3 things employers need to know before student loan payments begin again

The CARES Act of 2020 not only paused interest on federal loans but paused payments for loan holders. The idea was to give student loan borrowers a break given the uncertain financial climate of the pandemic. The date upon which loans were to resume has been pushed back multiple times, but as part of the debt ceiling deal made in early 2023, federal loans will resume starting October 1st.

Now, working Americans are preparing to repay their federal student loans. For many borrowers, this is the first time in over 3 years that they’ve had to even think about making their minimum monthly payment, and for some, this will be the first time they’ve had to think about making payments ever.

If you’re lucky to not have student loans, you may not have paid much attention to the student loan payment pause. As an employer, you might be wondering, why should this issue be on my radar at all?

Because the student debt crisis is a $1.7T problem that affects everyone. It’s been on hold for the last 3 years, but it’s about to start snowballing again – and it could drag your employees, your company, and the economy down with it.

So, here are three things that employers should be aware of as student loan payments resume:

#1: Your employees are about to be hit with a major financial burden.

As of October 1st, nearly 44 million working Americans are going to have to start making minimum monthly payments again on their student loans. Statistically speaking, employers should assume that nearly one-third of their employees are going to have to come up with an average of $300 to $500 a month to make their minimum monthly payments.

Maybe this would all be fine if macro- and micro-economic conditions were as unchanging as the frozen student loan balances, but sadly, that’s not the case. Borrowers’ personal financial situations look very different now than they did in 2020.

While a few borrowers continued to pay down their loan principals during the pandemic, the vast majority (83%) did not. Instead, the National Bureau of Economic Research found that while loans were paused, the majority of borrowers actually took on more debt, potentially with higher interest rates. By the end of last year, the average non-student debt for federal student loan borrowers increased by $1,800 as borrowers increased discretionary spending with credit cards and took out mortgages and auto loans for big life purchases.

Not only that, consider how life may have changed over the past 3 years. Twenty-five to forty-nine year olds, who not only represent the largest share of borrowers (65%) but also hold the majority of federal debt (69%), may have started families. Borrowers of all ages may be facing large health care bills as a result of the pandemic. And inflation has raised prices for everyone, no matter their age.

Add the rising costs of childcare, massive health care bills, and higher costs of living to the increase in accumulated debt, and here’s the bottom line: times have changed and consequently, the restarting of loan payments is going to hurt.

#2: The restart on student loan payments will have hidden costs for companies.

Student loan repayments restarting could impact your bottom line.

Faced with the burden of making their minimum monthly payments, employees with student debt are going to become even more financially stressed. Financial stress is one of the largest contributors to mental health, so you may find that an increasing number of your employees will struggle on that front. This, in turn, could result in costly expenses due to productivity loss, increased burnout, and high employee churn.

How, specifically, does financial stress affect employees’ workplace habits? Employees who are financially stressed are five times more likely to be distracted at work. On average, distracted employees lose 156 hours of productivity per year. Further, employees that are financially stressed are also twice as likely to leave. Replacing an employee can cost companies anywhere from half to 2 times that employee’s annual salary.

In 2022, when loans were on hold, 6 in 10 employees admitted to feeling some level of stress about their personal finances. Now that student loan payments, the largest source of financial stress for employees, are resuming, increased costs related to productivity loss, burnout, and employee mental health could cost employers $500B or more.

#3: Employers can actually help tackle the student debt crisis with a new benefit that’s gaining popularity: employer student loan contributions.

At $1.7T, the student debt crisis can seem like an incredibly daunting problem, but it’s one that is not impossible to solve. It will, however, require multiple solutions.

Luckily, one of those solutions is in the hands of employers.

Employers can help tackle the student debt crisis with a little-known benefit that’s a win-win for both companies and employees: tax-free employer student loan contributions.

In 2020 and 2021, COVID legislation paved the way for this benefit by extending the IRS’ definition of tax-free educational assistance to include employer contributions to student loans until 2026.

How it works

Under IRC Section 127, employers can contribute up to $5,250 per employee per year to an employee’s student loan under an employer educational assistance program. These contributions are tax-free, meaning employers don’t have to pay payroll taxes and employees don’t have to pay income taxes on the contributions.

The five main legal requirements of this benefit are that:

1. Employers create a formal written educational assistance plan before offering the benefit.
2. Employers provide reasonable notification of the availability and terms of the benefit plan to eligible employees.
3. The plan does not discriminate in favor of “Highly-Compensated Employees” as defined by the IRS under IRC 414(q).
4. The program must not provide more than 5% of the educational assistance benefit to shareholders or owners (or their spouses or dependents) who own more than 5% of the company.
5. The program must not make eligible employees choose between educational assistance and other forms of compensation that are otherwise includible in gross income.

Since Section 127 governs all educational assistance programs, any employers with existing tuition assistance and reimbursement programs can easily amend their benefit plans to include employer student loan contributions.

We are at the forefront of a benefit adoption curve that has been put on pause for the past 3 years. Prior to the pandemic, 8% of employers offered employer student loan repayments as a benefit when it was still taxable. In the middle of the payment pause, 31% of employers were considering offering some form of student loan assistance within the next few years. Throughout the pandemic, the percentage of employers offering employer student loan repayments as a benefit has remained steady at 8%, but now that student loan payments are resuming and the benefit is tax-free, we will undoubtedly see a continued uptick in interest in this benefit.

Related: Student loan payments are resuming: It’s time to roll out financial wellness benefits

Many employers have not been aware that this benefit exists, but it is one of the most impactful benefits an employer can currently offer. So impactful, in fact, that the IRS recently held a webinar to promote awareness and adoption of this benefit ahead of payments restarting.

If there’s one thing employers should know as payments restart, it’s this: we have the opportunity to mitigate the effects of the student debt crisis on our businesses. We can reduce the downstream effects of payments restarting, while simultaneously providing a prescriptive tool for employees’ financial wellbeing, with something as simple as a student loan contribution benefit. How great is that?

Mick MacLaverty, CEO of Highway Benefits