College Debt A Significant Drag on Millennial Employee Retirement Plan Participation

July 6, 2016

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The numbers are in: 25-35 year-olds are contributing far less than expected to retirement and other savings plans – and sky-high monthly college debt service requirements are a big part of the reason why.

According to data from EdVisors, those graduating from college in the year 2015 are leaving school with a record $35,051 in student loan debt, on average. Assuming a monthly interest rate of 6.8 percent and a 10-year debt repayment, that translates to $403 per month.

If you’re wondering why your employees aren’t contributions the maximum to their 401(k)s, or buying starter homes in your city, for that matter, this is why: It’s a lot tougher to qualify for a mortgage or even an apartment when you are already paying half a starter home mortgage before you even enter the work force. Indeed, that monthly payment would fully fund an entire IRA and then some, if it were available for long-term savings.

According to a recent survey by the Plan Sponsor Council of America, fully 1/3rd of Millennial employees report that student loan debt is a moderate or high barrier to saving for retirement. In the notoriously low-paying service industry, this figure amounted to over 42 percent. But the problem is not limited to service workers, by a long shot: The number of Millennial workers reporting that student loan service obligations were a moderate or high barrier to saving for retirement was even higher in the technology and telecommunications industry, where fully 45.5 percent of respondents reported that monthly student loan payments were hamstringing their ability to contribute to their own retirement funds.

Do employers have a role? 

Naturally, employers want to remain competitive when it comes to recruiting and retaining top talent. But when it comes to Millennial workers – at least the 69 percent of them who are graduating with college debt, according to the Pew Research Center – a generous 401(k) match and fantastic selection of available funds isn’t going to be much of a draw: If you can’t afford to contribute salary deferral contributions to your 401(k) and still pay your monthly bills, even a dollar-for-dollar match on the 401(k) won’t do you any good.

Further, we know that a huge number of these former students are struggling: Nearly 25 percent of outstanding student loan accounts are currently either delinquent or in default. That doesn’t include an unknown number of accounts who are one layoff or one setback away from default themselves.

“As the cost of tuition and the significance of a diploma continue to rise, many employers are considering new benefit programs to help future job entrants with the cost of 4-year college degrees,” said Hattie Gretna, head of the research department at Plan Sponsor Council of America.  “Employers may need to think about student loan debt in their efforts to educate Millennial employees about the benefits of saving for retirement, perhaps using a more holistic approach to financial education.”

What Can Employers Do? 

When it comes to direct assistance to employees with educational expenses, employers have two basic options:

1.) Sponsor a tuition assistance plan. These plans providing direct cash assistance to employees who take classes. Under current law, employers can deduct up to $5,250 per year in such expenses per employee – without generating taxable income to the employee. While these plans are great for those still trying to complete their schooling, or who are interested in going to graduate school or pursuing future certifications and credentials, they don’t provide much value for those who have already finished college, or who dropped out for whatever reason and still have outstanding student loan balances.

Tuition assistance plans have become very common – especially among larger employees, with over 70 percent of employers offering a tuition assistance plan in some form, according to the PSCA.

2.) Provide student loan repayment assistance. Employers can design a monthly or annual benefit designed specifically to help those with student loans pay down their loans. While these programs are not yet common (Only about 1.4 percent of employers currently offer such a benefit to new hires, according to the PSCA researchers, though that number is growing fast), they provide far more direct appeal to recent college students and graduates with student loans.

Currently, tax benefits are limited for these programs: Employers can generally deduct amounts they pay to student loan servicers on employees’ behalf, or cash payments to workers themselves as compensation expenses. But employees will still have to pay income taxes on the amount they receive in student loan repayment assistance.

While the current number of employers offering this particular benefit is still low – only about 2.9 percent of employers with 5,000 employees or more are currently offering the benefit, about 11.5 percent of employers are considering offering it, while 30 percent are undecided. Among employers with 5,000 employees or more, 22.6 percent of them are now actively considering offering a student loan repayment assistance program, with another 32.3 percent undecided.

The industry leader in considering a student loan repayment assistance program is the telecommunications industry, with 20 percent of employers of all sizes surveyed indicating they are considering adding a program. More than 14 percent of financial services employers, 16.1 percent of manufacturers and 16.7 percent if insurance and real estate industry employees are considering adding a student loan repayment assistance.