When it comes to how SoFi at Work can help beyond just how do I actually refinance a loan if you decide that that's a good fit for you.
(24:36)
But I did want to highlight in terms of how SoFi at work can help. We are here as part of the educators in that financial wellness landscape, we do work with small, medium-sized businesses where we can be that one-stop shop. But for larger employer partners, we know that your financial wellness ecosystem is big and complex and we can be here as a support system for part of that because at the end of the day, it's really about your employees getting the best fit help When it comes to tackling student loan debt or taking out future loans, again, we just want to demystify what can feel like a complex landscape.
(25:11)
We are, and I should say as of this week, I believe we've actually launched what we are calling our student loan specialists. So while SoFi as an entity has a really great arsenal of financial planners that are on staff, what we've heard and loud and clear is we need a little bit more guidance on how do we tackle this whole student loan situation. So our SoFi at loan specialists are here to help in terms of not just how employees can navigate what is definitely a changing landscape, walking them through that student loan refinancing process. I do want to say, and again, I am not a certified financial planner, but I have the privilege of working with just enough to be dangerous or helpful is that in this landscape we have seen it is not just about getting a lower interest rate so that you can pay off your loans faster.
(25:56)
For some, it may be actually looking at extending the loan term because $500 a month is just not feasible when we're going from $0 of what we budgeted to $500. So that could even mean looking at a higher interest rate, but we're extending our loan term because I really can only afford that $200 a month payment. Now I'll get there, but I've got some other pretty pressing needs like making my mortgage payment or daycare as a mom of two for example. So all that to say that is really the content that I wanted to cover today. Again, we've got a really fantastic team of certified financial planners. If this is part of the arsenal that you don't yet have available for your employees and you're interested in how SoFi at Work can help. And with that, if you haven't stopped by the SoFi at Work booth, my colleagues, Kelsey, Jake and I will be here through the rest of the event. And I appreciate you guys being my captive audience to talk about student loans over your salads and lunches today. So with that, I will go ahead and if there are any questions in the broader group, happy to address those, but if not, I will leave you to your salads and I'll be available at the front table if you do have questions. Great, thank you.