Average student loan balances across the country continue to rise, which leaves many new employees struggling with debt before they’ve even managed to start their first full-time role. This weighs heavily on the minds of many job applicants and is one of the reasons some employers have started offering student loan assistance as a benefit option.
Employers can assist with student loan payment quite directly if they choose to—by offering a direct employer match of student loan payments. This would be set up similarly to an employer match on an employee 401(k) contribution. Like a 401(k) contribution, this could be subject to annual maximums or be limited to a specific percentage of the employee’s pay—all at the employer’s discretion. There could also be maximum total employer contribution amounts. Unlike employer 401(k) contributions, however, student loan payment contributions are considered taxable income. If this is something your organization is considering, note there are several third-party vendors that can assist with the administration of this type of benefit.
Employers could also offer lump-sum student loan payments for employees, without tying those lump sums to employee salary or to their own student loan payment levels. For example, the employer could offer to pay X thousand dollars toward the employee’s student loan balance after the employee has been with the organization for a specified amount of time.
This type of benefit can have long-term implications for employees. Even modest assistance can end up reducing the total amount owed on their student loans, which can end up shortening the length of the loan and saving many more thousands in interest than what the benefit cost. Getting employees out of debt faster benefits employers in a lot of ways—not the least of which is reducing employee stress levels. It can also allow employees the ability to have more income to invest in their retirement funds.
Extra 401(k) Contributions as a Student Loan Offset
Another option that has been in the news lately is for an employer to offer extra 401(k) employer contributions—above and beyond the amount of the employer match for the employee’s 401(k) contributions—for employees who are also paying student loans. For example, the employee may contribute 2% of their income to their 401(k), and the employer may make a 4% 401(k) contribution. The theory here is that the employer is offering an additional benefit for those with student loans but doing so in a way that retains a tax advantage. This method also takes into account the fact that individuals with student loans often have to choose between higher retirement savings contributions and student loan payments because they cannot do both.
This is an indirect benefit since the employer is not paying the loan directly, but it’s a way that allows employees to not have to choose between contributing to their 401(k) versus paying more on their loans. Employees also get the benefit of extra compensation (the higher 401(k) employer contribution) without increasing their taxable income.
Bear in mind this option is currently under scrutiny. Here’s more information from the Internal Revenue Service (IRS) that was given to a private organization following this model: https://www.irs.gov/pub/irs-wd/201833012.pdf. The actions of one employer may or may not end up setting legal precedent.
Given there are limited organizations setting the precedents, employers should tread carefully. See https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-allows-401k-match-for-student-loan-payments.aspx for further discussion.
Other Financial Benefit Options
In addition to the options above, there are other indirect ways employers can give financial assistance. For example, employers could:
- Offer financial counseling, which can assist employees who are juggling multiple types of payments and financial stressors.
- Offer tuition reimbursement. This is, of course, only applicable to individuals currently enrolled in an educational program, but it can reduce future student loan burden, which can be beneficial for both employers and employees.
- Assist employees with student loans in other ways, such as providing information to them on how loans can be consolidated or refinanced. Large employers may also be able to assist with these options by negotiating better group rates.
Helping employees with student loans can have a significant impact on employee financial well-being. This, in turn, can reduce the likelihood that an employee will have a financial problem that will spill over into the workplace. And, of course, benefits act as a recruiting and retention tool. As student loan debt rises, this type of benefit may become more and more attractive for potential employees. This is especially relevant as the job market tightens and employers look for affordable ways to attract new employees.