Employer Benefits Target Student Loan Debtors
- December 3, 2016
- Posted by: Jeff Gitlen
- Category: Student Loans
Total American student loan debt crossed the $1.4 trillion mark as the class of 2016 graduated with a record average loan balance of $37,000 per graduate. While the cost of college has continued to increase each year, new graduates require more time to repay their student loans than previous classes. To help alleviate historically high student debt burdens, employers are increasingly introducing student loan reimbursement benefits to attract and retain Millennial talent.
While a recent survey showed that nearly 80% of Millennials would like to work for an employer that offered reimbursement benefits, while approximately half of the same survey respondents would decline a 401(k) match for student loan reimbursement benefits, very few employers currently offer it. Although, many employers do offer tuition assistance for continuing education for current employees. At the moment, approximately 4% of all U.S. employers offer this benefit by helping new and current employees match a portion of their monthly student loan payments. This small number of employers is slowly growing as only 3% of all employers offered reimbursement benefits in 2015.
How Valuable are the Benefits
Currently, most of the participating employers are in the technology or student loan industries, but companies within the financial and health industries have also begun offering reimbursement benefits as well. Each company has a different reimbursement policy, although there are some common trends. Benefits are available to new and current employees. Many companies will pay approximately $200 monthly ($2,400 annually), although some pay less and other companies might pay up to $600 each month.
Some companies will stop paying benefits after 5 years while others will continue offering benefits until the entire student loan balance has been repaid. To “max out” the monthly employer contribution, the employee needs to pay a similar amount. For example, if a company will contribute $200 each month, an employee will only receive the full amount if they pay at least $200. If they pay a smaller amount such as $150, the employer will contribute $150 for that month.
The one uniform trait common to all employer student loan reimbursement packages is that the benefits are considered taxable by the IRS. Federal lawmakers have introduced legislation to make reimbursement benefits non-taxable, similar to traditional 401(k) and employer-sponsored healthcare premiums. Until the Student Loan Repayment Assistance Act is passed, all employer student loan contributions will be considered taxable income. But, any reimbursement benefit, even if it is taxable, will help student loan debtors repay their loan balances sooner than if they did not receive any benefits at all.
How Much Money Can Tuition Reimbursement Benefits Save?
As the average 2016 college graduate has $37,000 in student loans to repay, the estimated monthly payment for a 10-year loan with an interest rate of 6% is $410.78. After 10 years of making the minimum monthly payment, the graduate will pay approximately $12,293 in interest charges. By working for an employer that contributes $200 each month for the life of the loan, the loan is instead paid off in approximately 6 years and only $7,150 in interest payments. Even if the benefits are taxable, the savings in interest payments are probably worthwhile for many.
How Employers Benefit by Offering Student Loan Reimbursement
Student loan reimbursement is an attractive option to a new 22-year-old college graduate as they place greater emphasis on repaying their student loans as quickly as possible. Millennials are the most indebted generation to enter the workforce because of the staggering costs to earn a college degree. To afford the high monthly payments, certain graduates pursue employment with companies that do not necessarily maximize their skills but offer a starting salary high enough to make the monthly student loan payment and other monthly bills like rent, utilities, and insurance. Student loan reimbursement, even if it is only $2,400 per year can be very valuable by offsetting the monthly interest charges and allowing each employee to prepay their loans.
As Millennials are now the largest living generation within the United States, they will soon wield more influence in the labor market. Student loan reimbursement helps employers retain talent as new graduates have more incentive to remain with the same employer to keep earning the reimbursement benefit and become debt-free sooner. There will always be employee turnover in every industry as individual employee needs change with getting married and starting a family, but a good benefits package helps convince many workers to remain loyal to their current employer.
Referring to the same survey that indicated approximately half of all Millennial employees would choose tuition reimbursement before employer-matched 401(k) contributions, these benefits can also be more valuable and attract more applicants for particular job positions. This can mean more work to find the most qualified candidates as each generation emphasizes each employee benefit differently. Most Gen Xers and Baby Boomers did not graduate college with $37,000 or more in student loans. They were able to use their salary to begin saving for future expenses like retirement and placed great emphasis on 401(k) contribution matching. While Millennials also value 401(k) matches, most of their monthly budget is dedicated to student loan payments, instead of increasing their 401(k) balance. As new graduates have 10 years to repay their loans and 40 years to save for retirement, timely student loans payments are a larger priority to many.
What is the Future of Employer Student Loan Reimbursement Benefits?
As the trend of higher education costs continuing to rise each year does not appear it will reverse anytime soon, each new graduating college class is going to be seeking any help they can receive to reduce the sting of student loan payments. Whether it is income-based repayments, federal student loan forgiveness programs, refinancing, or employer reimbursement benefits, student loan repayments are a high priority for Millennials. While it is still unclear if every company will offer tuition reimbursement, an increasing number of companies indicate that this benefit is gaining popularity across the private sector.
If the Student Loan Repayment Assistance Act is passed by Congress and signed into law, making employer contributions tax-exempt, there will be more incentive to begin offering these programs. So far, most of the participating companies have small payrolls, but the real litmus test will be when larger employers across many industries begin adopting their own reimbursement benefits to help attract and retain new graduates.