More employers are starting to offer student loan reimbursement assistance
Published 8:22 am Wednesday, October 26, 2016
By Tom Flynn
As it approaches nearly $1.3 trillion, student debt has risen to crisis proportions in this country. According to a report by LendEDU.com, 69% of graduating college students are weighed down with an average of $28,000 of student debt as they enter the workforce and try to start their lives. Many will struggle with student loan debt for many years, making it difficult to get ahead financially in an unforgiving economy. With millennial’s now comprising the largest demographic segment of the workforce, it is not surprising that an increasing number of companies are considering offering student loan assistance plans as an employee benefit. That could be the ray of light many people need to see a way forward.
How Does a Student Debt Assistance Benefit Work?
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As of 2016, about 4% of employers offer a student loan assistance benefit; however, it is high on the radar of many of the other 96% of employers that want to be able to attract and retain quality workers. As a relatively new type of benefit, its structure varies widely among the companies that offer it. Most have the benefit set up as a reimbursement plan that pays a fixed amount toward an employee’s annual loan payment up to a maximum amount, after which the benefit ends.
For example, PriceWaterhouseCoopers (PwC), which is one of the first major companies to offer the benefit, will reimburse up to $1,200 per year for a total of six years. Aetna plans to introduce the benefit in 2017 with a maximum $2,000 per year reimbursement up to $10,000. NVIDIA, a Silicon Valley visual graphics company, reimbursed as much as $6,000 a year up to $30,000.
Employees are eligible for the benefit after six to 12 months of employment. Some plans require that employees be current with their payments and continue to make them on time to remain eligible. For most plans, the benefit is available to anyone with college debt, not just recent college graduates. Also, some plans may only cover payments on federal student loans.
What About the Tax Treatment of Benefits?
As of the end 0f 2016, the reimbursements made under the plan are taxable as ordinary income; so, a $2,000 reimbursement, although it is actually paid directly to the student loan servicer, is simply treated as additional income. Also, the employer is not allowed to deduct the payment as they can with other types of benefits. However, the tax treatment of student loan assistance benefit plans may change if many legislators in Congress have their say.
A bipartisan effort is underway to enact the Student Loan Repayment Assistance (SLRA) Act, which would make the student loan repayment plans like a 401(k) plan. The new law would provide guidelines and tax incentives for creating a structured employee-benefit. Under the Act, employees could choose the amount they pay towards their student debt and employers would determine how much of the payment they would match. The maximum annual benefit would be capped at $6,000 with a lifetime cap of $50,000. Although student loan debt and the high cost of college tuition are hot political topics right now, there is still opposition to such a law due to the high cost of funding it.
Is a Student Repayment Plan Benefit a Good Deal?
Considering that the average student debt balance is $35,000, $10,000 paid towards that would be a significant benefit. When matched with the employee’s payments over a five or six year period, it could result in paying down the debt by well more than half. That would be a highly attractive benefit for the more than 40 million people in the workforce carrying student debt. The question is whether the benefit carries the same value as others that may be offered by employers without a student loan repayment benefit.
For example, if one company offers a starting salary of $45,000 a year plus a student loan repayment benefit of $2,000 for five years and another company doesn’t offer the benefit but the starting salary is $45,000, which is the better deal? Of course, you would have to consider the complete benefits package for both companies, but in a straight comparison, the higher salary may be the better deal because it doesn’t go away after a certain period of time. Currently, the income, whether it is received as a loan reimbursement or salary, is taxable, so there is no advantage as their might be with health insurance benefit or a company match for a 401(k) plan.
Employees should also be aware of a possible repayment clause for leaving the employer too soon. This type of clause varies widely among employers, but in many cases it would require the employee to come repay all or a portion of the benefit received. That should be a strong consideration when employees think there is any chance they could receive a better offer down the road.
Student Loan Repayment Benefit Hard to Pass Up
Because most millennials aren’t ready to think about retirement, especially with a mountain of debt to repay, they would likely choose a solid student repayment plan over a 401(k) plan, which is not a bad strategy. Although they would lose the advantage of more time with compounding returns in their 401(k), they would be in a better position to play catch up over 40 or 45 years if their debt is paid off more quickly.
With student debt continuing to spiral out of control, there is likely to be a sharp increase in the number of companies offering a student repayment benefit plan as a way to attract the best college graduates. For many graduates, their debt is all they can think about, especially when they have to contend with the increasing cost of living (Inflation may be low right now, but the cost of food, gas and housing is always rising). Graduates will need to do the math, however, to determine whether they would be better off taking the benefit or taking a higher salary. The best strategy for college graduates with student debt it to pay it off as quickly as possible, whether it is through an employer-provided benefit or a higher salary.
LendEDU is a content partner of The Oxford Eagle providing news and commentary. This content is produced independently of The Oxford Eagle.