Need For Student Loan Help Greatest Among Low-Wage Workers
January 27, 2016
How much debt are students carrying?

How much debt are students carrying? Turns out the ones who owe the least need the most help.

Employer-sponsored student loan repayment assistance programs are becoming more and more common among organizations that pride themselves on great compensation and benefits. In many instances, employees who work for these companies owe a tremendous amount in student loans – they are often lawyers, or have master’s degrees that helped them land jobs with such reputable organizations.

For these employees who tend to owe the most in student loans, student loan payments as an employee benefit can help tremendously. However, studies show that there is an underserved group of workers who need the help even more: workers who owe the least. Research from the Brookings Institution indicates that the smaller the loan balance, on average, the greater the default rate among borrowers.

Writing for the Brookings Institution, economist Susan M. Dynarski asserts:

“The fact is that default is highest among those with the smallest student debts. Of those borrowing under $5,000 for college, 34 percent end up in default. This default rate actually drops as borrowing increases. For those borrowing more than $100,000, the default rate is 18 percent. Among graduate borrowers—who tend to have the largest debts—just seven percent default on their loans.”

Why is this the case? Earnings, Denarski argues. Those with the biggest loan balances also generally managed to complete their degrees or graduate degrees, and have at least some power to command something above minimum wage. They’re also more likely to have full-time jobs, health insurance and all the goodies that come along with it.

The ones who borrowed less than $5,000 for college, however, often did so to attend two-year programs, trade schools, certificate programs or associates’ level training at for-profit schools that do little or no screening.

These workers typically command the lowest wages, as well, and have relatively high unemployment rates compared to their more affluent cohorts who graduated traditional four-year colleges and universities. From a recent Brookings Institute study by Adam Looney and Constantine Yannelis:

The median borrower from a for-profit institution who left school in 2011 and found a job in 2013 earned about $20,900—but over one in five (21 percent) were not employed; comparable community college borrowers earned $23,900 and almost one in six (17 percent) were not employed. At the same time, the median loan balances of non-traditional borrowers had jumped almost 40 percent (from $7,500 to $10,500) for for-profit borrowers and about 35 percent (from $7,100 to $9,600) among 2-year borrowers – driven by greater financial aid eligibility and need, higher loan limits, cuts to state aid, the impact of recession on household finances, and increased tuition costs. These debt increases were much larger among non-traditional borrowers than for borrowers from 4-year public and private institutions, or for graduate borrowers.

So the most desperate need for tuition repayment assistance isn’t at the higher end of the socioeconomic spectrum necessarily. It’s at the lower end – where balances are much lower, wages are much lower, and discretionary income is extremely scarce.

Employers are catching on, though, and more companies are attracting debt-burdened millennials, in part, via student loan repayment assistance and debt repayment assistance. The reason? It’s what younger workers want and demand in today’s marketplace. Yes, large companies are jumping on board. But employers in lower-wage sectors, such as food service, are also jumping on the opportunity as well.

Currently, about three percent of private employers are offering student loan repayment plans as an employee benefit, according to research from the Society of Human Resource Management. But 8 in 10 workers with student loan balances say they want to work for companies that offer this perk as an employee benefit. Among college-educated millennials, this metric is beginning to outpace interest in the 401(k) as the retention/recruiting benefit of choice.