A New Tax Break Could Push More Companies to Help Workers Pay Off Their Student Loans
Retirement contribution? Check. Unlimited paid time off? Check. Gym reimbursement and flexible spending account? Check and check.
Paying off your student loans? That’s the new reality for a growing portion of employees in 2021, thanks to an under-the-radar change in tax laws.
Originally designed to expire at the end of 2020, a provision in the CARES Act is still giving employers tax incentives if they offer student loan repayments, similar to employer-sponsored retirement and health care plans. The change allows up to $5,250 per year in tax free loan repayment contributions. As of December 2020, those incentives have been extended for at least five years, and employers are starting to take notice.
Student loan benefits are not a brand new phenomenon — big-name companies like Estée Lauder and Staples have offered various forms of repayment programs for years — but they’ve been pretty niche: A 2019 report from the Society for Human Resource Management found that just 8% of companies offered some form of student debt repayment to employees.
The key difference now is that employers can contribute money without having to pay taxes on it, making the benefit a better deal for both employers and employees. Based on that same report from the SHRM, the permanent implementation of a tax exemption could eventually increase employer participation rates from less than one in ten to one in three.
“Student loan benefits create a lot of interest from employers, but without a tax exemption it was very challenging for them to get final approval from executives,” says Greg Poulin, co-founder and CEO of Goodly, a student loan benefits provider.
In their most basic form, student loan benefits work like this: Employees who enroll in the program through a benefits provider like Goodly continue to make their regular monthly payments as usual (both federal and private loans are eligible), while employers go in and make secondary payments to the principal amount. The result is that, if you’re an employee, you can more quickly and aggressively pay off your debt. But up until this tax change, employees would have had to pay income taxes on the amount their employer contributed to their student loans.
According to Goodly’s data, employer contributions increased 50% over the past year, from an average of $100 to $150 per month, which Poulin attributes to the tax break. He also believes the benefit is such an attractive opportunity that employee enrollment in Goodly’s student loan benefits programs has been steadily growing over the past year, despite the fact that federal borrowers haven’t had to make any payments at all.
Although he expects to see a boost in enrollment after the forbearance period ends in September, Poulin says that if your employer is already offering repayment benefits, it’s best to start taking advantage sooner, rather than later.
“Right now is actually the best possible time to be repaying your student loans because interest has also been suspended, so any payment is going towards the principal,” he says.
For those with six-figure levels of debt, like many master’s degree holders, employer contributions may be nice, but they’d only amount to a drop in a bucket overall. But with the average American borrower having a student debt load of $37,500, the contributions could bring about significant improvements in many employees’ financial health. A 2019 report from the AARP found that an extra employer-sponsored repayment of $100 each month would result in the typical student loan borrower paying off their debt in seven years as opposed to the usual ten.
Around 62% of seniors at public and private nonprofit colleges graduated with student loan debt in 2019. And research from Georgetown University found that approximately 70% of jobs can be considered “bachelor’s-level” positions based on how many degree-holders work them and get paid more than their non-college educated counterparts.
All that’s to say: As more jobs require degrees and more college students take on debt in order to obtain those degrees, student loan repayment benefits can be an attractive incentive for a younger, more diverse talent pool with uniquely burdensome student debt loads. A faster repayment period allows workers to put more money toward the future, as opposed to just paying off the past.
“It’s difficult to do things like save for retirement, let alone think about things like saving to buy a house or start a family when you’re repaying such high student loan debt,” Poulin says.
For many employers, the decision to implement these benefits often comes down to making their companies more competitive at recruiting and hiring top talent.
Zach Wray, president and CEO of Sunrise Community, a non-profit organization providing care for people with disabilities, says it adopted the new benefit in February. The organization is hoping it helps with recruitment and retention, even though less than 5% of its 3,000-plus positions require more than a high school diploma.
“As recruitment and retention continued to be problematic for our whole industry, we wanted to really stand out,” he says. “We thought this would make us more attractive to people just getting out of school who might want to pursue this as a career.”
But for some employers, the most important aspect of the benefit isn’t just that it’s a useful recruitment tool.
“Our team is approximately 80% women and three-quarters ethnically diverse,” says Dr. Vik Bakhru, chief operating officer and chief financial officer of ConsejoSano, a virtual platform that connects underserved populations with health care providers. “So the first thought that comes to mind is how do we put into place the right policies, the right procedures, the right benefits that allow our team to be successful.” (Data show that women and Black and Latino borrowers tend to be disproportionately burdened by student debt.)
In the case of ConsejoSano, which just implemented employer-sponsored student loan repayments through Goodly at the beginning of 2021, those who enroll in the program start off with a $50-per-month contribution. Over the course of four years, the contribution can rise to up to $400 a month. So far, Bakhru says around 20% of employees have signed up, which tracks with his estimation that approximately one-third of full-time positions within the company require a secondary education.
One criticism of this benefit is that it does nothing for employees who either didn’t go to college, didn’t borrow for college or have already paid off their debt. That’s why Bakhru and his team are working to implement different college-related benefits that can satisfy the needs of the other two-thirds of their workforce.
“We hire from the communities we serve, and sometimes that means we hire individuals who haven’t yet gone through a formal educational program,” he says.
Bakhru says that later this year ConsejoSano will be adding employer contributions to a 529 college savings account, also through Goodly, to help serve employees who might choose to further their own education or prepare for their childrens’.
“We will find a way to impact every team member whether it’s through historical financial needs or future ambitions to improve one’s educational level,” says Bakhru.
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