Once a rare employee benefit found only at large, high-end accounting, law and tech firms, student loan repayment benefits are growing rapidly as a way to lure young talent with hot degrees.
It’s not surprising that the desire for help repaying student loans would be popular. According to the Report on the Economic Well-Being of U.S. Households in 2016 – May 2017 from the Federal Reserve, 63 percent of college students ages 18-29 indicated they acquired debt to finance their bachelor’s degree. And 69 percent took out loans to pay for their graduate studies.
So, how much do recent graduates owe?
Student Loan Hero estimates that the average debt for graduating seniors with student loans rose to $39,400 in 2017, up 6 percent from the previous year. In 2012, the average debt for a four-year public college degree was $25,500.
What started as a big-company benefit may be poised to trickle down quickly to small and medium-sized businesses as competition for employees continues to grow. In fact, some experts predict student loan repayment assistance to grow faster in smaller companies that have fewer levels of decision-makers.
Take this example of how student loan reimbursement could help the average employee:
Say your new hire has a student loan balance of $26,500 with a 4 percent interest rate and a ten year repayment term. An additional monthly employer contribution of $100 would save the employee over $10,000 in principal and interest. And the loan would be paid off three years sooner, according to Gradifi, a company that specializes in helping businesses establish this benefit.
Should your company consider offering this new perk? Here are some questions to consider before adding student loan repayment reimbursement to your complete benefits package.
Student loan repayment assistance: Questions to ask
While it’s natural to want to help employees in a tough spot, especially one that lasts as long as debt repayment, right now there are still more questions than answers when it comes to offering this benefit to your workers.
Just a few of the many questions to consider are:
- How will a student loan reimbursement program fit within and impact your complete benefits package?
- How much will you offer? Some companies offer as little as $50 a month, while others offer $5,000 a year.
- Will you match the employee’s contribution up to a certain amount annually, much like a 401(k) company match?
- Will you limit the total amount you’ll contribute over five years? 10 years?
- Will this benefit only be available to new employees? Employees who graduated less than 10 years ago? All employees?
- Will you help employees with other types of loan repayment, such as for cars or houses?
- Will it cause resentment among those employees who don’t receive this benefit because they don’t have student debt?
- If you hire two recent graduates and one has student debt and the other doesn’t, will you offer the non-debt-laden employee extra salary? Will it be fair if you don’t?
- How will you ensure the money actually goes toward student debt reduction? Will you require copies of their loan statements or pay directly toward the loan?
- Will you offer the benefit for private and federal loans, or only federal loans?
- How will you create an atmosphere of inclusiveness by communicating that this benefit applies to more than the ages 18-29 crowd?
As with any new benefit, it will be important to consult with a tax specialist to fully understand the costs and potential advantages to both the company and the individual, should you decide to offer student loan repayment assistance.
You’ll also have to make sure payroll is prepared to accurately process this taxable income and report it on your employees’ W-2 forms. Right now, student loan reimbursement qualifies as taxable income, but the U.S. Congress is considering legislation that would make such benefits tax-free, the same as tuition reimbursement.
Potential benefits of helping employees repay student loans
Since most student debt holders take about 10 years to pay off their loans, offering as little as $50-$100 a month can get employees out of debt years sooner.
And helping employees become more financially stable doesn’t just help the individual.
There can also be advantages to the company that supports financial well-being among its workers. A few of these include:
- It can help your organization recruit recent college grads. Multiple studies show that young recruits consider this a game-changing benefit that would make them more likely to go to work for a company that offered it.
- Recent graduates are better able to partake of their company’s 401(k) plan if they have less student debt vying for a portion of their monthly paycheck, and there are tax benefits when companies meet certain thresholds for 401(k) participation.
- It’s an appealing benefit for candidates with advanced degrees who often acquire debt in the six figures to obtain their education.
- It could round out your company’s educational benefits if you also offer employer tuition assistance, which currently lets companies reimburse workers up to $5,250 a year in tax-free tuition costs.
- Relieving some financial burden could reduce the stress and worry your workforce feels about having to repay large loans, which could boost employee productivity.
Tips for launching student loan reimbursement
The Society for Human Resource Management (SHRM) offers several tips for adding student loan reimbursement programs to your benefits mix, based on the experience of companies that have already done it. These tips are:
- Start slow. This can be one of the more expensive benefits to offer, so SHRM recommends offering $50-$100 a month to start. This allows your business to get a handle on true costs before expanding the program.
- Keep it simple. To encourage participation, keep requirements and paperwork to a minimum. This also makes it easier for HR to administer the program.
- Communicate clearly. Before they sign up for this benefit, make sure employees understand that it’s a taxable benefit, which means their paycheck will be smaller due to the additional tax burden.
- Create accountability. Require employees to pay at least their monthly minimum and use direct debit to make payments because nearly all loan services offer a discount if loan payments are made by bank debit.
So, if your company hires a lot of new college graduates – or prides itself on being progressive and cutting-edge – a student loan repayment benefit may help you snag more top talent.
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