Student loan relief plan offers pivotal opportunity to advance worker financial security

Last month, the Biden administration announced a plan to provide financial relief to people living on low to moderate incomes (LMI) with student loans. As student loan forgiveness and income-driven repayment changes take effect, employers and service providers have an opportunity to facilitate savings, an important step in improving financial security and reducing the racial and gender wealth gap. Employees with reduced or eliminated debt payments can redirect at least some of these funds into emergency savings and be better prepared for unexpected expenses – a proven method to advance financial security.

The student loan relief plan has created a moment for employers and service providers to influence employees earning LMI through products and benefits that meet their needs, wants and aspirations.

The student debt relief plan forgives $10,000 in student debt for those earning less than $125,000, and $20,000 for eligible borrowers who received a Pell Grant for undergraduate study. It will also cut monthly payments in half for 65% of borrowers, reducing income-driven undergraduate loan payment requirements from 10% to 5% of a borrower’s monthly income. The plan is timely: federal student loan repayments have been paused since March of 2020 in an effort to provide relief to student loan borrowers, but that pause will end on December 31, 2022.

Commonwealth and the Defined Contribution Institutional Investment Association’s (DCIIA) Retirement Research Center (RRC) have conducted joint research on the role that emergency savings plays in retirement savings and the institutionalization of emergency savings through the workplace.

Our research has subsequently uncovered a unique opportunity, heightened by the student loan relief plan, for plan sponsors and service providers to support and improve the financial wellness of employees eligible for student loan forgiveness by designing products or providing benefits that meet their specific needs. Further, through increased communication and revised messaging, employers can spotlight the benefits of redirecting reduced debt payments into emergency savings and/or retirement benefit offerings.

Our joint work indicates that student loan debt amongst individuals earning LMI is a barrier to emergency savings and, as a person’s student debt level increases, they are more likely to have a lower financial health score. A lack of emergency savings is a barrier to retirement participation. Like a set of dominoes, student debt has ramifications for both short- and long-term financial security. In fact, an American Student Assistance survey finds that 62% of employees who have student loans say they’ve put off saving for retirement.

Women, Black and Latinx borrowers are disproportionately impacted by student debt. More specifically, women hold roughly two-thirds of all student debt in the United States, and Black and Latinx college graduates owe an average of $25,000 more in student loan debt than white college graduates. Latinx borrowers are more likely to report delaying a financial decision like buying a house or saving for emergencies due to their student debt. Student debt reinforces the racial and gender wealth gap, as taking on disproportionate levels of debt for higher education does not necessarily translate to higher wages for Black or women workers.

Whether student debt is completely forgiven or monthly repayments are reduced, increasing awareness and offering a high-quality emergency saving solution could help employees leverage their increased discretionary income. For people with low-incomes and reduced payments, the Biden administration estimates that the average annual student loan payment will be lowered by more than $1,000 a year for both current and future borrowers.

Directing it into a liquid emergency savings account may be the most impactful use of these new “savable” funds. The DCIIA RRC and Commonwealth’s research finds those with emergency savings are 70% more likely to be contributing to their retirement. In fact, our previous research found that during the height of the pandemic, those with emergency savings were less likely to tap retirement savings to cover an unexpected expense.

Related: 16 million approved for Biden’s student debt relief, but lawsuits preventing payout

Plan sponsors and record keepers are in a unique position to offer support, information, and solutions to employees who are eligible for student loan debt forgiveness and other benefits such as reduced student loan repayments – which 45% of employees say this kind of support would motivate them to stay with their employer. Offering a high-quality emergency savings solution to employees with new discretionary income may protect individuals from cycles of debt while encouraging retirement participation in the process. This support is especially impactful to people earning LMI, women, and Black and Latinx populations. By leveraging debt forgiveness, employers and service providers can impact their own workforce and support broader progress in reducing the racial and gender wealth gap.

Natalie Blain is a Senior Innovation Manager at the national nonprofit Commonwealth.

Warren Cormier is the Director of the Defined Contribution Institutional Investment Association Retirement Research Center.