This article was originally published by Voluntary Advantage in the July 2023 edition of the Voluntary Benefits Voice. To read the full publication, click here; this article appears on page 18.
Student loans are a big problem in America; collectively, more than 45 million Americans, or 26% of the U.S. workforce, hold $1.7 trillion in student debt. But student debt also represents a bright opportunity for your company because student loan borrowers are committed to performing for your business. Before they ever interviewed at your organization, these individuals selected a college, chose a major, studied, tested, completed group projects, did internships, and earned a degree, all in an effort to start off on the right foot, which might also include landing a job at your company and building a career as a part of your organization. Now, your company has a unique opportunity to incentivize workers to join and stay with your firm.
In this article, we’ll cover the following topics:
- Administrative forbearance of federal student loans and the resumption of payments in October 2023
- The Supreme Court’s June 2023 decision to strike down President Biden’s Debt Relief Plan
- The three most popular ways employers are addressing student debt including a tax-free option
Student Loan Payments Resume in October
In October of this year, student loan borrowers will face a stark new reality. For the first time in more than 3½ years, they will be required to make an average monthly student loan payment of about $350. How would a $350 hit affect your monthly budget? For many, it will retake a place among their top 5 monthly expenses:
- Student loan payment
For some, it will cost more to pay down their student debt each month than it will cost them to drive to work.
October’s reality will be stark because the payment amount is significant, and payment resumptions will affect many people; only 10% of all student loans are private and thus are unaffected. On March 13th, 2020, COVID-19 Emergency Relief kicked off a period of administrative forbearance allowing federal student loan borrowers to forego monthly payments and not accrue interest on their loans. While some federal loan borrowers continued making payments to reduce their principal balance, most did not.
Broad-based Debt Forgiveness is Not Coming
On June 30th, 2023, the US Supreme Court ruled President Biden’s Student Debt Relief Plan unlawful in a 6-3 vote. Biden’s Student Debt Relief Plan was announced on August 24th, 2022; if enacted, it would have provided $10,000 in debt forgiveness to each federal student loan borrower and up to $20,000 in debt forgiveness to some. Across the US, it would have wiped out roughly one third of student debt and reduced the monthly payment for the remaining borrowers from $350 to about $250.
After the plan was announced and before it was rejected by the high court, at least 25 million borrowers indicated to the Department of Education that they’d be interested in receiving debt forgiveness under the plan. While future debt forgiveness legislation is possible, it’s neither guaranteed nor coming soon for a majority of borrowers.
So, what does that mean for employers?
In no uncertain terms, it means that student loan borrowers – your employees and your job candidates – want help paying down their debt. Based on national statistics provided by the New York Fed, St. Louis Fed, and Bureau of Labor Statistics, 26% of the workers at a randomly selected employer are likely to hold student loans. For employers in Financial Services, Healthcare, Professional Services, Technology, and Education, it’s North of 30% and, for some, as high as 35% of your workforce. And for those hiring new graduates, about 70% of your on-campus job applicants will hold student debt.
Employers are Tackling Student Debt and Achieving their Business Goals
The market for talent has never been so hot. It remains a candidate’s market, and employers seeking to attract college-educated workers need a way to stand out. Companies offering Student Loan Repayment – a defined monthly contribution to employee student loans – are able to hire 13% faster and retain talent 36% longer, and with legislation passed in 2020, employers may even contribute tax-free.
Best of all, Student Loan Repayment plans do not need to be costly in order to be effective. Today, the majority of employers (70%) offering Student Loan Repayment contribute just $50/month. A portion (20%) contribute $100/month, less (5%) contribute $30/month, and the remainder (5%) contribute a different amount. With participation rates averaging 25%, the cost of the benefit is modest and predictable. From a plan design perspective, employers have largely moved away from holding periods and tiered plans, making the benefit available to all full-time employees from the date of hire. Finally, most employers are choosing to offer their plans tax-free under section 127, thereby avoiding the cost of payroll taxes and the need to withhold income tax.
Many employers haven’t heard workers discuss student debt for the past three years, but that is set to change. October will be a wake-up call for borrowers who need to make payments again, and some recent grads will begin making payments for the first time. Employers that decide to help will reap the benefits of shorter hiring timelines and longer employee tenure.