Should Businesses Help Employees Pay Off Their Student Loans?
There’s no tax advantage, and it’s not easy, but some employers are offering loan-repayment as a benefit.
Every month, Fidelity Investments contributes exactly $167 apiece toward the student-loan payments of almost 9,000 of its employees. In most cases, Fidelity can make a simple electronic transfer to student-loan servicers, the patchwork of companies that handle billing and other administrative functions for student loans in the United States, of which there are over $1.5 trillion outstanding. A few servicers, though, force Fidelity to issue paper checks for individual loan payments—and if there’s an error, the check eventually gets sent back. “There are definitely issues,” says Akhil Nigam, the head of emerging products for Fidelity’s workplace-investing division. “I think it’s a learning exercise for the recordkeepers as well as the loan servicers.”
Fidelity started offering the student-loan repayment benefit to its own staff in 2016, after surveying its employees and hearing from clients that student debt was holding their workers back from saving for retirement. (Why $167 a month? That totals $2,000 a year, the threshold where employees feel that the payment substantially helps them manage their debt, according to Fidelity’s surveys of workers.) Earlier this year, Fidelity began administering the benefit on behalf of its corporate customers, charging a per-person fee to wrangle with the student-loan servicers for them. So far, 25 employers, including Hewlett-Packard Enterprise, have signed up.
Other well-known companies, such as PricewaterhouseCoopers, Staples, Aetna, and Penguin Random House, have also added student-loan payments to their list of employee perks. About 4 percent of companies said they offered the repayment as a benefit last year, and the figure rises to 8 percent for companies with 40,000 employees or more. The U.S. Consumer Financial Protection Bureau (CFPB) has said the benefit could quickly become more popular, given how many people have student loans—more than 44 million in the United States—and how worried they are about them. “A lot of people just want to get rid of it, because it’s such an emotional burden that they’re carrying from the past,” Nigam says. “They tell us, ‘I would love to get rid of my student loans before I get married or move on to the next stage of life,’ as opposed to thinking about retirement.”
In 2015, graduates who took out student loans finished with an average of $34,000 in debt, compared with $20,000 a decade earlier. In March, Jerome Powell, the Federal Reserve chairman, said swelling levels of student debt could hold back economic growth. Economists at the Federal Reserve Bank of New York have found that graduates with student debt are less likely to own a home in their early 30s than those who completed their education without taking on as much or any debt.
The Obama Administration, through enforcement actions and establishing a student-loan ombudsman in the CFPB to monitor complaints, has tried to make it easier for borrowers to pay back their loans. In January 2017, at the end of the Obama Administration, the CFPB sued Navient, the largest U.S. student-loan collector. But the Trump Administration seems to be backing off some of the earlier efforts. The CFPB has continued the Navient lawsuit and has fined other servicers for illegal practices; it also still has a student-loan ombudsman. But on May 9, Mick Mulvaney, the interim director, said its student-loan division will be folded into a broader consumer-information unit. The bureau also removed from its long-term agenda the goal of improving student-loan collection. In April, Education Secretary Betsy DeVos withdrew policy memos issued by the Obama Administration that prioritized awarding contracts to student-loan servicers who dealt fairly with borrowers.
In these challenges, financial-services companies sense an opportunity. Both large businesses such as Fidelity and smaller financial-technology start-ups are developing platforms for employers to help workers repay their loans. The benefit is pitched as a tool to recruit and retain young workers, especially for high-demand jobs, such as nursing, in a tight labor market. Memorial Hermann Health System, which owns 15 hospitals in the Houston area, started offering student-loan repayment in 2015 to attract employees with one to three years of experience. The health system makes 270 loan payments each quarter, and the retention rate of nurses who have signed up is 95 percent, compared to the average retention rate for nurses, which is 88 percent, says Lori Knowles, the chief human resources officer. “We believe in growing and developing our employees, and this is one of the things we can point to and show that we mean it,” she says.
