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.”