Hi Mom, please send money!

Crushing student loan debt has many young workers in a financial pinch, but there are ways employers can relieve the pressure.

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.

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.

(Continued)

#3: Replenish Bank of Mom & Dad

Some employers are helping employees finance their children’s college education. While an employee’s college-bound child is the ultimate beneficiary, an employer pays the money to the parent that works for the company. At Summit Credit Union, parents fill out a form to provide information about what institution their child is attending and what their children are studying, and they produce an invoice of the semester bill from the school. “We will reimburse $1,000 per semester while they are in school, up to five years,” Sponem says. “If my son or daughter is in college, I can get reimbursed up to $1,000 per semester for their tuition.”

This form of compensation is not provided tax-free to the parent (employee), according to Grosh. Generally, programs that provide benefits to spouses or dependents of employees are not considered a qualified educational assistance program under the federal tax code. Some employers may offer qualified scholarships through a separate private foundation created by the employer, which could perhaps qualify for an exclusion from the employee’s income, Grosh adds.

#4: Train them up

Perhaps only a few select companies can afford to offer recent graduates an opportunity to train for a good paying job, but it’s another way to address the affordability issue. Epic, the medical software developer and Dane County’s second largest employer, may not do this with student loan debt specifically in mind, but it does help meet its growing workforce needs.

Epic CEO Judy Faulkner notes the company hires people with different kinds of degrees. “Many of those graduates had limited choices in their areas of study, and they find good, well-paying jobs at Epic,” she states. “We like having a staff with diverse educational backgrounds. They bring good knowledge and good thinking skills, and we educate them for their new profession.”

#5: Resort to resourcefulness

When in doubt, employers can refer debt-ridden employees to a spate of available financial resources, and the easiest and most accessible thing an employer can do is to become familiar with those that are out there.

“Offer them to employees, much as you would offer financial education generally,” Reinemann advises. “Many workplaces offer programs to connect you with resources for counseling or health care, and it seems to me there may be a file in a personnel person’s drawer that says this or that employee has a student loan issue.”

For example, the state of Wisconsin has a website, lookforwardwi.gov, aimed at the whole question of financing a college education, and there are a number of audiences at whom the website is aimed. Some are the families of young children who should be planning for college. Some are older students who are making a college decision, and some of them are people with large amounts of debt.

“There are sources on that website for people who want to pursue what they need to do to better manage their student debt, and by better manage, I’m being a little vague on purpose,” Reinemann says, “but better management can include refinancing options. It’s often possible after a year or two in the workplace, a bit of a credit record, to go to a lender and say, ‘I have this package of student debt that I’d like to refinance,’ and often you’re going to do a little bit better than when the loans were first issued.”

The website also is educational, as it tries to draw a distinction often lost on people — the difference between refinancing student debt and consolidating it. “Refis” are a clear-cut option, as people borrow money to pay off the old loans. Refinancing can include consolidation, where a borrower has several loans at varying interest rates made into one loan repayment at (hopefully) a lower interest rate. “You want to get away from paying many different people and make one payment a month, but obviously if you can consolidate and also obtain better financing terms, you would do that,” Reinemann notes. “It’s just good, common sense.”

Lookforwardwi.gov also provides a list of lenders who are willing to offer student loan refinancing products, and they are not just state-chartered community banks. Credit unions are very well represented.

There also is the federal government’s loan forgiveness program for public employees. It only applies to federally subsidized student loans and only to people working broadly in government service, but it’s a large program that people should consider. “You have to make payments for 10 years and be regularly on time before you get your forgiveness,” Reinemann says. “They are not going to wipe away everything.”

One resource that has expired is the federal Perkins loan program, a low-cost (5% interest rate) program that has provided financial aid packages to thousands of Wisconsin students. Derek Kindle, director of the Office of Student Financial Aid at UW–Madison, would like it to be extended at least on a temporary basis.

“At this time, we have seen no national or statewide initiatives to replace the Perkins loan program,” Kindle says. “Our understanding during the 2015 Perkins extension conversation was that Congress would re-evaluate Perkins within the larger Higher Education Act (HEA) reauthorization to better reflect the needs of our students and families, which we believe we would be a sensible and considerate approach. Because Congress has not tackled HEA Reauthorization, they should support a two-year extension. Allowing the program to expire is detrimental to our most financially vulnerable students and families.”

#6: Financial tutoring

Sometimes, future employers can help interning students while they are in college by helping them learn how to more effectively manage money while they are in school, and they provide financial education to existing employees so they can stop digging themselves into a deeper debt hole.

According to Sponem, whose credit union has promoted financial literacy in local schools and among its members, it’s important for students to understand what to borrow money for, what expenses they really need to pay for out of pocket, what scholarships are available, especially after the first year, and what standard of living is appropriate in school.

