By Holly Jones, JD, Senior Legal Editor
In yesterday’s Advisor, we took a look at why certain 401(k) benefits are not as attractive to candidates with significant student loan debt. These candidates might not be able to contribute, and so the benefit becomes a nonbenefit. Today we’ll explore how employers can offer an alternate benefit to this type of candidate.
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Many employers now offer tuition reimbursement and educational assistance programs as part of their benefits strategy. Student loan contribution is simply another means of specifically, retroactively assisting workers with the education and training that makes them qualified to work for your company.
As explained in yesterday’s Advisor, employees with student loans are often more interested in the short-term goal of freeing up their debt-to-income ratio in order to purchase a home, rather than saving for retirement. If retention and recruitment are the goals of your well-crafted benefits strategy, then it may be time to consider a new type of 401(k)—one that can help workers achieve the personal goals that precede retirement.
Tuition.io, a student loan management service, recently announced a program called Flex395 that enables employers to directly assist their workers with student loan repayment as an employee benefit. The program is very similar to 401(k) contributions—employers sign up for the Flex395 service and set up a customized plan, and interested employees are invited to participate.
As employees sign up, Tuition.io securely aggregates and organizes each individual’s total educational debt burden. The service provides basic financial support and tools to the borrower, helping him or her apply either a “snowball” or “avalanche” method for a more personalized repayment strategy.
Borrowers can see graphical representations of their total debt, as well as charts demonstrating the compounding effect of every additional dollar paid—by themselves and their employers—and an estimate of how much sooner the loan will be paid in full. This is information that may be more immediately relatable and motivating than a projected 401(k) balance 40 years from now.
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Individual employees’ personal financial data remains confidential; employers only see aggregated data for all staff participating in the Flex395 program. However, with this data, employers will still see the overall difference their contributions make, both in the total percentage of debt paid down and the amount of time shaved off the repayment terms for participants.
Rewards Include Recruitment, Retention, Loyalty, and a Stand-Out Benefits Program
Employers who wish to participate in a student loan repayment/matching plan have a lot of leeway in how they devise the plan. This type of benefit is not regulated by Employee Retirement Income Security Act (ERISA) or IRS rules, so employers can choose how to structure contributions as part of their compensation plan.
For example, employers could contribute a flat educational assistance stipend, match employee payments dollar for dollar up to a certain amount, match payments based on the percentage that would be contributed to a 401(k), increase contributions based on seniority or years of service, etc.
Just as employee wellness plans and 401(k) matching encourage workers to adopt healthy and responsible behaviors outside the workplace, employer student loan contributions can do the same by relieving workers of a significant source of financial stress and frustration. Unlike a direct increase in salary, which may simply stimulate spending, matching a percentage of employees’ student debt payments directly incentivizes borrowers to focus on paying off student loans in a timely manner.
Finally, consider that paying off student loans also relieves employees – and their employers—of another concern: default. The current default rate for federal student loans is just under 14 percent (higher if private loans are also factored in.) Defaulting on a student loan is not only ruinous to one’s self-esteem and credit score, but it can also halt an otherwise valuable and productive employee’s career.
In 22 states, borrowers can have their professional licenses and certifications suspended for default on student loans. Licensed professionals may include attorneys, nurses, teachers, mental health professionals, cosmetologists—any profession regulated by a state board or agency. Some states even permit the suspension of driver’s licenses. That’s a heavy cloud to have overhead, especially if the student debt was incurred in order to practice the profession in the first place.
Being adaptable to current and future trends, like 401(k) benefit offering for candidates with student loans, is vital for the health of any company trying to stay on top. Part of staying current means knowing the latest understanding about how a total rewards framework works.
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