Newest Employee Perk Aims to Help Workers Navigate A Tricky Tradeoff: Pay Off Student Debt or Save for Retirement?

David Proudfit has a goal to pay off his student debt by the middle of 2020.

He's getting some unexpected, targeted help along the way: CSAA Insurance Group, where he's worked for nearly 11 years.

The AAA subsidiary launched a student loan repayment program for its 3,700 employees last February. With the new program, Proudfit is directing part of the company’s retirement contribution—which he wasn’t previously earning as his family focused on paying down debt—toward his student loans.

As a result, CSAA is throwing in $355 a month toward his student loans. That’s on top of what Proudfit, who is a manager of service operations in the Glendale, Ariz. office, is personally paying.

Proudfit’s company is offering the newest form of a growing benefit trend: An increasing number of companies are giving employees money and other assistance to help them pay off their student debts, and a small segment of companies within that group have begun tying the benefit to already-existing retirement plans.

About 8% of companies offered some kind of student loan benefit in 2019, according to a survey conducted by the Society for Human Resource Management. That's up from 4% in 2018. That benefit can mean anything from access to an advisor to walk employees through repayment strategies to direct payments toward their debt. Since the idea entered the mainstream in 2016 with major employers like PricewaterhouseCoopers, Penguin Random House, and Fidelity, it’s generated plenty of buzz, even though it’s available to only a small slice of the workforce.

The appeal for companies is fairly straightforward: The labor market is tight, and they need to recruit and keep the best employees. And by linking the program to already-existing retirement benefits, the companies aren’t necessarily spending more money than they’ve budgeted for, says David Krasnow, who in 2018 founded Thrive, a platform that manages student loan repayment benefits for more than 50 companies.

And the appeal for employees is clear, too. Many workers prioritize paying off their student loans over saving for retirement, and these programs aim to help them to do both. The average 401(k) balance for millennials is just $29,400 for millennials and $116,400 for members of Gen X, according to Fidelity.

At CSAA, 60% of the workers who’ve signed up for the new student loan benefit weren’t previously taking full advantage of the company’s 6% retirement match. In fact, billions of dollars in 401(k) matches go unclaimed each year, Krasnow says. And he thinks for younger workers, student debt is a big reason why. "If you're 30 years old, it's pretty difficult to focus on what the future looks like 30 years down the road if you owe all this money," he says.

The drawback to the benefit is that nearly every employer currently has to cover payroll taxes on the amount it pays out for student debt, unlike on retirement plan contributions. And perhaps more importantly, employees who receive the benefit also have to pay taxes on it.

Taking a Unique Approach

The one exception may be Abbott Laboratories. Last year the medical device company got permission from the IRS to expand its existing 401(k) program to allow an employees' student debt payments to qualify for deferred retirement contributions. Employees have to show Abbott that they're putting at least 2% of their salary toward their student loans, and in return, Abbott will put in its full 5% contribution toward their 401(k).

Abbott’s senior human resources team began working on the idea back in 2015, when they were looking for innovative ways to both distinguish themselves as an employer and to fill employees’ needs.

The company, with headquarters near Chicago, didn’t want to just give people more cash to pay down their loans, says Mary Moreland, executive vice president of human resources. Her team wanted to create something that’d align with the company’s philosophy of promoting long-term financial security.

“Every decade you don’t save for retirement, the amount that you have to save to get to the same place basically doubles” she says. “This program says, ‘we’ll save for you while you’re paying down student loans.’”

Roughly 1,000 employees have signed up for the benefit so far, and about two-thirds of these enrollees were hired in the past two years. The average amount of debt of participating employees is $47,000. (That’s higher than the national average for bachelor's degree holders, though it likely reflects the large share of Abbott’s workforce that has graduate degrees.)

To help employees understand the benefit, Abbott created a calculator to show them how much they're saving in interest by increasing their monthly payments to pay off their loans quicker. An employee with a starting salary of $70,000, for example, would pay off her debt three years earlier by diverting an additional 2% of her pay toward debt repayment, according to Abbott’s calculations. She’d also have more than $50,000 saved for retirement—assuming annual raises and a 6% annual return—without ever having contributed toward her 401(k) herself.

Moreland called the benefit an “incredible retention tool,” but she added that it’s too early to have any actual data on that.

Abbott's ruling from the IRS applies only to its own retirement plan. It's not something other companies can rely upon to introduce their own tax-free student loan benefit. A group of organizations representing companies and the benefits industry has pushed for guidance from the IRS that would apply more generally and consider issues not included in the private letter ruling. But that sort of broader ruling would likely require action from Congress, says Aliya Robinson, senior vice president of retirement and compensation at The ERISA Industry Committee (ERIC), one of the organizations that's asked for more clarification. Until the regulations change or Congress weighs in, most companies will be cautious in following Abbott's lead and tying student loan payments to tax-deferred retirement contributions, Robinson predicts.

That means most companies choosing to add a student loan benefit will stick to a taxable contribution outside of the actual 401(k) program, even if the amount offered is based on the retirement match.

Tackling Dual Goals

Perhaps surprisingly, retirement experts have found that young workers with student loans participate in their workplace retirement plans at the same rate as their peers without loans. The big difference is they save less—about half as much as their loan-free counterparts, according to a paper from the Center for Retirement Research at Boston College.

Another interesting finding was that among workers with debt, there was little difference between the amount saved by those with a small loan balance versus those with a large loan balance. You’d expect those with a smaller debt burden to have more room in their monthly budget to contribute to a savings plan, says Matthew Rutledge, an associate professor of economics at Boston College and co-author of the paper. Yet that wasn’t the case.

"They're not making financial decisions based on how much they can afford, but rather based on their phase of life," he says. "They're either in a student loan repayment phase or a retirement phase."

These newer benefit programs can target that mental hang up, he says. And the best ones will encourage workers to save more for retirement while simultaneously paying down loans quicker. That way they can capitalize on compound interest for retirement savings while reducing the total interest paid on student debt.

Shannon Ramirez was working as a consultant for Abbott when she heard about the new benefit. It was one of the reasons she sought a full-time position with the company, to help her pay down just under $60,000 in federal and private loans.

Now the 43-year-old works in Abbott’s Minnetonka, Minn., facility as a learning and development supervisor and plans to graduate with her bachelor’s degree in organizational leadership next winter. She’s been attending college part-time for nearly 10 years, taking time off to raise her children and support her family.

The program has helped reduce the financial stress on her family. She and her husband no longer have to choose between paying off debt or saving for the future, she says.

“Those conversations are really a thing of the past.” she says. Instead, she’s able to start thinking about other financial goals, including buying a home.

“It’s helping us live our lives to the fullest.”