Why does the student debt of their workforce matter to employers?

Student debt is a pervasive issue for nearly 1 in 5 adults in the US, and a barrier to financial security for many of them. Its impact is disproportionately felt by workers who are Black, Latinx and women. As student loan payments resume this month after being paused for several years during the pandemic, the financial implications of student loan repayments on both short-term finances and retirement are on the minds of American workers.

But why does the student debt of their workforce matter to employers? There are three major reasons that employers need to be paying attention to developments in student loan debt repayment. First, student loan debt affects financial security and stress levels – which has an impact on a firm’s productivity and bottom line. Secondly, employers have increasingly recognized their role in employee financial wellness over the past several years – and student loan debt is a major part of the employee financial picture. And finally, there is potential for student loan benefits to impact equity, due to the disproportionate debt load carried by workers who are Black, Latinx or women.

Student loan debt’s impact on financial stress

A workforce under financial stress is a less productive workforce as well; employee financial stress costs employers $250 million a year. And more than 6 in 10 people with student loans report that they are a cause of stress. Despite the temporary relief provided by the CARES Act, 80% of those with student loans anticipate having somewhat or a great deal of difficulty keeping up with payments.

It’s not surprising that people would worry about covering the cost of their loans. According to data from the Federal Reserve, the typical monthly student loan payment is between $200 and $299 – and with more than half of Americans living paycheck to paycheck, the restart of student loan payments is a major financial moment in the lives of Americans. Commonwealth and the Defined Contribution Institutional Investment Association surveyed a small sample of full time workers earning low and moderate incomes and found the majority of respondents with student debt had over $10,000 in student loans – and respondents who are Black, Latinx or women were significantly more likely to have over $50,000 in debt than white respondents.

It has also become clear that student debt is a barrier to taking full advantage of a core employer financial benefit: retirement savings. According to Fidelity, the student debt payment pause correlated with an increased participation in retirement savings, with 72% of student loan borrowers contributing at least 5% to their 401(k), compared to 63% prior to the payment pause. There has also been a 5.8 percentage point decrease in student loan borrowers with a loan out against their 401(k) during the pause.

With 97% of employers saying that they feel responsible for employee financial wellness, considering the impact of student loan debt on your employee population is an important piece of the overall financial wellbeing and benefits landscape.

Considering employers’ role in student loan repayments

With the key role that employers play in worker financial security, benefits designed to support those burdened by student debt could be a major factor in overall worker financial wellbeing.

Policy decisions around student loan debt and repayments are in flux, but now is the time for employers to start thinking about what they can do when it comes to student loan benefits. Employers can consider offering guidance so employees can understand their repayment options, including eligibility for government assistance programs. Partnering with other providers to help with loan consolidation and refinancing is an additional option.

Employers can also examine direct loan repayments, made possible through policy. The CARES Act pandemic relief law in March 2020 expanded an existing tax break, allowing employers to pay up to $5,250 per year towards an employee’s student loans, tax-free for both the employer and the business. However, without further intervention from Congress, that tax break is set to expire in 2026.

More recently, the SECURE 2.0 Act – designed to boost employees’ access and participation in retirement savings plans – also offers a Student Loan Match Provision that allows employers to make matching contributions to retirement plans based on the employees’ qualified student loan payments.

The increased retirement contributions that occurred when student loan repayments were paused demonstrate the link between the two, and provide an argument for both benefits and policy that allow employers to build student loan repayment support for their workers.

There are still a number of elements employers must look at and work through around SECURE 2.0 and other policies, but their potential impact is important when weighing student loan benefit options, and should be considered as part of the landscape.

The potential equity impact of student loan benefits

It’s undeniable that student loan debt has a disproportionate impact on people who are Black, Latinx, or women. For example, Black college graduates owe $7,400 more than white college graduates – a debt gap that triples four years after graduating. Gender disparity in debt grows around 3% each year as well.

Disproportionate student loan debt may have a ripple effect: Latinx borrowers are most likely to delay getting married and having children due to student loan debt, and 46% of Black student borrowers were likely to put off buying a home.

It’s key to ensure that these benefits are designed to reduce financial burdens while allowing borrowers to allocate their resources in other ways, such as investing in their future or increasing emergency savings. And most importantly, benefits must be designed inclusively for all workers in need of student debt assistance. This means designing intentionally for systems change – not just individual behavior change; designing products that meet the needs, wants and aspirations of people living on low and moderate incomes; and giving workers agency over their financial lives. There’s a high impact opportunity to build student loan repayment solutions that change the products and channels that have been historically discriminatory.

Student loan benefits may offer an opportunity for employers to directly impact their employers of color, but understanding their employees’ diverse needs is required to create an equitable solution – as is designing benefit plans in response to those needs and tracking impact by race, ethnicity and gender.

Read more: SECURE 2.0’s student loan match takes effect in 2024: Are you up to speed?

One area that will require special attention from an equity perspective in the suite of potential student loan benefits is the SECURE 2.0 Student Loan Match Provision. While the legislation provides a new way for employers to assist students with debt, access to retirement plans is also inequitable – so employers focusing on this as their only solution may inadvertently exacerbate many of these equity issues.

As the conversation around student debt continues, employers are an essential part of the response. The first step is to include student loans in our thinking inclusively about overall financial wellbeing for our workforce. From there, we can build on provider solutions, government policies, and research and tracking around student loan repayments and equity in order to build student loan benefits programs that help reduce financial stress, improve financial security, and contribute to closing the racial and gender wealth gaps.

Nick Maynard is a senior vice president at Commonwealth, a national financial nonprofit that builds financial security and opportunity for all through cross-sector collaboration.