Student loans are a drag on millennial workers. More than 40 million Americans, including millennials as well as members of other generations, have some kind of student debt. New college grads have an average of $35,000 in student loans. As employers look to attract and retain top talent, some companies, including CommonBond, offer student loan repayment benefits.
Fast Company has hypothesized that student loan repayment benefits may become the "new 401(k)." That makes sense. Seventy-five percent of student loan borrowers said they would like to work for a company that offered a student loan repayment benefit, according to a July 2015 survey from Iontuition. Nearly half of those borrowers (49%) said they would prefer student loan payments benefits over a 401(k) plan.
But student loan repayment benefits haven't caught on as much as 401(k)s just yet. Here's why:
Awareness of student loan repayment benefits among employers is still low.
Only 3% of midsize and large companies offer student loan repayment benefits, according to the latest survey from the Society of Human Resource Management. Meanwhile, 8 in 10 workers have access to an employer-sponsored retirement plan, such as a 401(k), at their workplace.
Student loan repayment benefits don't enjoy the same tax treatment as 401(k) contributions.
Employees who receive student loan repayment benefits from employers have those benefits taxed as ordinary income. Most workers will automatically have taxes taken out of their student loan repayment benefits by payroll processors. So you usually don't have to worry about owing any taxes if you receive student loan repayment benefits. But if you receive $100 a month in student loan repayment benefits, less than $75 a month goes toward your student loans if you're in the 25% federal tax bracket because federal, state and local taxes. It's still free money from your employer, which is great, especially for young graduates where every dollar makes a huge impact on their budgets. It's a different story with 401(k) contributions. Employees do not pay taxes on employer contributions to their 401(k) accounts and that money grows tax-free until it is withdrawn from those retirement accounts. Plus, the employer gets a tax deduction for its 401(k) matching contributions.
Employers are more focused on helping employees retire than repay their student loans.
But student debt repayment and retirement savings are interrelated needs. A person with $30,000 in student loans could lose an estimated $325,000 in retirement savings compared with a person who graduated college debt-free, according to estimates from the LIMRA Secure Retirement Institute. So paying down student debt faster ultimately enables employees to save more for retirement over time.
Things are changing though to make student loan repayment benefits more attractive to employers:
Some high-profile companies have adopted student loan repayment benefits to attract millennials.
In September, PwC became the first Big Four accounting firm to announce that it will offer student loan repayment benefits to its employees this year. "We know through listening to our employees that student loan debt impacts their daily lives and decisions," wrote Robert Moritz, PwC's U.S. chairman. He notes that employers are "competing for the best talent, and in most cases, the cost of hiring and onboarding a new employee is much higher than the cost of retaining one." Student loan repayment benefits could make more financial sense for employers as the race for top talent heats up.
The tax treatment of student loan repayment benefits may improve soon.
At least one lawmaker wants to change how student loan repayment benefits are taxed. Austin Scott (R-GA) recently introduced the "Student Tax Affordability and Relief Act" in the House of Representatives. The bill, H.R. 4363, would provide a gross income exclusion for employers that offer student loan repayment benefits. Under the proposal, employers could provide "qualified student loan payment assistance" up to $10,000 per employee and receive a tax break similar to the employer match for 401(k) contributions.
High levels of student loan debt are not going away anytime soon.
America collectively has more than $1.3 trillion in student loan debt. MarketWatch estimates that the level of American's student loan debt grows $2,726 every second. The growth in the cost of college education continues to outpace overall inflation. Millennial workers will need to help to handle this enormous debt load and are likely to prefer employers who can offer assistance to help them with their student loans.
It's early days for student loan repayment benefits. It took years before the 401(k) gained critical mass among employers. Student loan repayment benefits may yet become just as common as the 401(k).
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