Employees increasingly are looking to their employers for help with managing their student loan debt, but there are several issues employers should consider in advance, according to industry experts.
In a new Employee Benefit Research Institute issue brief summarizing a web briefing — “Student Loan Debt Trends and Employer Programs to Help” — EBRI’s Craig Copeland, Neil Lloyd from Mercer, Alex Smith with the City of Memphis, and moderator Stacy Schaus offer observations on student loan debt, as well as issues to consider with employer programs to help with such loans.
In recent years, a growing share of those with student loan debt is coming from families with heads ages 40 or older, and it will continue to be an important issue for workers and employers, the brief notes. In fact, families with heads ages 45-54 showed significant growth in the share of those with student loan debt, increasing from 8.9% in 1992 to nearly 20% in 2016, notes Copeland.
Accordingly, as workers recognize the lifelong financial consequences of having student loans, they likely will increasingly look for employers that provide student loan programs. In fact, some employers, such as the City of Memphis and Abbott Labs, have already developed programs to address the issue.
Pros and Cons
Mercer’s Neal Lloyd, who is a partner and head of the firm’s DC & Financial Wellness Research program, warns that employers will need to consider several matters when providing these programs beyond some of the obvious ones, such as how much is the program going to cost. For example, Lloyd explains that it’s important to understand who the arrangement will actually benefit, since not all of these programs will benefit everyone equally.
Among the range of programs include student loan 401(k) match or a student loan direct payment approach. Problems with the direct payment approach are high costs and perceptions of discrimination from paying for only some workers’ debt and only a certain type of debt. An additional issue is that the direct payment benefit is fully taxable to the employees.
The student loan 401(k) match, on the other hand, has become attractive to some after it gained attention from the recent IRS private letter ruling that the Abbott Labs’ program didn’t create a contingent benefit issue, Lloyd notes. It also avoids the tax problem, but it doesn’t directly pay anything towards student debt, even though it helps with retirement savings, he observes.
Lloyd further notes that the PLR was applicable to Abbott only, so other employers will need to avoid their own issues that the ruling addressed. Moreover, he notes that coverage and non-discrimination issues can present problems, particularly if highly compensated employees are included. These comments echo concerns raised at the 2018 ASPPA Annual Conference urging caution with non-discrimination issues resulting from plan design changes involving student loan assistance programs.
“The private letter ruling didn’t say much that wasn’t already thought through, but the issues surrounding a student loan 401(k) match program is not a one-paragraph answer but a multiple-page answer,” Lloyd emphasizes. But given the positive reaction to the Abbott case, Lloyd expects that more employers will explore this type of program further.
To address the discrimination concerns, employers are looking to combine student debt repayment programs with other benefits, Lloyd further explains. For example, he notes that instead of employers offering $150 per month only for those with student debt, they might offer $150 for student debt or as a contribution to a 401(k) plan. While this does address some of the discrimination issues, the negative is it’s a more significant amount of money to spend that needs to be worked out from a budget standpoint, he notes.
“Some people are still wary of mixing the 401(k) plan with student debt. But we believe there will be more traction with these ideas,” Lloyd states. “Definitely, more conversation of what’s ahead with what appears like more companies will be addressing these issues, which will provide more feedback on what is working and, therefore, where the programs are headed,” he notes.
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