One of the hottest trends in employee benefits is student loan repayment, and it is not hard to understand why. A provision of the Consolidated Appropriations Act of 2021 now allows employers to make tax-free contributions to their employees’ student loans of up to $5,250 per year, without the payments being counted as taxable income.
According to Gregory Poulin, the CEO of Goodly, a leading provider of student loan repayment benefits, tax-free student loan repayment is the most important legislative change to employee benefits in 40 years since Congress altered the tax code with passage of the Revenue Act of 1978, which led to the proliferation of 401k retirement plans.
How Indebted Are Students?
Americans are more burdened by student loan debt than ever. In fact, more than 44 million Americans owe $1.7 trillion in student debt. Student loans have surpassed all other forms of debt in the U.S. aside from housing debt, with nearly 70% of the class of 2019 taking out student loans.
Every year, three million college graduates enter the workforce with an average student loan balance of $40,000. Research suggests it takes four-year degree holders an average of 19.7 years to pay off their loans. By 2028, the Congressional Budget Office predicts that over $1 trillion in new student loan debt will be added.
Millennials, those born between 1980 and 2000, are now the most educated generation in U.S. history. However, student loan debt does not just impact the younger generation. In a society with multi-generational workforces, more employees are going back to school than ever before, and individuals of all ages are relying on student loans to fund their education.
Why Offer a Student Loan Repayment Program?
Employers are realizing how critical it is to offer a holistic approach to their employees’ overall well-being. Although this includes traditional benefits such as health insurance and paid time off, it also includes nontraditional benefits like student loan repayment programs that help address financial well-being.
According to TechCrunch and Goodly, “86% of employees said they’d stay with a company for at least five years if their employer helped pay down their student loans. Yet employers break even if workers stay just two extra months and get a 5x return if they stay an extra year because it costs so much to hire and train replacement staff.”
How Can Employers Benefit?
While the advantages are obvious for employees, the following are benefits that employers can reap by establishing a student loan repayment program:
- Tax-Deductible Business Expense. Employer contributions toward student loans are considered a fringe benefit and can be used to reduce taxable profit. The maximum monthly tax-free limit is $437.50, but the most common employer contributions are $50-$100 per month.
- Boost Recruitment and Retention. Millennials are more likely to change jobs than their older co-workers. By providing them with student loan aid from the start, or after they reach a certain tenure, you can foster loyalty, reduce turnover-related expenses and set yourself apart from competitors.
- Improve Employee Well-being. Financial stress affects more than 60% of millennials. Employees who struggle with their finances are more likely to be less focused at work, lead an unhealthy lifestyle and incur higher medical costs, since stress is a known contributor to high blood pressure and heart disease. Employer-sponsored student loan repayment can have a profound impact on the financial and mental well-being of employees, which, in turn, can improve employee morale and increase productivity.
Student Loan Repayment Considerations
Here are some other points to consider when deciding whether to offer a student loan repayment program:
- Eligibility. Consider which employees will be eligible for the benefit. Eligibility could be based on tenure, job classification or the age of the loan, for instance. Also, consider what types of loans will be covered (private versus federal), since this may affect how your program will need to be set up.
- Frequency and Limits. Determine how frequently contributions will be made (monthly, quarterly or annually) and the highest amount your company will contribute (for instance, up to $10,000). In addition, employers can make contributions in various ways, including a fixed dollar amount, a percent of the employee’s student loan or a percentage of the employee’s salary. It is important to evaluate what model will work best for your business.
- Departure from the Company. Some employers have also included provisions that state that if employees leave the company within a certain amount of time (for example, 6, 12 or 18 months) they will have to refund a specified amount of their student loan benefit.
- Outside Help. While student loan repayment programs can be handled internally, there are several companies like BenefitEd and Goodly that facilitate student loan repayment options. External vendors can help ensure compliance, verify payments are being distributed properly (especially if employees owe money to multiple lenders), and provide valuable tools to manage and reduce debt.
Set Yourself Apart
Over the past few years, the number of employers offering student loan repayment benefits has more than doubled in an effort to remain relevant and focus on the workforce’s evolving expectations. However, with the recent legislation allowing employers to make tax-free contributions to student loans on behalf of their employees, we anticipate this benefit will explode over the next couple of years.
If you employ young professionals, or if positions at your company require advanced schooling, consider offering a student loan repayment program to set yourself apart from others in your industry.
To learn more about employee benefits and how to engage your workforce, contact us today.
The above information does not constitute advice. Always contact your employee benefits broker or trusted adviser for insurance-related questions.