Benefits Products & Services
By Thomas A. McCoy, CLU
ADDRESSING STUDENT LOAN DEBT
How employer assistance can strengthen a benefits plan
Year-in and year-out, plan sponsors, insurers and brokers have emphasized the need for retirement plan participants to contribute as much as possible to their plans. Hopefully, a lot of workers have picked up on that message.
Now an increasing number of employers are also offering financial advice of the shorter-term variety through financial wellness programs that include features such as monthly budget counseling. Student loan debt is one short-term (and sometimes not-so-short-term) barrier to retirement plan contributions for many employees.
Student loan payment assistance is a benefit that not only can help employees improve their short-term financial life, but also free up funds to contribute to their retirement plan.
“Student loans can also be a source of stress and have an impact on how employees show up for work,” said Kelsey Bradbury, senior research and insights consultant at Lincoln Financial Group. Bradbury moderated a recent webinar held by the Employee Benefit Research Institute (EBRI).
“At Lincoln, we recently did a survey to determine what financial steps employees have taken during the pandemic. ‘Paying down debt’ was one of the top answers,” she said.
Josh Dietch, vice president and group manager of retirement thought leadership at T. Rowe Price, told the webinar audience, “We have two crises going on. There’s an estimated retirement savings shortfall of $3.8 trillion (based on 2019 EBRI figures), and there is $1.7 trillion that Americans owe in government-issued student loan debt.”
According to EBRI research, 41.4% of families headed by workers under age 35 carry student loan debt; among those in the 35-44 age bracket, 33.7% have student loan balances; for 45 to 54-year-olds, 23.3%; and for 55 to 64-year-olds, 12.2%.
Median student loan balances rose from $15,283 to $22,000 between 2010 and 2019 (in 2019 dollars). The median monthly payment (2019) was $200, representing 3.2% of family income. For about one-third (32.1%), their payments were between 5% and 10% of their family income. For those under age 35 with at least a four-year college degree, almost half (47.8%) had payments that were between 5% and 10% of their monthly income.
Dietch and other speakers at EBRI’s webinar showed how student loan debt affects the financial health of all age demographics, cutting into their opportunities to save for retirement. While the general media often focuses on the student debt burden of recent college graduates, Dietch said Gen Xers (ages 45-56) are also hard hit by it.
A recent T. Rowe Price survey found that 59.6% of Gen Xers with student loan debt are participants in their employer’s retirement plan compared to 75.3% of Gen Xers without student loan debt. In contrast, there was little difference in plan participation in the Millennial and Baby Boomer age groups between those with and without student loans.
For Gen Xers, he said, “It’s just an expensive time of life, and it only gets worse if there is student loan debt that is trailing them into this period, or if they have debt from advanced degrees. More people feel they will be paying on their student loans for more than 10 years, even if it was originally set up as a 10-year payoff,” Dietch stated.
“Retirement contributions get pushed out because it is less immediate than the day-to-day living expenses.” He also noted that his firm’s research shows that “retirement plan participants who took coronavirus distributions from their plan as part of the Cares Act tended to be mid-career employees.”
Retirement plan savings is only one of employees’ savings priorities, but it is the largest one across all three major age demographics, according to 2019 research from T. Rowe Price. More than 90% of Millennials, Gen Xers and Baby Boomers rank it as number one. The only savings priorities that even come close to retirement savings are Millennials’ goal of saving for college education (84.9%) and Millennials’ goal of reducing other kinds of debt (75%).
Beyond financial counseling provided within a financial wellness program, what student loan payment assistance are employers offering, or could they offer, as part of an employee benefits program? And what are the payoffs?
T J Donovan, head of sales for Gradifi by E*Trade, a student loan repayment benefit provider, cited figures from a 2019 survey from the Society of Human Resource Management, showing that 8% of employers were offering direct student loan repayment assistance as a benefit in 2019.
Employers that contribute to employees’ student loan debt payment are freeing up funds that employees can use for retirement fund contributions. Employers benefit by an improvement in employee retention, he said.
“We have one client in California, a small technology company, that competes for talent with companies like Facebook and Google. After two years of offering our student loan payment benefit, they had a nearly 50% reduction in their attrition rate and a nearly 10% increase in 401(k) plan participation. They attributed those improvements directly to the student loan payment program.”
As an illustration of how Gradifi’s program works, IAT Insurance Group, a provider of specialty property, casualty and surety products, began offering Gradifi’s Student Loan PayDown Plan in the third quarter of 2020. IAT matches 50% of an employee’s college loan payment (up to a $300 monthly contribution by IAT, with a per-employee lifetime cap of $30,000).
IAT sends its monthly match amount directly to the lender, and that contribution is applied directly to the loan principal.
At the EBRI webinar, Donovan was asked about the question employers may face about the fairness of providing this benefit when there are employees without student loan debt. “One way we deal with this,” Donovan said, “is that we designed the program so employers can provide funds to go not only toward student debt payments but also to 529 savings plans for employees’ children.
“In some cases, the employee has both student loan debt and 529 accounts, and they are given the choice as to where to apply their employer’s contribution.”
Donovan pointed out that up to $5,250 per year in loan repayment assistance can be provided tax-free to both the employer and employee under legislation enacted in response to the COVID-19 crisis.
(For a discussion of another student loan assistance program offered to employees of healthcare company Abbott in conjunction with its 401(k) program, see “Benefits Products & Services,” October 2019 issue of Rough Notes.)
Dietch emphasized, “A student loan repayment program can be additive to a benefits program if it fits in with the employer’s goals. What are they trying to achieve? If it is retention and recruitment, then maybe it’s a great program. If you have other objectives, maybe there are other benefits that are more suitable.”
Donovan agreed. “Student loan repayment, like all benefits choices, has to fit into the employer’s overall benefits strategy,” he said. “We have clients who operate in fields with a very competitive job market in the knowledge-based economy—clinical staff, software engineers, especially in areas like California, the Bay area or the East Coast. Recruitment and retention are critical for them.”
The employer’s values shape benefits choices too, Donovan pointed out. “We work with a technology company that evaluates its benefits choices to see if they fit within one of their six ‘tenets.’ The tenets are: diversity, inclusion, equality, motivation, engagement and loyalty. The student loan payment program fits into equality.
“They think of equality as something like, ‘Do we have enough access for someone in a wheelchair to do their job? Do we have the ability to hire a software engineer who might be autistic?’ So, they think of what is going to be disruptive to someone trying to do their best job. They decided that student loan debt, because of the stress it causes, is one of those things that would be disruptive to the motivation of an individual.
“In addition to considering the budget for a student loan assistance benefit, an employer needs to think how it can be used to build an engaged and motivated workforce.”
The pandemic has made employers more conscious of individual employee needs and the effect of stress on their productivity. Student loan payment assistance is a benefit that not only can help employees improve their short-term financial life, but also free up funds to contribute to their retirement plan.
Thomas A. McCoy, CLU, is an Indiana-based freelance insurance writer.