In an Issue Brief from the Employee Benefit Research Institute, Craig Copeland, senior research associate, says that overall, the percentage of families with student loan debt has grown tremendously since 1992, more than doubling from 10.5% in 1992 to 22.3% in 2016.
Data used for the analysis also shows student loan debt has moved from households with heads of younger ages to those with heads of older ages. In addition, the analysis finds families with heads having a college degree or higher have higher defined contribution (DC) retirement plan balances than those families with a head with some college only (no bachelor’s degree completed). The DC balances of families without a student loan are higher than for those with a student loan.
Focusing on families with heads younger than age 35, the median DC plan balance of those families whose head has a college degree or higher and no student loan was $20,000. This is compared with $13,000 for families with heads of the same age and educational level but with a student loan. Likewise, the median DC plan balance of families in this age cohort whose head has some college only and no student loan was $10,000, compared with $4,700 for comparable families with a student loan.
The growing student loan problem and its relation to retirement savings has led employers to consider adopting student loan repayment benefits. In the Issue Brief, Neil Lloyd, partner and head of DC & financial wellness research at Mercer, explains choices plan sponsors have for offering such a benefit.
Lloyd says employers can offer refinancing with a single provider of student loan refinancing. The advantage of this arrangement is that the programs tend to offer incentives to those individuals who refinance, and this credit to the loan account can be several hundred dollars. For this reason, he says, it is a better outcome than if the employee had just refinanced on their own.
According to Lloyd, a variation of the employer offering refinancing is a marketplace platform. Instead of a single provider, a platform of a whole range of quotations and group of providers is offered. Again, a similar incentive payment of around $100 is placed into the account.
On the loan management side, Lloyed explains that student loan direct payment platforms or payment programs are where an employer will agree to pay a certain amount—for example, $100 or $150 per month. He says it can be a lot more complex than that but simply a payment towards an individual student loan for a fixed period of time.
Along with having a student loan direct payment platform, Lloyd says employers may provide tools that tell employees what to do with the $100 a month that the company is paying. For example, the tools could tell the employee which loan it should go toward, which loan should be paid back next, or suggest better restructuring arrangements, including whether the worker is a good candidate for refinancing.
Lloyd then discusses the option of student loan 401(k) matches, saying it tends to address a quandary many employees have: Do they pay back student debt or do they contribute to retirement savings? With the student loan 401(k) match idea, employers will potentially accept that individuals don’t have money to put into the 401(k), but they are paying off their student loans, so employers will match what is being paid on the student loans with contributions into their 401(k) plan.
Considerations for plan sponsors
“There are a number of issues for an employer to consider when providing these programs beyond some of the obvious ones, such as how much is the program going to cost the employer,” Lloyd says.
Starting with a refinancing platform, Lloyd points out that it doesn’t matter whether it’s a single partner or a marketplace, the real advantage is that there is limited effort needed from and typically no cost to the employer. However, he notes, the challenge comes in that refinancing can be a great help to those employees with high creditworthiness and whose situation is improving, but it’s going to be less helpful to those with less attractive prospects. Another issue with refinancing is that if someone refinances a loan, they lose certain federal protections—such as eligibility for student loan forgiveness programs.
With direct payment programs, Lloyd points out this is more costly for employers, and there are also certain perceptions of discrimination. For example, some feel student loan repayment benefits help some workers and not others, and some feel addressing student loan debt but not other types of debt may be perceived as discriminatory. In addition, a direct payment benefit is taxable to employees.
A student loan match is not taxable to employees, but can the fact that an employer is making a contribution to retirement savings for employees that are making student loans be considered discriminatory against other employees?
Lloyd mentions the recent IRS Private Letter Ruling (PLR) approving a type of student loan match for Abbott. He points out that PLRs are only intended for the requestor, and that the PLR did not address certain issues; for example, how nondiscrimination testing will be affected. “Other employers will need to avoid their own issues that the private ruling addressed,” Lloyd says.The full EBRI Issue Brief, “Student Loan Debt Trends and Employer Programs to Help,” may be downloaded from here for registered members.
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