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Crushing student loan debt has many young workers in a financial pinch, but there are ways employers can relieve the pressure.
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From the pages of In Business magazine.
College loan debt has been described as a crisis, and while that might be overstating things a bit, even those who have manageable situations feel as though they are under the gun.
At best, those who took on substantial debt — well into the tens of thousands of dollars — might be curtailing their lifestyles or putting off retirement savings while they shed what is owed. At worst, especially if they took out massive amounts of debt for degrees that did not lead to good-paying jobs, crushing debt has led to life-altering events or, sadly, life-taking tragedies.
This is occurring even with some recent improvement in student debt repayment. The U.S. Department of Education reports that among the 5 million borrowers who entered repayment in 2014, 11.5% defaulted on their loans, a slight increase over the 11.3% from the previous year’s cohort. That’s actually a dramatic improvement over the peak of four years ago, when the default rate hit 14.7%.
In Wisconsin, where a state-imposed tuition freeze has been in place for several years, the statewide average student debt at public four-year institutions and private, nonprofit four-year institutions was $30,059 for 2016, which ranked 17th nationally, according to the Institute for College Access and Success. The percentage of students with debt was 67%, which ranked sixth nationally.
At UW–Madison, where financial wellness and debt counseling are provided to current and former students, the average student debt was $27,831, with 46% of the student body taking on debt.
“...about 5% of businesses appear to be offering some sort of a student loan reimbursement as an employer-paid benefit.” — Jay Risch, secretary of the Wisconsin Department of Financial Institutions
Even with federal student loan default creeping back up, not everyone describes the situation as a crisis. Jay Risch, secretary of the Wisconsin Department of Financial Institutions, thinks the term crisis is overused in relation to student debt. “I wouldn’t characterize it as such. It’s an issue for some, but the fact is the vast majority of student debt holders are current on their payments,” Risch says. “There certainly are cases where somebody has a high debt load and a job that doesn’t bring in enough money. That seems to be the story you hear about, those more isolated instances.”
John Reinemann, executive secretary of the Wisconsin Higher Educational Aids Board, prefers not to get bogged down in semantics, but characterized the situation as “large and severe.” Asked what, in addition to the tuition freeze, state government is doing to alleviate the situation, he notes the state has focused its efforts on debt prevention. Each year, the state gives away about $120 million in direct college aid to students, with $104 million now annually allocated for the largest, need-based grant program. The state also offers a number of loans, mostly for very focused professions such as teaching and nursing, which come to about $15 million a year.
Reinemann also cites the millions of dollars of state investment in the capital budgets of educational institutions. “Every dollar we spend on post-secondary education in this state is a dollar that doesn’t have to be raised by the families attending the institutions,” he notes. “We estimate our total level of support for things like the University of Wisconsin System, its many campuses, the technical college system — our sponsorship of these institutions — makes education more affordable for more people. People tend to forget that.”
Since 2010, the state DFI has awarded $750,000 in competitive grants to Wisconsin public school districts to establish financial literacy as a condition of graduation. That year, only 25% of Wisconsin school districts had some sort of financial literacy curriculum up and running; today, it stands at 64%.
Still, students get into financial trouble with debt, and the business case for employers helping young workers in this situation is that it makes them more loyal employees and willing consumers. Kim Sponem, CEO and president of Summit Credit Union, believes student loan debt is a drain on the local economy. Oppressive debt can delay saving for retirement, saving for a down payment on a home, and the purchase of consumer goods.
“Combine that with a household that has more than one student loan to repay and 15 years later, they may still be making payments,” Sponem states.
Employee benefits are a potential solution to the college-debt problem, and helping highly leveraged young workers can be a powerful recruiting and retention strategy. In this look at the student debt situation, we explore what employers are doing to help recent college graduates who are in over their heads. Just to remove a piece of low-hanging fruit, we’ll look beyond the automatic payroll deductions that employers make to ensure their young workers remain on track in repaying their student loans.
#1: Signing bonus babies
Before 2017, the declining default rate had been attributed to a growing reliance on income-driven repayment plans, which are for students whose federal student loan payments are high relative to their income, but another factor is that employers are stepping up to the plate.
Signing bonuses are not new, but tying them to student debt service is. In what some describe as a new national tend, some employers provide either signing bonuses or retention bonuses by paying down a certain amount of their employees’ debt as a means to attract and retain them. There are many different ways that employers are designing these programs, but in essence they allocate funds that go directly to paying down student debt.
The rationale for doing so is not only about recruiting and retention, but the fact that the company benefits from their education. “This seems to be kind of an emerging benefit that some companies are providing,” notes Risch. “The number we found is that about 5% of businesses appear to be offering some sort of a student loan reimbursement as an employer-paid benefit. This has the potential to be a competitive advantage for businesses that offer students some debt help.”
#2: Covering costs
Once on the job but still in school, Summit Credit Union helps employees pay for a portion of their educational expenses. “That’s the type of program we’ve had for a long time,” Sponem explains. “They might be working for us part-time or full-time, and they get reimbursed for so much of their college costs.”
Even limited part-time employees, those who work less than 12 hours a week, receive educational assistance while in school.
Those who are no longer in school but have student loans also are eligible. “It’s really as simple as filling out the proper form for reimbursement,” Sponem notes. “They are able to get $100 each month and use that to pay off their student loan, or at least ease the pain of repaying their student loan.”
Jason Grosh, senior manager, tax for BKD CPAs and Advisors, says that under the federal tax code, employer provided educational assistance may be taxable to an employee if it is deemed to qualify the employee for a new trade or business. However, current law allows employers to establish a qualified educational assistance program to provide tax-free assistance under these circumstances. Under this program, employers can provide up to $5,250 of tax-free educational assistance by reimbursing employees for their qualified educational expenses (such as tuition and fees) or paying the educational institution directly for those educational expenses. This is not for student loans, but for the education that the employee is receiving while, and in some circumstances after, working for the employer. For example, if they want to pursue a master’s degree after hire, that may qualify the employee for a new trade or business, and the employer would likely need a qualified educational assistance program in place to provide a tax-free benefit up to $5,250.
There are potentially more generous exclusions available related to tuition reductions for employees of qualified educational institutions.
“Those programs can’t discriminate in favor of highly-compensated employees, and there are some limitations related to the owners of the company and amounts that can be reimbursed for them, but the big picture for a regular employee is there is currently a code provision that allows for at least a partial exclusion,” Grosh explains. “It allows employers to help them to some extent.”
Grosh also noted there may be additional exclusions available, as a working fringe benefit, if the education is necessary to keep the employee’s present job or maintains or improves skills required for present work.