It is no surprise to many employers that student loan debt is on the rise among younger graduates. What may surprise some is the trend toward offering student loan assistance programs as part of a benefits package to entice younger applicants.
As student loan debt is on the rise, younger employees’ retirement funds are on the decline. With average monthly student loan payments inching toward $400, it is difficult for graduates to make ends meet with rent, food, and other living expenses, let alone fathom sacrificing any more of their paychecks for a retirement fund they will not touch for another few decades. This is where some employers have decided to help.
Enter Abbott labs, the feature of a recent New York Times article, and a pharmaceutical and medical products company that hires many young, debt-laden graduates who often pursue higher education beyond the traditional four-year degree. Abbott has created a program to help younger workers pay off their loans sooner while still putting money toward a 401(k) fund. The company has called their program “Freedom 2 Save,” and it entails rewarding employees who contribute at least two percent of their pay toward their monthly minimum student loan payment with a corresponding five percent contribution from Abbott toward the employee’s 401(k) plan.
Abbott also appeals to employees who may have lower, or no student loan obligations by offering the same five percent contribution to employees who contribute at least two percent of their pay toward their 401(k) plans. With these benefits, Abbott estimates that an employee making the minimum two percent payments toward their loans can end up with around $54,000 in a 401(k) plan after just ten years with the company without contributing any of their own funds (assuming annual merit raises and a steady rate of return). Unfortunately, Abbott is in the minority of companies offering such plans. Only about four percent of companies offer student loan repayment assistance programs or employer-funded retirement savings plans based on student loan payments. Other companies opt to contribute directly to pay down the loan balance or offer some blend of retirement and loan assistance programs.
As it stands now, employee contributions to student loan debt are made with taxable earnings, while payments to the 401(k) plan reduce taxable income. Therefore, employers may want to consider the tax implications of offering such plans. There is, however, a bill pending to allow employer-made payments toward qualified loans to function as 401(k) contributions for tax purposes. The U.S. News and World Report states that the proposed “Employer Participation in Student Loan Assistance Act” would allow employers to provide up to $5,250 annually for student loans tax-free. Nevertheless, employers should not hold their breath for it to pass; the bill was introduced in February of 2017, and Skopos Labs’ predictions do not give it a high chance for success.
Even without the added tax benefits, however, employers may want to consider implementing student loan assistance programs to sweeten the more traditional healthcare and retirement benefits package. For one, employers offering this kind of benefit become more attractive to younger, motivated workers. A potential employee torn between two companies is apt to choose the one offering the better benefits package. If student loan assistance is on the table, many would jump at the opportunity. The Student Loan Ranger’s organization recently polled 502 workers between 22 and 33 years old. The poll indicated that almost ninety percent of young graduates would commit to an employer for at least five years if the employer offered some kind of loan assistance program within its benefits package. With only four percent of companies offering such benefits, a student loan assistance program or some combination thereof with a retirement savings plan would help companies stand out.
In addition to initially attracting talent, these benefits could help companies retain workers. For instance, if a company offered a progressive assistance program, where the amount of employer contribution increased the longer the employee remained with the company, employees may be less inclined to leave after a few short years for another employer. The company would have better continuity, and its employees would get their loans paid off more quickly.
Lastly, companies implementing these benefits could help give back to their employees. Most graduates attend at least four years of higher education to be eligible for employment in the first place. As a reward for that commitment, and in exchange for the benefit to the company from built-in employee experience from intern and externships, employers could offer to ease the burden of paying for their employees’ qualifications. Many companies already offer to finance continuing education for their employees, so financing the education needed to get employment in the first place could serve as the retroactive version of paying for employees’ continuing education.
Companies stand to gain much from offering student loan assistance or a retirement savings program for younger graduates. There are many different options available, and companies are encouraged to do their research on which programs might work best for their respective employees, current and future.
This article was written with contribution from Sarah Rothermel, 3rd year law student at Widener Law Commonwealth.