Student Loan Assistance Programs. Improving Employee Financial Well-Being
The total student loan debt in 2023, including federal and private loans, has reached $1.75 trillion, with an average of $28,950 per borrower. United States student loan borrowers collectively owe a massive $1.78 trillion in federal and private student loans as of March 2023, as reported in the Federal Reserve’s most recent quarterly figures. During the pandemic, employees sought support from their employers, mainly for physical and mental well-being. Now, many employees are specifically seeking help with the repayment of their student loans. Student loan assistance programs offered by employers have grown in popularity as a perk that can help your business attract and hold on to skilled workers.
The CARES Act Moratorium on student loan relief is ending soon
The CARES Act passed in March 2020, provided relief to federal student loan borrowers by automatically suspending payments and interest on federal student loans through September 30, 2021.
The moratorium on student loan payments is coming to an end in October 2023, after being extended multiple times, leading to the resumption of payments and interest. Despite attempts by the Biden Administration to implement a widespread student loan forgiveness program, it was struck down by the U.S. Supreme Court in June 2023.
According to data from the US Federal Reserve, approximately 20 million individuals who borrowed money to finance their higher education costs have been able to forego making their average estimated monthly payments of $200-$400 for over three years. This is because the pause on payments has been extended eight times.
Once October arrives, Americans with student loans will have gone three and a half years without making payments or accumulating additional interest. The expiration of this moratorium is expected to present a significant challenge to both spending and saving for borrowers, generating significant financial stress for millions of Americans.
According to a recent paper from the University of Chicago, individuals who benefited from the debt moratorium on federal student loans have, on average, significantly increased their borrowing for mortgages, auto loans, and credit cards. As payments resume, these borrowers will now be required to manage not only their original debt but also the additional debt they have taken on.
What are some solutions employers can implement?
Financial stress can profoundly affect employee performance at work. It can cause diminished productivity, impaired problem-solving skills, irritability from loss of sleep, difficulties collaborating and communicating effectively, increased absences and use of sick leave, higher turnover, lower morale, and engagement, strained working relationships, lack of focus, poor decision-making, and poor health.
If you have been putting off implementing a student loan assistance program for your employees or have not considered it at all, there are compelling reasons why you should do so sooner rather than later to bolster your workforce.
Financially stressed employees experience reduced productivity levels
Employers should care about this issue for several reasons. Financially stressed employees tend to be less productive. According to Fast Company, 84% of respondents to a survey have experienced increased stress levels due to their student loans.
An average full-time employee dealing with financial worries loses approximately 156 hours (equivalent to 19.5 days) of productivity each year due to the distraction caused by these concerns. Based on the average American hourly wage, this translates to around $4,000 in payroll per employee per year spent on money-related concerns.
Also, these employees are twice as likely to seek employment elsewhere in search of an employer who offers more financial support, potentially leading to higher turnover rates that are expensive, reduce productivity, and impede growth.
Employer support boosts engagement and retention
Employees who feel supported by their employers are more engaged and less likely to leave their jobs. Gallup’s annual workforce surveys reveal that companies with high employee engagement are more profitable and productive than others in the same industry. Workers experiencing anxiety related to personal finances, including student loans, are more prone to disengagement.
According to NetSuite, companies with higher levels of employee engagement experience lower turnover rates, with some seeing rates as much as 43% lower compared to companies with less than 40% annualized turnover. The study also found that employee engagement is linked to organizational outcomes, with a very important effect being that business units that have highly engaged employees demonstrate a 24% lower turnover compared to their counterparts in the same industry.
Companies may consider whether providing employee financial well-being assistance would generate a positive return on investment by reducing costs associated with decreased productivity and increased turnover.
Higher education rates have increased
Employers benefit from having a workforce with higher education qualifications. The need to pursue higher education for many jobs contributes to the increase in student loan debt.
A Harvard Business Review report found that many employers agree that the skills required for jobs have changed such that numerous roles that previously only demanded a high school diploma now call for college-level education, according to most employers.
The negative impact of student loan debt on mental health
New research from the University of Georgia suggests that student loan debt may be exacerbating mental health issues. The study analyzed over 85,000 posts on Reddit and Twitter that mentioned student loan debt, excluding posts from policymakers and politicians. The researchers chose these social media forums because people voluntarily share their opinions and emotions on the sites without prompting.
The study found that individuals with student loan debt frequently discussed issues like depression, anxiety, stress, and suicidal thoughts – indicating that the financial burden may be worsening their mental health conditions.
