Employee perks are a great way to attract and retain exceptional employees. Would offering student loan repayment give your business a significant leg up on the competition?
- In a bid to attract and retain millennial and Gen Z talent, a small percentage of U.S. companies are offering to help their employees pay down their student debt.
- Just 8% of American businesses have adopted the perk, though experts believe it could be an enticing prospect for workers moving forward.
- A new piece of legislation is making its way through Congress that could make company contributions to student debt a tax-free benefit.
As the American workforce continues to shift in favor of bringing millennial and Gen Z workers into the fold, companies everywhere are trying to find a competitive edge that attracts and retains that growing segment of employees. The rush for qualified help has resulted in all sorts of new benefits in recent years. And while many offerings focus on providing a decent work-life balance for today's constantly connected workplace, one slowly trending perk has the potential to lift employees up from under an all too common financial burden – student debt.
It's a novel idea, for sure, but approximately 8% of American companies are now offering student loan repayment as a benefit to their employees, according to the Society for Human Resource Management (SHRM) 2019 Employee Benefits Survey. In previous years, that figure was at about 4%.
Generally provided through third-party servicers, employer student loan repayment options allow business owners to directly contribute to an employee's overall student debt on a monthly basis. Working similarly to a retirement savings fund or 401k contribution match, a student loan repayment plan (SLRP) usually comes with the stipulation that the beneficiary continue their regular monthly loan payments. If kept up regularly, this benefit could dramatically reduce the amount of time needed to pay off the loan debt in question.
While this type of student loan benefit may sound like a great way to help an employee repay their student loans, thus reducing their stress levels in the workplace, there are certain things to keep in mind when considering whether you should add a SLRP to your own company's benefits package.
Why student loans should matter to American businesses
It's no secret that student loan debt in America has become a major issue. According to the Federal Reserve, 54% of young Americans who attended college ended up with some form of student debt. Approximately 45 million people are on the hook for roughly $1.6 trillion in student loans, with the typical amount owed ranging between $20,000 and $24,999. As this debt threatens a massive crisis for the nation's socioeconomic well-being, it's important to note just how detrimental it can be for business.
One of the most common requirements for people to get a job in today's economy is a college degree or some other form of higher education. As a result, most college graduates are entering the workforce with a huge loan debt resting on their shoulders. According to the 2018 John Hancock Financial Stress Survey, 69% of workers said they were stressed about their finances, with 72% saying they often stressed about their monetary situation while at work. That type of distraction was estimated to cost companies approximately $2,000 per employee.
"Financial stress is one of the biggest concerns among our participants – and it has implications for their health, healthcare costs, and premiums, and, ultimately, their productivity," said Patrick Murphy, president and CEO of John Hancock Retirement Plan Services. "Employers can play a role in making their employees' financial lives better – and if done well, it may even benefit the company's bottom line."
Additionally, workers living under the weight of student debt are less likely to advance in their own lives. According to Student Loan Hero, 43% of student loan borrowers said they were forced to hold off on buying a home because of their debt. Other major life events are also delayed, including marriage, starting a family and other milestones. Without those opportunities available to them, employees are often left looking for more lucrative work to help pay off their loan debt, resulting in higher turnover.
"More and more employers are requiring advanced degrees for higher-skill jobs, which means it's normal for people to be carrying a six-figure student loan debt when starting a job," said Jake Northrup, a financial planner and founder of Experience Your Wealth. "An employee with a six-figure debt loan balance is not going to be motivated by the superior health or disability insurance offered by the employer when their student loan payments are running their life."
How some companies are helping address student debt
Since it's likely that some of your employees are currently dealing with student debt, implementing a repayment plan could help them right away.
In most cases where a business helps its employees with their student debt, the program works like any other financial benefit. Employers contribute a fixed amount between $50 and $100 per month, with some outliers offering even more than that. As long as the employee continues to make their student loan payments on time, the company-provided loan assistance can continue.
While just a small percentage of businesses offer the benefit, some major companies in the U.S. are among those that do.
According to SHRM, Fidelity Investments offers its employees up to $2,000 per year over five years for anyone working there after six months. PricewaterhouseCoopers offers its employees $1,200 a year toward their student debt, with a cap of $10,000, which the company estimates could eliminate approximately three years of payments. Chegg, an education tech company, "bases its student loan repayment plan disbursements on seniority – only in reverse," with entry-level employees getting up to $5,000 per year in assistance while higher-ups get up to $3,000 annually.
Since this is such a new benefit, how each company implements it depends on how much it's willing to contribute. SHRM suggests that any company looking to add the benefit should start small, ensure it's easy for employees to take advantage of, and be upfront about the good and bad sides of the benefit.
"I've seen companies take part of that budget and specifically label it for a benefit like this – as an end-of-year reward or performance incentive, for instance, the company will put dollars toward the person's student loan debt," said Melissa Cadwallader, head of human resources at ZenBusiness. "The pros of this approach are excellent. Since not many companies have figured this perk out, it's a great recruiting tactic that can set you apart from others."
The downside of offering a student loan repayment plan
Overall, offering a student loan repayment plan as a business owner can be a win-win situation if your company can afford it. This can be an expensive employee benefit, so it requires careful consideration and financial planning before the first employees can take advantage of it.
"Recruiting and retaining employees is a major challenge for small businesses. While larger companies may have the capacity to pay down their employee's student debt to attract talent, this is not presently an option for many small businesses," said Elliot Richardson, president and co-founder of the Small Business Advocacy Council.
Another thing to keep in mind is that under current federal tax law, offering to pay off an employee's student debt is seen as taxable compensation. Unlike other benefits that see employer contributions coming out of an employee's paycheck before taxes are accounted for, both your company and your employee will have to pay taxes on the amount provided through a SLRP. Employer student loan repayment plans are not considered part of your income tax withholding.
"[The fact that these contributions are taxed] certainly slows the adoption of student loan payments by employers," Northrup said.
To address this issue, a piece of bipartisan legislation titled the Employer Participation in Repayment Act of 2019 has been making its way through the legislative process. Sponsored by Sens. Mark Warner (D-Virginia) and John Thune (R-South Dakota) along with Rep. Scott Peters (D-California), the bill would change the current tax code to let employers provide up to $5,250 in tax-free student loan assistance per year for each employee. The proposal mirrors existing IRS guidelines that allow for other assistance programs, such as programs that allow companies to cover the same amount of tuition reimbursement for employees actively taking college courses while they work.
Along with tax considerations, one major downside to this is the potential alienation it can instill resentment among employees who either were never student loan borrowers or who have already paid their private and federal loans off through student loan refinancing, public service loan forgiveness, or some other student loan forgiveness program. If some people are receiving thousands of dollars in benefits and others aren't, some warn that can create a rift within a workforce.
"You risk making some employees feel excluded if this is overdone," said Cadwallader. "Not all employees will still have student loans given where they're at in their lives, so do you still have other benefits or aspects of your employee rewards budget that appeal to them? Keep your perks well rounded in that respect, or you risk building up indifference or resentment from some toward your perks program."