By In Budgeting, Other Voluntary Benefits, Student Loan Debt

The Benefits of Employer-Provided Student Loan Debt Pay-down

Why are an increasing number of employers offering benefits that address financial wellness, including student loan payoff? Simply put, it’s good for their business. A non-distracted workforce equates to more productivity. It is also a powerful recruitment tool.

While there are benefits to employees who are trying to get out from under the yoke of student loan debt, are there better ways to protect one’s financial future? Before you sign up for the company student loan debt repayment benefit, there are some things you need to consider.

The impact of student loan debt

Student loan debt has reached a whopping $1.53 trillion, according to the US Federal Reserve. This number represents 44 million Americans who are impacted by considerable debt, largely skewed, as you’d expect, by millennials. In 2018, 70 percent of college students will graduate with an average of $36,000 or more due in student loans. This means that unless a high-paying job is immediately available, the average new college graduate hits the job market struggling to find a job earning at least enough to maintain some standard of living while he or she is paying student loan payments that often exceed monthly rent payments.

Forget about retiring early under these conditions — you just want to avoid having to live with your parents until you are 50.

This problem also affects parents who have co-signed on student loans, and are now dealing with “boomerang kids” who have moved back into the family home because of a lack of employment. A Merrill Lynch and Age Wave study indicated that as many as 79 percent of parents are providing some level of financial support to their adult children, a total of $500 billion annually. One in five are those who have returned home due to lack of financial stability. The largest share of the financial burden (60 percent) goes to food and groceries, followed by repayment of student loans (27 percent). It’s unfair that older Americans are putting their own dreams of retirement on hold as the next generation has become crippled by debt. And it’s equally unfair to young people starting out to have to put off their own dreams (including retirement) to live in mom and dad’s basement.

There’s also the fact that one in four borrowers go into default each year, which opens up a whole other set of problems — absenteeism, poor financial choices, and even depression, to name a few

It can be easy to see how company benefits like financial wellness and student loan repayment programs are attractive to many working adults. Eliminating student loan debt can take the pressure off so that an individual can focus on building a life, a career, and reducing reliance on parents to pay the bills.

Tax implications of student loan repayment benefits

It’s important to consider the tax implications of participating in student loan benefits (and weigh the pros and cons). With the exception of tuition reimbursements, payments made by the employer towards student loan debt is considered taxable income, which can put someone into a higher tax bracket. This is something that should be reviewed by a qualified tax professional if you are earning at the top percentile of your career. However, paying down a student loan faster can reduce late fees and added interest—shaving years off a loan repayment schedule.

It’s important to note that the dollar amount of student loan repayment benefits varies by company, but even receiving a few thousand dollars a year from an employer can reduce the principle and shorten the loan repayment time. Over a five-year period, and combined with your own debt paydown strategies, this could lead to a multiplier effect of savings. This also provides the opportunity to put more money into a retirement savings plan sooner, which can increase the rate at which your nest egg grows. Not participating in the student loan program and taking advantage of the extra funds doesn’t support a better retirement. It means throwing money away on high interest.

What kinds of student loan debt reduction programs are employers offering, and what is the optimal choice?

Fortunately, companies are seeing that helping employees tackle student loan debt is as good for them as it is for you — take advantage of that generosity to further your FI goals. Here’s a rundown of some of the most common benefits offered.

Online budgeting tools – Using online financial applications can empower anyone to create a monthly budget, pay down debt, and set financial goals for the future. Lifestyle resources can also help those dealing with the crushing effects of stress due to debt.

Student Loan direct payments – A growing number of companies are offering direct payment of student loans for eligible employees. Requirements may vary by company. Some offer monthly payments, while others provide an annual bonus for employees who are working towards paying down their debts.

Tuition reimbursement – The Society for Human Resource Management (SHRM) found that about half of all organizations offer some form of tuition reimbursement. This can help defray the costs of going back to school for career-related skills, which reduces future reliance on student loans. These aren’t widely advertised at all companies, so be sure to check with your HR manager to see if 1) your company offers tuition reimbursement, and 2) if you qualify.

Employer contributionsPayroll deductions and contributions to 526 college savings plans and retirement savings accounts are also ways that employers help employees to reduce debt. The benefit is based on a number of factors. For example, one employer program contributes a 50-percent extra payment into the tax-deferred 401(k) for every dollar the employee pays towards the student loan. Other companies pay year-end bonuses stemming from profit shares, distributing the funds to the student loan holder directly. The average payment made on behalf of participants is anywhere from $4,000-$7,000 annually.

Financial counseling – In order to help you get on the right track with all debts and investments simultaneously, financial counseling benefits are valuable. The way it typically works is, employers offer a certain number of sessions with a financial advisor who can help you make a plan to reach your financial goals. These counseling services are typically confidential and independent of your employer, so they can definitely be worth if if your employer offers them. Whether it’s paying down debt, creating a budget, or planning for early retirement, this can be a good option for anyone.

Are there other ways to deal with student loan debt for a better retirement?

Student loans are something that many educated adults will have to contend with at some point in life. Not letting loan payments get behind is the first defense against late fees, penalties, and a ruined credit history. If needed, seek financial counseling and refinance student loans to make monthly payments more affordable. Income sensitive repayments and deferments are available in some cases. Use these opportunities sparingly because interest will still accrue. Taking a part time job or earning income from a side-business or investments can help to pay down debt fast, while allowing for additional income to be added to tax-deferred retirement.

Stay tuned to The Benefits of FI for more tips on paying down your student loan debt quickly and efficiently, regardless of what your employer is offering in the way of help.

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