Retirement plan advisers and employers have a range of options to help students manage their student loan debt as well as save for retirement, according to legal and industry experts.
People with student loan debt who are also managing inflation costs and market volatility, no longer have federal support for loan forgiveness as a Biden administration program remains locked up in the courts. But advisers can work with plan sponsors on options for their participants, according to experts speaking during a PLANSPONSOR plan progress webinar series last week.
“Employers have tried to start thinking very creatively about ways to address [student loan debt management],” David Amendola, senior director, intellectual capital leader for benefits advisory and compliance at WTW.
Employers can be advised to select from direct-to-worker payments, available under 2020’s Coronavirus Aid, Relief, and Economic Security Act, or use an indirect option for student debt repayment benefits. In the current legal framework, both basic and creative options are available, explains Jeff Holdvogt, partner at McDermott Will and Emery.
Student loan debt benefits are top of mind for employers, at least in part because pandemic-era moratorium on student loan payments is ending and President Biden’s proposed program for some student loan forgiveness has been delayed in court challenges. Biden moved to forgive certain types of loans, earlier this year.
“There’s an expectation that many individuals will begin repaying student loans again sometime soon and what should employers be thinking about in terms of student loan benefits [for workers]? There’s a few different buckets of options for employers to provide student loan benefits,” Holdvogt says.
The least complex with regards to involvement for employers, is to promote a loan consolidation or refinancing option. This benefit has an employer work with an insurer or refinance company to assist the worker, “get a lower interest rate,” Holdvogt says.
An attraction of this indirect benefit arrangement is it involves limited work for the employer.
“[This is] a very straightforward way for an employer to do something to show their employee base they see this as an issue, that student loan debt is important to them and [to be seen] do[ing] something to help,” says Holdvogt.
A significant but direct-to-worker arrangement would be through an education assistance program.
The IRS program, under code section 127, allows employers to provide up to $5,250 tax free to employees each year for certain qualified educational assistance.
“The most significant currently available student loan debt benefit is the educational assistance program benefit that’s available through the CARES Act,” adds Holdvogt.
The legislation included “a provision that tacked on to the educational assistance program the ability to provide direct benefits for student loan repayments,” he adds. “An employer who already has an educational assistance program could add on to allow for a student loan benefit…to pay employees up to $5,250 per year, tax-free for qualified student loan debt.”
Congress also may act on provision contained in the SECURE 2.0 package of retirement bills, to allow employers to make 401(k) contributions to match some portion of what employees make in student loan debt payments.
“One of the reasons why the direct contribution benefit is a really impactful benefit [is] you’re asking employers to mak[e] potentially direct payments to pay down student loan debt more quickly, but if that’s offered on a broad scale, that can get really expensive,” Amendola says. “Budget wise, a lot of times the conversation goes well, ‘we’d love to do that. But we can’t really afford that right now.’ The 401(k) match is really intriguing because it’s more cost neutral than a direct benefit.”
Additional arrangements include tuition forgiveness programs, where a company will fund an individual’s education or certification in a field of study, in return for some years of the worker’s employment or in return for outright tuition forgiveness, says Jay Schmitt, a principal at Strategic Benefits Advisors.
Tuition assistance was used, in a form, successfully by a hospital system to train nurses, he says, at a large health care system that was suffering from a nursing shortage.
“They decided to buy a nursing school so they had a source of nurses coming, and if the nurse came out of school and went to work for this hospital system, the entire debt they took to get through school was forgiven,” explains Schmitt. “If they went somewhere else, only a portion of [debt] was [forgiven] but you had to stay for a couple of years and that program had fantastic uptake.”
Another creative arrangement is to allow employees to convert paid time off into funds for debt repayment.
“Some organizations have implemented and a lot of others have been interested in potentially allowing employees to convert a certain number of days and PTO into funds that would then go to pay off student loan debt,” explains Amendola. “That’s a very challenging proposition and involves tax issues that are not only challenging, [but] potentially, to some employers just nonstarters.
What type of benefit is most preferred by an employer’s workforce is likely to vary and it will depend on plan sponsor population demographics, adds Schmitt.
“If you ask a Millennial right out of college versus a Baby [B]boomer, who has been in the workforce, 30 years, you’re going to get different answers,” he says. “It completely depends on the hierarchy of what you’re dealing with, what industry you’re in, those things.”