“Paying too much for housing, as an example, can add a significant amount to student loan debt,” she states. “Students sometimes get sucked into the idea that they need a really nice place to live during college, and they are surprised to find out when they graduate that their actual standard of living just went down.”

Providing insight on the earnings potential of different career choices and weighing that against after-graduation expenses can help students plan and think about how much they can reasonably borrow, she adds.

The components of a good financial literacy program depend on the student and/or employee; it’s not a one size fits all. Summit offers several different financial education programs and delivers them in a variety of ways because some people want an actual classroom program while others just want tips along the way (just-in-time learning) and others want experiential learning opportunities.

“What’s really important is that we are there at the time people are making a decision,” Sponem explains. “If they are going to be doing something different or new, then we are there to help guide them and talk them through it.”

No matter how much student debt has been incurred, one bit of advice is that it’s unwise to put off a 401(k) account until after student debt is paid off. This temptation always will be there, but if the employer offers company matching, Sponem says young workers are better off adjusting their lifestyle for a few years. Saving for retirement is habit forming and it should be a life-long habit because it will put people in a much better long-term position.

That’s true even for those starting at 1% in a 401(k) and increasing it as their career unfolds. “I advise people to both save and pay off debt,” she states. “If you’re getting a match in your 401(k) and you have student loans, try to get as close to the full match as you possibly can, even though you have student loan debt.”

Government to the rescue?

Federal officials have kindly volunteered to rid us of oppressive student loan debt, proposing everything from higher levels of tax-free exclusion to free tuition. One proposal in the state Legislature, which has been introduced several times, would create a new state entity to help people refinance their student debt regardless of where that debt comes from. Students already can go to the U.S. Department of Education and get help consolidating a group of student loans, and they can repeatedly refinance their student debt, but the state bill would create an entity that would have the authority to issue bonds and use the proceeds to refinance the student debt of Wisconsin residents.

For a number of reasons, it hasn’t gone anywhere, primarily because lawmakers don’t know how much student debt there is in Wisconsin, and they don’t have a means of estimating how much debt would be brought to the agency to be refinanced for a high-risk group of borrowers, Reinemann notes.

Failing more legislative relief, the best advice for crafting a college financing strategy is to earn as much you can and take advantage of all grant and scholarship resources to reduce the debt load, while relying on low-interest federal loans for direct costs such as tuition, fees, room, and board. “We’re seeing a trend in the UW Colleges where students and their families are so afraid of debt these days that they are reluctant to fill out the free application for federal student aid (FAFSA), and this would also make students eligible for free money or grants,” notes Cathy Sandeen, chancellor of University of Wisconsin Colleges and Extension. “We worry that all of this press, this negative press about student loans and debt, is taking students in a direction that could actually hurt them.”

(Continued)

Badger promise: Fulfilling potential

Kim Krautkramer is exactly the kind of promising student the Badger Promise program is designed to help. Too bad it was launched too late to help Kim finance her college education, but she’s managing to fulfill her potential as she works her way toward a medical degree.

Medical student Kim Krautkramer will not benefit from the new Badger Promise financial aid program, but she’s glad it’s there to help undergraduate students finance their education without piling up excessive debt.

The new financial aid program, which launched this fall, was created to expand access to a UW–Madison education and address affordability concerns for Wisconsin residents, specifically for first-generation transfer students. Building on existing partnerships between two-year University of Wisconsin Colleges and the Wisconsin Technical College System, it seeks to expand access to lower-income Wisconsin residents who either want or need to begin at a two-year school, and it does so by providing free tuition.

Under the program, all first-generation transfers, who are more likely to enter UW–Madison as transfer students, receive one year of free tuition, and Badger Promise students who are eligible for federal Pell Grants would receive two free years of tuition. According to the university, each student receives whatever reward is needed to cover the full amount of their tuition and fees, the average award will total about $4,800 per student, and this is on top of any need-based aid for which they might qualify.

“Theoretically, it would reduce the amount of debt a student would need to take on for those last two years of the bachelor’s degree should they go to UW–Madison,” says Cathy Sandeen, chancellor of University of Wisconsin Colleges and Extension. “It includes tuition and fees, but not living expenses, but still it’s a significant reduction in what they would ordinarily pay.”

Krautkramer has earned a doctorate in biochemistry and now is finishing her third year of medical training. Upon graduating from high school, she was concerned about the cost of a college education, so she attended UW–Marathon County for her first year of undergraduate work before transferring to UW–Madison. That allowed her to work for 30 hours a week to earn enough to pay for school and have one year of her undergraduate education without the financial stress that comes with attending a larger institution.

“While it did provide a much more financially feasible option, it also gave me a stellar education with smaller class sizes, so it was really a win-win situation for someone coming from a small town,” she explains. “At that point in my life, I knew college was expensive and that I’d need to take out large loans to make it happen, but the true cost of a university education didn’t really set in until my first year at UW–Madison.”

