What you need to know about student loan programs and consolidation

What is the most talked about benefit in the new year? Student loan assistance programs. Recent surveys confirm that student loans are a top concern among employees, especially recent grads, but it is not just a millennial issue. Many baby boomers have cosigned loans for their children or returned to school themselves incurring debt at a time when they should be concentrating on preparations for retirement.

According to a Society for Human Resource Management survey, only eight percent of companies currently offer employer student loan repayment assistance programs, but that is double the number of companies who offered the benefit a year ago. It is important to understand that student loan repayment programs are not the same as employer tuition reimbursement programs. Employer sponsored tuition reimbursement benefits are tax deductible up to an annual limit of $5,250 per employee, but current student loan repayments are taxable.

However, the Employer Participation in Repayment Act of 2019, a bipartisan bill, is currently being considered by Congress and if passed, it would allow employers to give tax free student loan assistance up to the same limits as tuition reimbursement, but until that legislation passes, what options are available for employees and employers?

Student loans are complicated and the various programs available today, may not work for all types of employers legally or financially. The simplest benefit is to provide employees with access to organizations that will work with them to help refinance or consolidate their student loans. According to the Federal Student Aid website, there are at least 20 different types of student loans that are eligible for consolidation.

There are pros and cons for consolidating these loans and employees need to carefully consider what their future plans may entail, as once the loans are consolidated the transaction cannot be reversed and employees could lose benefits that may be of assistance should their plans for the future change.

In addition, the pros and cons for consolidation differ for Federal versus Private loans and any decisions regarding consolidation need to be made thoughtfully and with careful consideration.

Pros for consolidation of Federal student loans include the following:

1. Single monthly payment

2. Lower payment amount by extending the repayment time period

3. Consolidating loans other than Direct Loans (which are from the William D. Ford Federal Direct Loan Program) may provide the following:

1. Additional income driven repayment options
2. Public Service Loan Forgiveness (PSLF)
3. Renewed deferment or forbearance options
4. Fixed interest rate
5. Cure a default

Cons for consolidation of Federal student loans include the following:

1. Private loans are not eligible for consolidation into Direct Loans

2. Longer repayment periods may result in more interest being paid

3. May cause loss of interest rate discounts, principal rebates, and some loan cancellation benefits-Perkins loans

4. Possible loss of deferment or forbearance options

5. May lose credit for any payments made under income driven or Public Service Loan Forgiveness (PSLF) programs

6. Once the loans are consolidated you are unable to reverse the transaction

Pros for consolidation of private student loans:

1. Single monthly payment ( and potentially lower your interest rate – increase credit score by lowering debt-to-income ratio)

2. Choice of fixed or variable interest rate

3. Release co-signer

4. Possibility of refinancing parent’s PLUS loan into the child’s name

5. Potential monthly payment reduction

Cons for consolidation of private student loans:

1. Strict credit requirement may need FICO credit score of 670 or higher

2. May require a degree from a Title IV accredited school

3. Loss of federal loan benefits

1. Income-driven payment options
2. Public Service Loan Forgiveness (PSLF)

4. Shorter repayment periods – 10-20 years as compared to 30 years (resulting in higher payment)

5. Potential loss of deferment and forbearance options – interest continues to accrue

6. Shorter default determination period

Many companies specialize in providing student loan consolidation services. The websites and article links below provide an overview of the top firms and may be used as a resource to review the options available to employers and employees in today’s marketplace. You may also want to check with your defined contribution plan recordkeeper as many of them are also offering student loan repayment services for their customers.

• Studentaid.gov: Glossary, student aid
• Studentaid.gov: Repayment options
• Student Loan Hero
• Crediful
• Consumers Advocate
• U.S. News: Student loan consolidation
• Sofi
• Millennial Money

Innovest does not endorse any of the above referenced firms and the links are provided for informational purposes only. The material provided in this article is meant to provide information only and may not include all items to be considered. We recommend you consult your tax professional and school administration office for guidance prior to making a decision to consolidate student loans.

Types of federal loans that may be eligible for consolidation:

1. Subsidized Federal Stafford Loans

2. Unsubsidized Federal Stafford Loans

3. PLUS loans from the Federal Family Education Loan (FFEL) Program

4. Supplemental Loans for Students

5. Federal Perkins Loans

6. Nursing Student Loans

7. Nurse Faculty Loans

8. Health Education Assistance Loans

9. Health Professions Student Loans

10. Loans for Disadvantaged Students

11. Direct Subsidized Loans

12. Direct Unsubsidized Loans

13. Direct PLUS Loans

14. Federal Family Education Loan (FFEL) - Consolidation Loans and Direct Consolidation Loans (only under certain conditions)

15. Federal Insured Student Loans

16. Guaranteed Student Loans

17. National Direct Student Loans

18. National Defense Student Loans

19. Parent Loans for Undergraduate Students

20. Auxiliary Loans to Assist Students

Disclaimer: This information was gathered from third-party sources and may not be a complete list.

Marianne Marvez, RPA, CEBS is a Vice President and Director at Innovest. She has more than 30 years of experience in the retirement plan sector. She is a member of Innovest’s Retirement Plan Practice Group, a specialized team that identifies best practices and implements process improvements to maximize efficiencies for our retirement plan clients. Marianne holds the Certified Employee Benefits Specialist (CEBS) and the Retirement Plan Associate (RPA) designations from the International Foundation of Employee Benefit Plans and the Wharton School of the University of Pennsylvania. She is also holds the Series 65 License (Registered Investment Adviser Representative) though FINRA. Prior to joining Innovest, Marianne was a Director with Empower Retirement, a Senior Consultant at Strategies, LLC, a Vice President and Senior Relationship Manager at Bank of America Merrill Lynch and spent 15 years with Invesco Retirement Plan Services as an Associate Partner and Senior Client Relationship Manager.