Considering the anxiety around student loans, the benefit is appealing, but does it make sense? For one thing, the student-loan industry is notoriously opaque and difficult to deal with. By the time college students graduate, they may have accumulated loans from a number of different places. In contrast with credit-card companies, which typically provide in monthly statements what's called a minimum-payment warning, student-loan servicers don’t have to tell borrowers how long it will take to repay their loans if they contribute only the minimum every month. “When we launch a new client, employees will call us and say, ‘This says it’s going to take 14 more years to pay off this debt, and that can’t be right,’” says Scott Thompson, the chief executive of Tuition.io, a financial-technology company that began administering student-loan repayment benefits for employers in 2016. “We’ve had people cry on the phone.”
Last year, the CFPB reported complaints from borrowers that student-loan servicers inexplicably returned payments from employers, applied funds to the wrong account, or made other servicing errors that took months or even years to resolve. In some cases, the benefit affected people’s eligibility for loan-forgiveness programs. Thompson, whose company provided information about customer experiences to the bureau for its report, says the larger servicers have become easier to work with as more companies have begun offering the benefit. Fidelity’s Nigam says that up to 90 percent of payments have no issues. Still, problems persist.
Nor is it clear that helping employees pay off their loans is any better, from a purely financial perspective, than giving them extra money to spend as they wish. When employers make payments for their workers, those payments are considered equivalent to regular wages. There’s no tax benefit, as there is for retirement plans, health insurance, or even tuition assistance. Employers have to pay payroll taxes on the student-loan payments, and employees have to pay income taxes. It’s like a bonus—but one that involves a middleman charging fees for processing the student-loan payments. A U.S. House bill introduced in February 2017, H.R. 795, would give employers’ student-loan payments more favorable tax consideration, bringing them in line with tuition assistance. The bill has more than 100 co-sponsors, from both parties, but the measure was not included in the giant tax-reform plan passed in December, and it is stalled in the House Ways and Means Committee.
Why, despite all this, are employers still offering the benefit? It may be that there’s a psychological advantage. Steve Connelly, the president of Connelly Partners, a Boston advertising agency with roughly 170 employees, says helping his young workers address their loans is an important “expression of empathy” with their financial situation. (A further motivation: He is friends with fellow Babson College alumnus Tim DeMello, the founder of Gradifi, a Boston financial-tech company that administers the loan benefit for Connelly’s agency.) “When you’re an old man, your job is to get as many young people into a 401(k) as possible,” Connelly says. “The kids that work for me today, they’re saddled with so much debt that, one, I feel some obligation to figure out how to help them, and, two, they can’t take advantage of our traditional 401(k) match.”
Connelly Partners offers its workers $1,000 up-front toward their student loans, then an ongoing $1,200 a year. Connelly is considering extending the benefit to older employees who have taken out student loans to cover their children’s college tuition. (People over the age of 50 are the fastest-growing group of people who hold student debt in the United States.) “Some people do get mad because it is taxable,” which can be a surprise, Connelly says. “Even though we tell them and tell them.” It could be more efficient for Connelly simply to give his employees extra money, and to let them use it to repay student loans—or cover some other financial need. But Connelly has a bit of a paternal feeling toward his young employees; he wants to help them repay their loans, not just hand them a stack of cash. Give employees a bonus, and “they’ll do whatever they want with it,” he says.
Employees, too, may get some emotional reward. Kelli Hovanec, a manager at the House of Blues in Dallas, signed up last year for a loan-repayment program introduced by Live Nation, which owns the House of Blues. She graduated in 2008 from DePaul University, where I teach journalism. Hovanec’s debt totaled over $28,000, and she had been paying $150 to $230 a month toward her loans. With the new benefit, administered by Tuition.io, Live Nation contributed another $100 a month. As of a few months ago, Hovanec thought she had about a year left on her payments, but she recently received a letter saying her loans were paid off. In disbelief, she called the servicer to make sure it wasn’t a mistake. “Then I texted my parents to let them know I was done, and then a few friends to rub it in their faces,” Hovanec says. She is planning to buy a new car, after years of postponing the purchase. “I don’t know anyone else in my group of friends,” she says, “that is going to be done in the next ten years.”