Tips for Launching a Student Loan Repayment Benefit

January 25, 2018

 

While the overall number of employers who offer student loan repayment assistance as an employment perk is still relatively low – about 4 percent of employers offer it, according to the Society for Human Resources Management – student loan repayment assistance is one of the fastest-growing employment benefits in business today. Here we discuss some tips for launching a successful student loan repayment benefit.

The situation

At present, larger companies are about twice as likely to offer a student loan repayment program benefit to employees, compared to employers overall. Among companies with 40,000 employees or more, about 8 percent offer student loan repayment assistance benefits as part of the employee benefit package.

Why does it make sense to do so? Employers say they offer it because it’s a cost-effective way for them to distinguish themselves from the pack when it comes to recruiting talented 20 and 30-somethings and others struggling with student loan payments.

Student debt may also be holding employees back from fully participating in company 401(k) plans and other voluntary benefits programs. With the average student loan payment now topping $351 per month for workers between age 20 and 30, according to StudentLoanHero.com, many employees are putting off 401(k) contributions in order to keep current with their student loans.

Employers with no benefits targeting this age cohort are reporting problems with employee engagement, which in turn leads to higher rates of presenteeism and higher turnover. And as we reported in this space in The High Cost of Millennial Turnoverit costs companies between $15,000 and $25,000 to replace every millennial employee they lose.

Furthermore, when junior employees aren’t participating in the company 401(k) plan, it limits the ability of senior employees to participate, too, thanks to “top hat” rules designed to encourage companies to provide incentives to participate in 401(k) plans. When employees don’t participate, they don’t have an incentive to stick around at least until their employer contributions vest, and senior management and highly-compensated employees can’t contribute as much to their own 401(k)s.

“Student-loan repayment assistance has the potential to affect more than 44 million Americans burdened by student loan debt,” said Scott Thompson, CEO of Tuition.io, a benefit administration firm [disclosure – Tuition.io is the parent and sponsor of this blog]. “The $1.4 trillion student loan crisis has … heightened financial stress, which can lead to disengagement in the workplace,” he noted.

It therefore makes a great deal of sense to make direct benefits available that employees struggling with hundreds of dollars per month in student loan servicing on relatively modest incomes can use now, while moving them along to contributing to 401(k) plans as soon as possible.

Providing educational assistance, to include student loan repayment assistance, is a natural solution – and one embraced by a growing list of employers, including Fidelity Financial Services, Pricewaterhouse Coopers, New York Life, STAPLES, Mercer, Aetna, Chegg, Natixis and many others.

How to get started

If your firm needs to attract and retain quality talent, particularly in the 20-40 demographic, it may make sense to start or expand a student loan repayment program for your company, say experts.

First, design a program that you can afford to sustain. Many companies are targeting a $100 per month benefit, or $1,200 per year. But in practice, many small employers are starting with contribution levels around half that. It is still big enough to make a noticeable dent in many employees’ student loan payments each month. Meanwhile, employers still have the flexibility to surprise employees to the upside by providing a bonus payment at the end of the year,  designed to get employees out of debt faster.

Simplicity Rules. While no two companies are exactly alike, the most successful rollouts are often the simplest. Keep the paperwork down to a minimum, and make it easy for employees to enroll.

Make sure workers have skin in the game. Some employers require workers to continue making at least the minimum required monthly payment on the loan themselves to continue participating, or they work out a percentage of the minimum payment that’s acceptable to both the worker and employer.

Be sensitive to tax consequences. While there is legislation pending in Congress to address this, any benefits paid in student loan repayment assistance are taxable to the employee, under current law. If benefits are too high relative to a worker’s overall wages, the worker could get an unexpectedly high tax bill come the following April. Ensure workers understand that the benefit is taxable.

Take advantage of direct deposit discounts. Most student loan servicers give a significant discount on interest if the borrower makes payments via direct debits. To maximize this benefit, help employees sign up for direct debit via their banks, and make your own contributions via direct debit through Tuition.io or a comparable vendor with expertise specific to student loan repayment assistance.