Student Debt is a Big Problem For The Entire Workforce
It’s no secret. With student debt now totaling over $1.7T, it has become a massive problem for all Americans.
The average 2020 graduate left school with over $30,000 in loans, and this number continues to grow every year.
The average 2020 graduate left school with over $30,000 in student loans
However, recent grads aren’t the only ones shouldering this burden. Parents now stake claim to over $100B in student debt for their children.
Parents now hold over $100B in student debt for their children
According to Guardian’s report, “College Debt in America: The Case for Tuition & Loan Repayment Benefits,” 52% of late Boomers (age 54 – 60) say that college debt is a major impediment to meeting their financial goals.
Employer-Sponsored Student Loan Programs
Employers have several options to help their employees with student debt. Some of the more well-known programs today include student loan refinancing and student loan repayment assistance.
How Do Student Loan Refinance Benefits Work?
Student loan refinancing is similar to refinancing a home. Employees with student debt can refinance their federal or private student loans to get a lower interest rate, lower monthly payment, and/or quicker path to paying off their loans.
Employees can refinance their student loans to lower their interest rate or monthly payment
Typically, refinancing requires the employee to have a high credit score and a high-and-stable income. Oftentimes, the lender will also require a certain type of degree, such as an MBA, law degree, or medical degree.
For workplaces that have a high concentration of high-earning advanced-degree-holders, a refi benefit could address a larger percentage of the company. For most general companies, student loan refinance benefits can have limited participation.
A refinance benefit may fit better for employers with a high concentration of advanced degree holders
Offering a student loan refinance benefit could help more employees become aware of the program and its potential benefits. However, if the employees are a good fit for refinancing their loans, they are probably receiving direct-mail campaigns from several of these companies already.
Because of their limited applicability in most workplaces, student loan refi benefits are typically bundled with other student loan benefits.
Student Loan Repayment Assistance Programs
Some employers may want to directly help employees pay off their student loans, rather than simply guiding them to a refinance option.
Employers can directly pay an employee’s student loans, or they can incentivize employees to pay their own loans by matching their payments into the employee’s 401(k).
Companies can directly pay an employee’s student loans or match loan payments into an employee’s 401(k)
Until 2020, there had not been any tax benefits for employers to directly contribute to an employee’s student loans. In fact, doing so has traditionally been treated as additional taxable income for the employee.
However, the CARES act, signed in March of 2020, made it possible for employers to contribute up to $5,250 toward an employee’s student loans tax-free. In December of 2020, the Consolidated Appropriations Act was signed, which extended this change through 2025.
The 2020 CARES act made it possible for employers to pay off up to $5,250 of an employee’s student debt tax-free
For employers to take advantage of this tax benefit, they have to set up an educational assistance program that meets the requirements of IRS Code Section 127. The payments have to be made for a “qualified education loan incurred by the employee for the education of the employee.”
There are several student loan repayment assistance vendors in the market today.
Typically, these vendors make it easy for employers to implement this benefit without having to set up direct relationships with the student loan servicers. However, according to Section 127, repayment assistance does not have to be paid directly to the student loan servicers to receive favorable tax treatment.
Vendors exist to help employers implement and administer student loan repayment assistance benefits
Typically, vendors charge an implementation fee and a monthly fee for eligible or participating employees.
Similar to 401(k)s, the main value of student l0an repayment assistance can come from the employer’s contribution. Employers should keep this in mind, as it substantially increases the cost of this benefit.
Matching Student Loan Payments Into a 401(k)
Employers can also encourage employees to pay down their student loans by matching those payments to the employee’s 401(k). For example, if an employee pays $200 a month toward their student debt, an employer can match that payment with a contribution into the employee’s 401(k).
Although there is no specific legislation that has been passed to allow this setup, companies have been using a recent IRS ruling letter as a precedent.
This letter indicated that the employer would not violate the contingent benefit prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6) of the tax code by matching an employee’s student loan payments into their 401(k).
The IRS issued a letter that did not prohibit matching student loan payments into a 401(k)
The 401(k) matching option does not have the same $5,250 tax benefit limit as the student loan repayment option, but the $58,000 overall contribution limit for 401(k)s still applies.
Because student debt is preventing many recent grads from contributing to their retirement, the matching contribution can be both an incentive to pay down their student debt more quickly and a catalyst to start saving for retirement.
Can Employer-Sponsored 529 Plans Help With Student Debt?
When the SECURE Act was passed in 2019, it added student debt – in addition to higher education, trade schools, and K-12 education – as a qualified expense for 529 funds.
The 2019 SECURE Act made it possible for 529 plans to be used for student debt
Employees can now use their 529 account savings to pay down student debt, and any investment earnings accrued in the account can be withdrawn tax-free.
Like student loan repayment assistance benefits, employers can contribute funds to an employee’s 529 account to help them pay off debt more quickly. They can also contribute funds to the 529 accounts of employees saving for the future education of children, grandchildren, and any other loved ones.
For this reason, a 529 benefit can be much more equitable than other student-loan-specific benefits. Also, employer contributions into an employee’s 529 account that are used for student debt may qualify for the new $5,250 student loan tax benefit.
An employer-sponsored 529 benefit can help employees pay off student debt and save for a loved one’s future education
State-sponsored 529 plans have traditionally been difficult to implement in the workplace setting. However, innovative technology solutions have emerged that eliminate many of the traditional implementation and administration difficulties.
New technology makes employer-sponsored 529 benefits easier to implement and can bring in additional sources of savings
Several innovative 529 technology solutions have also created new sources of savings, such as gifting and cashback rewards.
These extra sources of savings allow employers to offer a 529 benefit that helps save for college and repay student debt without specifically requiring the employer to come out of pocket with a match. This substantially lowers the cost to employers without getting rid of the “free money” value of the benefit.
Gifting and cashback rewards can help employees save without requiring the employer to directly contribute
While traditional 529 plans have historically not been a great fit for most workplaces, emerging technology vendors can provide an easy-to-implement, cost-effective solution that the majority of the workplace can benefit from.
Employers should consider their budgets, their workplace demographics, and how much support they can set aside for these programs when selecting the best student debt benefit for their workplace.