Why Employee Student Loan Assistance Is One of the Most Sought-After Employee Benefits
Student loan assistance may be gaining traction among employers, but there are still questions about why and how to offer an employer student loan repayment assistance program. Recent legislation has also extended the tax benefits of employer programs offering student loan repayment for employees.
What Is a Student Loan Assistance Program?
The increase in student loan debt in recent years has become a primary concern of many college-educated workers. When employees are paying off long-term educational loans, employers have offered to shoulder a portion of the burden by including student loan repayment in their benefits package. For college graduates, an employer student loan assistance program is a highly attractive benefit that has become increasingly prevalent. According to a survey by the Employee Benefit Research Institute, 17% of employers offer student loan repayment assistance, a number that has grown since the pandemic began, thanks in part to new legislation that extended the tax benefits for these programs.
Different Types of Student Loan Assistance Programs
Employer student loan repayment assistance is a relatively new benefit option, but several different programs have evolved. Companies offering this benefit use a variety of plan structures. Before selecting a program and moving toward implementation, it's wise to review your options in-depth. For each option, specialized rules or regulations may apply.
You can make a data-driven decision on the best plan to offer based on the relative age of your workforce and the number of employees anticipated to take advantage of a student loan assistance program. Some plan structures may work better than others for your employees. Some programs may be offered in conjunction with additional benefits such as financial counseling, tuition reimbursement, or a retirement savings plans. Here are some of the existing options employers use when setting up student loan employee assistance benefits:
Direct Repayment Programs
With a direct repayment program, employers make cash payments to directly pay down employee student loans. These plans may pay a set amount each year, regardless of how much the employee pays. Alternatively, a repayment program can be set up as a matching program that will send payments equaling the amount the employee is paying, up to a specified limit.
Companies may choose to offer employees a certain amount of discretionary benefit dollars to spend each year on items such as wellness benefits or extra paid time off. Student loan repayment options can be added to the options, and a portion of the discretionary benefits funds can be chosen to pay down student debt.
Employer and Employee Advantages
Both employers and employees can benefit from a student loan repayment benefit. The faster payoff of student debt translates to lower interest paid by the employee over the life of their student loans. Also, paying down existing debt enables employees to transition to their next stage in life, and make other significant purchases such as a car or house. Employers also benefit by offering student loan repayment assistance, as this benefit can be a useful tool for recruitment and retention. There are also tax advantages for both employees and employers.
Employer Tax Benefits
The Consolidated Appropriations Act currently permits employers to offer student loan repayment as part of an educational assistance plan and obtain a tax benefit similar to those granted for tuition reimbursement. Currently, $5,250 of tax-free assistance per employee may be deducted by employers when payments are made under a Qualified Educational Assistance Program. This total amount covers student loan repayments, tuition reimbursement, and other qualifying educational expenses such as supplies, equipment, or books. Additional qualifying guideline for tax-free treatment are as follows:
- The employer must have a written plan. The IRS provides additional guidance on Educational Assistance.
- The plan must not favor highly compensated employees.
- Plans that allow a choice of benefits including student loan repayment, such as the discretionary plans described above, do not qualify.
Employee Student Loan Assistance and Your Business: Hear From the Experts
In 2017, Ken Burtnick, senior product strategy manager at Paychex, sat down with David Aronson, chairman and CEO of Peanut Butter, to answer some of these common questions.
KB: Can you explain what student loan assistance is?
DA: Student loan assistance is an employee benefit program where companies offer eligible employees the opportunity to receive monthly contributions toward their student loans along with resources to help manage their student debt.
KB: Why are employers choosing to offer this benefit?
DA: Companies are looking to improve their employment value proposition to become an employer of choice among college-educated talent.
Many Americans cite paying off student debt as their #1 financial goal. But today, they're on their own to do it. Our recent Millennial Benefit Preferences study found that when companies help their employees tackle student debt, they may be able to hire 13 percent faster, retain talent 36 percent longer, and enhance workplace productivity. It may even improve gender and cultural diversity, since women hold two-thirds of student debt, and African American college graduates on average carry more student loan debt than other racial / ethnic groups. Student loan assistance can be a unique financial incentive that companies use to engage these and other often-underrepresented groups in the workplace.
KB: Got it. When employers are evaluating student loan repayment options, what are the questions they most commonly ask?
DA: Executives first want to know: How many of my employees hold student debt? From there, they're looking to understand how to structure and communicate a student loan assistance program. And of course, they want to know: what's the ROI?
KB: Alright. Let's dive into it. How can an employer know how many of its employees have student debt?
DA: Student debt is a real problem. There's a student debt holder living in most American households, and on average, someone with student debt is paying more toward these loans than to own a car.
For employers, the key is to understand how prevalent the student debt problem is across their company or in a particular segment of the workforce. Peanut Butter's plan design process leverages data-driven analysis along with insights from our work supporting top employers to help management teams efficiently design student loan assistance programs that support their organization's talent goals, leverage best practices, and deploy capital in an efficient way. With a basic employee census file, Peanut Butter's proprietary model can estimate the prevalence of student debt across a company.
KB: How should a new plan be structured and communicated?
DA: Plan structure should be driven by your company's goals and budget.
While most employers make the benefit available to all full-time employees, it's not required. The flexibility in defining your eligible population can make implementing a program easier than you may think.
Is your primary challenge recruiting? Offer the benefit to new hires only. Are budget concerns leading you to think you can't roll this out? Consider restricting the eligible population by tenure, salary level, or role as a means to control the initial cost.
Contribution amounts vary and, again, should be driven by the employer's talent and business goals. If you want to offer the benefit to all employees, you may need to contribute less. If you're restricting the eligible population, then you may contribute more per month toward individual student loans. We provide benchmarking data to guide this decision, and ultimately recommend a contribution amount based on an organization's needs.
Finally, you need to consider how to communicate the benefits to employees, recruits, and the media. This will be driven by plan structure, and Peanut Butter's experience in rolling out programs for employers of all sizes has helped businesses do this effectively.
KB: Are there any lessons you've learned that might help employers strategize on their plan design?
DA: The three best pieces of advice we offer to all employers when we help them with plan design are (1) Start low and grow; (2) Keep it simple; and (3) Remember that it's all about the people.
KB: Alright, last question. How does an employer know how many employees are likely to participate?
DA: With a firm handle on your eligible population and communication strategy, a proprietary model can be used to estimate participation in your student loan assistance program, and provide analysis that includes both total cost and return on investment.
Our plan design process at Peanut Butter can help clients feel confident that they have a student loan assistance program that is uniquely designed for their company, goals, and budget.
Learn more about Peanut Butter.
Creating a Qualified Educational Assistance Program With Paychex
The student loan debt of today's college graduates makes an employer educational assistance program a highly sought-after benefit. If you'd like to add this type of plan to your current employee benefits, Paychex can provide assistance with plan design and implementation, as well as payroll integration. You can also use our student loan tax deduction calculator to determine the potential impact of this benefit program.