Laden With Student Debt

At year-end 2016, Americans held a record $1.3 trillion in outstanding federal student loans, according to a report from the Federal Reserve Bank of New York. These loans now represent the biggest chunk of consumer debt in the country outside of mortgages, and they carry the highest delinquency rate.

Additionally, it seems that the skyrocketing cost of higher learning impacts anyone needing a loan to afford it—no matter what their age.

Student loan payments now prevent 62% of Millennials from saving for retirement and making other investments, according to a recent survey by American Student Assistance (ASA). The study also found that 48% in this group have no emergency savings, and 35% have difficulty paying for daily necessities because of their loans.

But Millennials are not the only ones struggling. The Federal Reserve Bank study also found that 17% of outstanding student loan debt is owed by borrowers over age 50. And a recent report from the Consumer Financial Protection Bureau (CFPB) reveals that 40% of borrowers 65 and older are in default—the highest rate for any age group.

A major contributor to this rising debt among elders is their taking or co-signing loans toward their adult children’s or grandchildren’s education. According to a Government Accountability Office (GAO) report, approximately 706,000 households headed by someone 65 or older carry student loan debt.

Even if older borrowers took the loan for themselves, the outcome is the same. ASA notes, “A growing number of those early student loan borrowers are now heading for retirement and have found their financial situation precarious at best due to their outstanding student loans.”

Many workers, therefore, are turning to their employers for help, and companies are paying attention. This debt-related stress affects their bottom line in the form of increased absenteeism, decreased productivity and disengagement.

As a result, many providers are creating programs that address both needs, helping employers boost their workers’ financial wellness by contributing toward their student loans or making a match toward their 401(k), whichever best suits the individual’s payment method.

One key aspect of such programs is raising awareness about the different repayment avenues open to borrowers and then motivating them to act on what they have learned.

Snezana Zlatar, senior vice president, full service solutions product and financial wellness, at Prudential Retirement in Newark, New Jersey, says her firm has seen some success with its student loan management adviser platform. This is designed to be an interactive, one-stop resource where users can explore in plain language the terms and conditions of their loans, including any potential opportunities for loan forgiveness, debt consolidation, cheaper repayment programs or other refinancing options. “It’s about making employees aware of what’s available and what solutions are best for their unique needs,” Zlatar says.

Akhil Nigam, managing director for Fidelity Labs, Fidelity Investments in Boston, says his company is also developing student debt solutions to focus on simplifying the complexities behind repayment.

Fidelity Labs set out on a mission to revamp existing solutions last year in response to a customer survey of its parent company’s workplace retirement plans, Nigam says. The study found that 80% of participants said student loans affect their ability to save for retirement. Moreover, two-thirds had stopped or reduced plan contributions because of student loans. The same percentage had resorted to borrowing against their retirement plan or to taking a hardship withdrawal to cover their debt. This debt burden was present among employees of all ages.

“The federal government allows for many different ways to repay your loans,” Nigam says. “But each of these repayment options can be difficult for the average consumer to understand in terms of eligibility requirements, how to apply and how each [option] can help.”

The repayment process can be further complicated by the fact that many student borrowers end up taking two or more different types of loans. Each type can vary significantly depending on interest rates, repayment options, and opportunities for consolidation and forgiveness, he says. What is startling, though, is that many borrowers sign off on these loans without learning even the basics about them. According to a recent Prudential survey, 25% of current students do not know whether their loan is a federal or a private loan.

Therefore, to ease the process, Nigam says, Fidelity’s debt management tool aggregates an employee’s student loans into a single interface where he can compare loan details and develop a payment strategy. Employees also have access to calculators and other tools whereby they can factor in personal details such as income level and savings to the payback equation.

Student Loans and the Bigger Picture
Many providers agree that educational resources and interactive tools are inadequate to help employees truly achieve financial wellness. Zlatar says that by using Prudential’s loan advisory platform alone, employees can save up to a few hundred dollars a month, which they can then redirect to meet other financial needs such as building an emergency fund and saving for retirement, but some employees must be motivated to do so.

Thus, she advises encouraging employees to view student-loan repayment as a step in a holistic approach to achieving financial wellness. “We talk to employers about what they need in order to enable their employees to learn and adopt the behavior that will help them manage day-to-day finances, save and invest effectively, and protect against financial risks such as unexpected illness or loss of income.”

Brian Hamilton, vice president of SmartDollar, in Nashville, Tennessee agrees that simple, step-by-step guidance and behavioral change are paramount to any financial wellness program. SmartDollar starts with encouraging employees to build a budget and emergency savings. “Studies show that almost 49% of Americans can’t cover a $400 emergency without borrowing money,” Hamilton says. “So we want employees to set aside some money first so they can stop borrowing each time they need something.”

The program then guides employees to tackle their consumer debt, including student loans, by making minimum payments on each, but devoting the most energy to the smaller debts. “We go from the smallest balance to largest because when you pay off the smallest one, you get that quick win. And any time you want to modify your behavior, you want to see the quick win so you keep going.”

Prudential concluded in a recent student debt study that the takeaway message “[is] not that students and their families should never borrow to pay for college. Rather, it is that by borrowing from an informed position, taking advantage of other sources of funding, and managing their finances carefully, students can minimize the burden of student loan debt after graduation and improve their financial wellness.”

The same study found that 56% of borrowers paying off student loans said they would have applied for more scholarships and grants had they foreseen the financial burden they face now. Moreover, 44% said they would have saved more, and 34% said they would have worked more while in school.

“We hear a lot of people say that, had they known what they know right now, they might have made different choices. So many of them simply didn’t know what they were getting themselves into,” Nigam says.

Still, while some employers may hesitate to invest in a student-debt reduction initiative, the move could secure an employer’s ability to attract and retain top talent. According to the ASA survey, “Seventy-six percent of respondents said that, all other things being equal, if an employer offered assistance with student loan repayment, it would be the deciding factor or have considerable impact on their choice to take that job.”

A recent study by Prudential Retirement found that graduates carrying college loans say employer assistance with repaying them is as important to their job selection as the availability of health insurance.

Key Takeaways:

• Financial wellness programs addressing student loan repayment offer options such as debt consolidation, assessment of loan forgiveness, means for debt reduction and other refinancing options.
• Advisers can show potential borrowers how to finance college from an informed position—such as by including other funding sources—thereby lessening the burden of student loan debt later.