The researchers conclude that student loan debt repayment challenges appear to have a significant psychological toll on borrowers and can make preexisting mental health issues more severe. The study adds to growing evidence of the negative impact of student loan debt on employees’ mental wellness, which directly impacts their workplace performance.
How can employers support employees’ financial well-being?
To support employees’ financial well-being, employers can consider implementing various measures, like offering financial education programs and seminars on topics like budgeting, saving for retirement, managing debt, and building credit, which can help employees develop good financial habits.
Also, employers can provide financial assistance programs to help employees directly address the issues they are facing. These programs are often offered as an employee benefit to attract and retain talent and are highly valued by the employee population.
Companies like Google, PwC, Nvidia, Penguin Random House, and Chegg are helping their employees pay off their student loans and many others are considering adding this sought-on benefit to their benefits package.
Student loan repayment assistance programs
Student loan repayment assistance (SLRA)
One option is student loan repayment assistance (SLRA). The IRS first authorized student loan repayment assistance (SLRA) in 2018. The program allows employers to offer tax-free student loan repayment assistance of up to $5,250 per year to their employees. The benefit is not considered taxable income for the employee and is deductible for the employer.
This program initially allowed employers to match employee student loan payments by contributing to their retirement plans. The CARES Act of 2020 expanded this assistance by permitting employers to make direct, non-taxable SLRA payments of up to $5,250 per employee through December 2020. The Consolidated Appropriations Act (CAA) extended this option through 2025.
Many companies have started offering student loan repayment assistance as part of their benefits package. The assistance can come in various forms. Some employers directly contribute a specific amount towards employees’ student loan payments each month. Others may provide a one-time lump sum payment or offer matching contributions to employees who make extra payments.
LRAPs can help employers in their employee retention strategies, especially among recent graduates or those with high student loan balances. They signal that the employer values the employee’s financial well-being. Some LRAPs require employees to stay with the organization for a certain period, typically 2-5 years, after receiving the benefit. This ensures the employer gets a return on their investment.
LifeStyle spending accounts
Another approach is the use of a personal spending account or lifestyle spending account (LSA), where employers provide direct monetary assistance or financial skills improvement programs, beyond traditional healthcare and insurance benefits.
You can pair this benefit program with a FLEXIBLE SPENDING PLAN (FSA) that allows employees to set aside a portion of their pre-tax income to cover specific expenses related to their lifestyle and well-being.
FSAs reimburse employees for eligible expenses such as mental health services, childcare expenses, transportation-related costs, or other subsidies. Lifestyle spending accounts (LSA’s) can be used for expenses such as budgeting classes, financial planning courses, direct help with household expenses.
One of the primary benefits of a flexible spending account (FSA) is that the funds allocated to
it are deducted from the employee’s gross income before taxes are calculated. This means
that employees can reduce their taxable income and potentially lower their overall tax liability.
Similar to other flexible spending accounts, lifestyle spending accounts often have contribution limits set by the employer or by regulations. These limits may vary depending onthe plan and the applicable tax laws. Employers may offer a rollover or grace period option to allow employees to use the remaining funds or carry them over into the next year.
Emergency savings accounts
Employers can help employees improve their financial well-being by facilitating emergency savings accounts (ESAs). Emergency savings accounts, also known as rainy-day funds or contingency funds, are financial accounts specifically designated to cover unexpected expenses or financial emergencies.
The primary purpose of an emergency savings account is to provide individuals with a financial safety net to handle unexpected situations or emergencies. These accounts are intended to cover expenses such as medical emergencies, car repairs, job loss, home repairs, or other unforeseen events. This involves deducting a predetermined amount from employees’ paychecks for automatic deposit into a savings account of their choice.
Emergency savings accounts are typically built over time by regularly setting aside a portion of income specifically for this purpose. Financial experts often recommend aiming to save three to six months’ worth of living expenses in an emergency fund, although the ideal amount may vary depending on personal circumstances. It is crucial for emergency savings accounts to be easily accessible when needed.
While the funds should be readily available, it’s also important to keep them separate from regular checking or spending accounts to minimize the temptation to use the funds for non-emergency purposes. Having an emergency savings account provides financial stability and peace of mind, reduces reliance on high-interest credit cards or loans during emergencies, and helps individuals avoid debt. It can also provide a sense of security and confidence in managing unexpected financial situations.
By prioritizing and providing support for employees’ financial well-being, employers can mitigate decreased productivity, low turnover, and financial stress, ultimately fostering a more engaged and stable workforce.
If you are an employer and not sure which one of these loan repayment assistance programs is right for you, VantagePoint has a team of experts that can offer consultancy and support in setting up any of these three benefits having many years of experience in benefits administration. Get in touch with us or schedule a demo today!