The American Student Loan Crisis – Plan Sponsor Solutions

At the end of each spring semester, millions of college graduates in the United States celebrate their college diploma in return for their hard work. With the hopes that their degree will bring a successful career, these graduates enter the workforce, often bringing with them tens of thousands of dollars in student loan debt. With 44.7 million Americans currently carrying an estimated $1.5 trillion in student debt, this financial burden will remain with many for decades. And as these graduates become part of the employee population of many companies, employers are now exploring their role on how they can assist with tackling this debt.

As a result of the growing student loan crisis, and as many new graduates increasingly struggle to pay for day-to-day necessities such as car payments, rent, and groceries, the debt burden significantly impacts their overall financial wellness. Employees of all ages struggle to save for their retirement due to the compounding of student debt burdens. Student loans are the fastest growing segment of U.S. household debt, surpassing credit card loans to become the largest source of debt, after mortgages. A recent loan management report conducted by Invesco states that seven in ten college graduates have student loans, and the average person leaves school with $30,000 in debt. In addition, over 20% of graduates with outstanding loans owe more than $100,000. Alarmingly, close to 20% of existing loans are delinquent or in default— this figure could balloon to 40% by 2023 argues Invesco. With an increased focus on recruitment and retention of highly skilled workers, a growing number of employers are exploring innovative solutions to assist employees with student loan repayments, concurrent with other healthy savings behavior.

Employer Offerings

In line with offering financial wellness education to employees and assisting with overall debt management, employers have more directly targeted their efforts to address concerns of student loans. Specifically, employers have implemented loan management platforms where a company assists in addressing an employee’s student loan debt through assessment tools that guide refinancing and repayment options. Some innovative approaches employers have introduced to address student loan debt include:

1. Refinancing – Provides employees with the best rates for paying back their loans.
2. Loan Management – Assists employees with managing their loan payments in one consolidated place.
   • Option 1: Direct Payment – Employers will directly pay the existing student loan debt for the employee.
   • Option 2: Employer Match – Employers incentivize employees to pay down student loans and start retirement savings by providing a pre-tax match on student loan repayments.
3. Assessment Tools – Employers guide and assist their employees with the appropriate steps to refinancing, consolidating, and repaying their student loans through a loan management platform.

Student Loan Management Programs and 401(k)/403(b) Matching

Employers who want to attract and retain employees, by better helping them achieve their financial freedom, currently offer one of two primary categories within their loan management platforms: student loan direct payment programs and student loan employer match programs.

Student Loan Direct Payment Programs

Administered through a third-party vendor, this payment program allows employers to continuously make regular payments that are directly applied to an employee’s loan principal. Tax deductible contributions are currently pending in Congress; however, student loan direct payments are considered taxable income for the time being. Pending legislation, which includes the Employer Participation in Student Loan Assistance Act (House) and the Employer Participation in Repayment Act (Senate), proposes categorizing student loans the same as tuition reimbursement benefits, allowing employers to contribute up to $5,250 per year, tax-free, in assisting employees with paying their loans.

Employer Match Programs

Student loan employer match programs enable employers to make matching contributions to an employee’s retirement account based on the employee’s loan repayments. Under this arrangement, money is taken out of the employee’s account on a payroll basis to pay down their loans, and the employer makes a separate matching contribution.

The Future

Employer loan management programs are a trending topic right now, and if the IRS approves this legislation, employers of all sizes could offer their employees a student loan benefit program within their retirement plan.

We encourage plan sponsors to monitor developments in loan management tools within the marketplace and consider these types of solutions to help participants better achieve their desired retirement outcomes, as well as to bolster their retirement efforts. As an independent registered investment advisor, PlanPILOT helps deliver comprehensive retirement plan advisory services to 403(b), 457, and 401(k) plan sponsors. Our services minimize sponsors’ fiduciary risks while improving participant outcomes, a winning combination. Call us today at (312) 973-4911 or email info@planpilot.com.

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