Krautkramer incurred between $40,000 to $60,000 in student loans as an undergraduate but also took advantage of scholarships and grants. “I quickly depleted the little bit of savings I had within a single year merely paying for textbooks,” she notes. “Fortunately, my MD and PhD work has been fully funded by the Medical Scientist Training Program.” This training program is a National Institutes of Health-sponsored program offered at 47 medical schools in the U.S.

“It’s noteworthy that these loans have accrued significant interest while in deferment during my MD-PhD training (eight years post-undergraduate), which I do think is a significant burden and somewhat of a deterrent to students like myself who are coming into a long post-graduate course and have already accrued student debt that will only grow while they remain a student,” Krautkramer explains. “Although my MD-PhD education is funded by the MSTP, and I now receive a living stipend benefit also through the MSTP, medical school itself is quite an expensive endeavor.”

While Krautkramer wishes she could have accomplished all this without incurring so much student debt, she has no regrets. “I’m certainly glad I made the decision to go to college, and absolutely love the research program I built during my PhD thesis work,” Krautkramer says. “I’m extremely excited for the career opportunities that await as an MD-PhD, and I know it will allow me to have a job I feel passionate and inspired about for the rest of my life. That in itself is worth everything.”

The Badger Promise program will not help Krautkramer, but she believes it will be immensely helpful to others by freeing them from the burden of excessive debt to pursue graduate school, medical school, law school, or even the unpaid internship that might lead to a great job. This fall, the financial aid package has been provided to 139 new transfer students.

“I very sincerely hope that programs like the Badger Promise will allow current and future students to experience the freedom to aim high that comes with being less tethered to student debt,” she states, “and the inevitably poor financial state that so many students in the United States find themselves in.”

Education assistance is elementary to Watson

Derek Kindle, director of the Office of Student Financial Aid at UW–Madison, has heard of employers helping their younger workers repay student loans with benefits such as signing bonuses and educational reimbursement. In his view, it’s a seldom used but positive trend in employee benefits.

Elizabeth Watson, an accountant with Summit Credit Union, is poised to pursue a dual master’s degree but would like to do so without adding too much to an already crushing student debt load that Summit is helping her repay.

“As far as we hear, employer assistance with student loan debt is still rare, though it is slowly becoming a more popular recruitment tool,” he says, “and we are certainly fans of this approach.”

So is Elizabeth Watson, an accountant with Summit Credit Union. Her employer is helping her manage what she views as crushing student loan debt, and it’s the kind of benefit more employers are bound to consider as part of their recruitment and retention strategy.

The reason it’s likely to become a common feature of employee benefit practices is the high level of indebtedness related to student loans. To compete for younger workers, they might have to provide some relief, and Watson’s case illustrates the business case for doing so.

Watson began her undergrad program on a part-time basis while working at Summit full time. She completed a bachelor’s degree in accounting with just over 150 credits, and in that time, she accumulated just under $60,000 in student loans. Watson, who was not a traditional student, took longer to graduate and also had a mortgage to pay. “When I graduated in 2014, the amount I owed on my student debt was larger than the remaining principle balance on my home at the time, which I thought was pretty substantial and a little depressing.”

Now on a 30-year repayment plan for her college loan, her monthly payment is $325 and Summit’s student-loan reimbursement benefit covers $100 of it.

To advance her career, Watson wants to avoid incurring $40,000 more in debt, which is the approximate cost of a dual masters degree — an MBA and an MSA (a master’s of science in accounting) — that she’s registered for. Watson has applied for some scholarships and plans to take advantage of educational assistance offered by Summit, where she first started as a teller while in school. “As an employee of Summit, the actual costs come to be a bit less than that because they offer $1,000 of tuition assistance every semester, for up to five semesters, so that will reduce what I have,” she says.

Otherwise, she would like to find a way of proceeding without taking out additional loans. “I’d have to take a good look at my finances before I can do that,” she acknowledges.

Married with two children, Watson considers herself to be in a high-leverage situation in which she’s living frugally. Her master’s degrees would be pursued evenings and online and could take up to three years to complete, but she’s grateful to have an employer willing to invest in her future, a situation that makes her a more loyal employee.

“I’m hoping to be able to advance, to be as much of an asset to the company as I can,” she says, “and in order to do that, I believe I need as much education behind it as possible to be able to really come through with my end of the deal.”

For Summit, the return on investment involves more than loyalty, according to CEO and President Kim Sponem. “When people are less stressed about their financial circumstances, they can put more energy into what they are doing at the moment,” she notes. “The less people are worried about their finances and they are more in control of their financial situation, they tend to be happier and tend to have less stress and can focus on what they are doing.

“We have a talented team at Summit, and anything we can do to help them perform and relieve outside stresses is something we should do.”

Click here to sign up for the free IB ezine — your twice-weekly resource for local business news, analysis, voices, and the names you need to know. If you are not already a subscriber to In Business magazine, be sure to sign up for our monthly print edition here.