Student debt may be a growing threat to your employees’ financial well-being. Today, more than half of students leave school with some debt. Collectively, Americans now owe $1.75 trillion in total student loan debt (including federal and private loans). That’s more than the overall amount of outstanding credit card debt or auto loan debt. In fact, it’s second only to mortgage debt.
Now that the pandemic-related pause on federal student loan repayment is over, your employees who are burdened with student debt may find it harder to budget successfully or put money away for emergency savings and retirement.
And it’s not just former students feeling the pinch. Parents who are saddled with parent loans, helping their kids pay off student loans, and/or trying to save for a child’s future college education may also be under stress.
All of this has put HR professionals in the position of becoming college finance experts as they try to help their workforce manage this growing financial burden and achieve better financial well-being overall.
Before the pandemic, an increasing number of employers were implementing student debt repayment programs and other benefits to help with college financing. That number is expected to continue to rise post-pandemic now that the government has made it more attractive to offer student loan repayment benefits.
In addition, employers may discover that a suite of benefits designed to create a holistic approach to college financing may help employees make the most cost-effective college savings and paying decisions.
Here are four kinds of programs that can help lessen student debt stress among your employees and integrate college financing into your financial wellness program.
1. Student Loan Repayment Programs
New government rules extend the CARES Act provision allowing employers to provide $5,250 tax-exempt annually for an employee’s student loan repayment through 2025. Employees will also have no tax liability for the contributions. Employers can make the payments directly to their employees’ student loan servicers or lenders, or they can provide them to the employees themselves, who can then put them toward their student debt.
While the maximum allowed annually on a tax-exempt basis is $5,250 per employee, employers do not have to provide that much. Many organizations start with a $50 to $100 a month payment. Even this seemingly small amount can help employees save thousands of dollars in interest over the life of the loan if directed toward the principal.
Recommended: How Does an HR Team Implement a Student Loan Matching or Direct Repayment Benefit?
2. 529 Contribution Payroll Deductions
For employees looking to pay for their children’s college costs or continue their own education, saving for tuition can be the best defense against student debt. That’s why a growing number of employers offer payroll deductions programs that allow employees to save in state-sponsored 529 college savings plans.
In 529 plans, earnings accumulate tax-free. Withdrawals are tax-free when used to pay for qualified higher education. In addition, beneficiaries of 529s usually do not have to count 529 earnings as income. Many states also offer tax breaks on 529 contributions.
While in the past, the options for using unspent 529 funds were limited (and often meant facing tax and penalty consequences), new government regulations may ease employee concerns about over-saving for college. Starting in 2024, the SECURE 2.0 Act allows savers to roll unused 529 funds — to a lifetime limit of $35,000 — into the beneficiary’s Roth IRA, without incurring the usual 10% penalty for nonqualified withdrawals or generating any taxable income.
This might come as a relief to any employees with younger children who worry about having excess funds stuck in a 529 should their child not need the money (if, for example, they opt not to go to college or choose a lower-cost school).
In many cases, employers offer matching contributions to employee 529 accounts. And, because employees may invest in any of the 49 state plans available, some employers offer college finance counseling to help with choosing a 529.
Recommended: Companies That Help Employees Pay for College
3. Education and Information about College Financing
Employers can offer expert seminars and one-on-one sessions with college financing experts to parents of high school age children on key strategies for choosing colleges, applying for financial aid, and, importantly, evaluating college acceptances and financial aid offers. Here are some key concerns employers can help with:
Understanding the Difference Between Merit Aid and Need-Based Aid
Parents are often confused about these two types of aid, especially when negotiating competing offers from schools.
• Need-based aid is the package of federal aid and loans that schools put together based on a family’s ability to pay.
• Merit aid is based on a student’s academic and other achievements and is not based on the ability to pay. Unlike need-based aid, merit aid is typically awarded for all four academic years.
Depending on their circumstances, employees may find themselves negotiating both types of financial aid offers from various schools. Certain strategies may work better for each type of aid. Parents who understand the process for both may have better results.
Understanding Subsidized and Unsubsidized Student Loans
There are two types of direct federal loans in the student’s name with no cosigner necessary. These are subsidized and unsubsidized student loans.
With Direct Subsidized Loans, the government pays the interest on the loans while your student is in college. That factor makes these, in almost all cases, the best type of student loan available.
With Direct Unsubsidized Loans, interest starts accruing at the time of disbursement.
Most years, rates for both these types of loans can be more favorable than the rates for private student loans.
But there are limits on how much you can borrow. The maximum an undergraduate student can borrow in Direct Subsidized Loans and Direct Unsubsidized Loans ranges from $5,500 to $12,500 per year, depending on what year they are in school and their dependency status.
Understanding PLUS Loans
PLUS loans are federal loans available in the parent’s name. Borrowing limits are higher than federal student loans for undergraduates (you can get up to the full cost of attendance at your child’s child’s school minus any financial aid) and there is no minimum credit score to qualify. However, interest rates on PLUS loans are significantly higher than they are for undergraduate federal student loans. You may find it makes sense to offer education and tools to help parents compare federal PLUS loans and private loans.
Understanding Private Student Loans
Several types of private student loans are available. The loans are in the student’s name but usually require a cosigner. Rates, repayment terms, and total borrowing amounts vary widely among lenders so, again, employees may need help researching and comparing options.
Recommended: Parents of College-bound Students Resource Guide
4. Student Loan Discounts
Many employers who offer college financing benefits may want to consider partnering with a lender or group of lenders willing to offer the workforce a discount on private student and parent loan rates as well as access to educational programs to help employees navigate the college borrowing process.
The Takeaway
There is a wide variety of college financing benefits and education efforts that employers can use to help relieve the stress of college financing and student loan debt among their employees. SoFi at Work can help with student loan repayment platforms, extensive education efforts, a 529 college savings program, an online student debt navigator, and more.
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