Why employers need to take student loan repayment benefits seriously
Congress made it easier than ever for companies to pay down workers’ student loans and provide a path to financial freedom.
Across the country, workers are saddled with student loan debt. In total, 47 million Americans collectively hold $1.7 trillion in outstanding student loan debt. The average employee-borrower can expect to spend $5,000 a year repaying their student loans. Such a staggering level of debt often creates significant financial stress for employees and becomes a roadblock to achieving major financial and personal goals.
Student loan borrowers have half the retirement savings of their peers without student debt by the age of 30. Student loans are something employees take into consideration when making decisions around where to work as well as when to get married, purchase a home, and start a family. Research shows that financial stress negatively impacts employee health and productivity and can lead to absenteeism.
Related: A potential game changer for student loan debt: The Employer Participation in Repayment Act
When taking the profound impact of student debt into consideration, it’s not hard to understand why employees are increasingly turning to their employer for help repaying their student loans. When asked, “What percentage of your benefit compensation money would you allocate for student loan debt repayment versus an alternative benefit?” In all cases, respondents between the ages of 18 and 35 chose more money going toward student loan repayment, ahead of all other benefits, including health insurance, retirement, childcare, and PTO.
With the passage of the Consolidated Appropriations Act of 2021 in December, Congress gave employers a big reason to help pay down student debt. Within the legislation is a provision that allows employers to make tax-free contributions of up to $5,250 a year to their employees’ student debt, without the payments being included in the employees’ taxable income. In doing so, Congress made it easier than ever for companies to pay down workers’ student loans and provide a path to financial freedom for millions of employees struggling with student debt.
The tax-exemption was originally included as part of the CARES Act and set to expire at the end of 2020. Congress granted a five-year extension through the end of 2025 and it’s widely expected to be made permanent.
At Goodly, we partner with employers to help them offer student loan repayment as an employee benefit. From our experience working with hundreds of employers, we’ve seen a wide range of employer contributions. Some employers start with smaller contributions of $25 per month while others maximize the tax-free limit of $5,250 per year by contributing $437.50 per month. Across all of Goodly’s clients, the most frequent employer contribution is $100 per month, which makes student loan paydown a relatively inexpensive benefit to fund. For many employers using Goodly, they simply redirect existing benefits budgets from programs that see low utilization toward student loan benefits.
This is fairly straightforward when one considers that 70% of employers already offer tuition assistance benefits that allow employees to go back to school. These programs often see participation rates of less than 10% of eligible workers in a given year. Thanks to the new tax-exemption, employers can simply redirect this existing benefits budget to student loan repayment, at no additional cost.
One of the reasons student loan repayment now ranks as the most important and popular benefit for millennial and Gen Z employees is the profound impact it has on a borrower’s ability to become debt-free. With the help of tax-free employer contributions, the average employee-borrower on Goodly is on track to pay off their student loans 31% faster than they otherwise would. The reason for this is that the most common approach to employer-sponsored student loan repayment is to have employees continue making their regular student loan payments. Employer payments are not only tax-free but applied on top of the employee’s payment directly to the principal of the student loan.
Employer-sponsored student loan repayment was well on its way to becoming table stakes as a mainstream benefit with approximately 1 in 10 employers offering it before the tax-exemption was enacted. That figure is expected to see a 300% increase in 2021 surging to one in three employers now that the benefit is tax-free, according to the Society of Human Resources Management.
Growth of student loan benefits has largely been driven by demand from employees. Every year, 70% of all college graduates, representing 3 million Americans, are entering the workforce with an average student loan balance of $40,000. As a result, the US is expected to add over $1 trillion dollars in new student loan debt by 2028. Ballooning student loan debt is pushing many employers to reconsider their current benefits offerings to meet the evolving needs and shifting demographics of the workforce. By 2025, millennials will make up 75% of the workforce, employers must understand the extreme impact student debt has on employees and be prepared to meet the needs of millennial and Gen Z employees if they expect to attract and retain top talent.
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