Paying for college is no small matter and many students take out student loans to help cover the costs. In 2017, most college graduates left school owing about $37,000. In the meantime, average salaries for 2018 college graduates hover at about $50,000.
For young people trying to repay their student loans as well as cover other necessary expenses after college (e.g., rent, utilities, groceries, car payments), budgeting can be tricky.
Yet, some recent graduates are finding that their new jobs come with a surprising, and surprisingly useful, perk: student loan repayment benefits. Although still rare — just 4 percent of employers currently offer such a program — they can make finding the balance between paying down debt, covering living expenses and even saving much more manageable.
Matt Beecher, CEO of Vault, a platform that helps employers offer a student loan repayment benefit, believes that the number of companies providing this benefit will grow quickly.
"It's been a slow-moving adoption, but everyone who looks at the space and the movement truly believes we're moving toward 25-50 percent over the next five years," he says of the portion of employers who will offer student loan repayment assistance. "We've gone from companies saying 'oh, that's interesting,' to quickly moving to, 'wait a minute, this is something we absolutely need to have.'"
Matthew W. Burr, a human resources consultant, agrees.
"Currently, not too many employers are offering student loan repayment benefits," says Burr, who authored a book called $74,000 in 24 Months: How I killed my student loans (and you can too!). "However, as the war for talent continues to increase and turnover continues to be a driving concern in organizations, these perks will grow in popularity."
As they do, there are a few key things to know.
The Advantages of Repayment Programs
Companies offering a student loan repayment benefit normally match contributions from their workforce — much like how 401(k) programs work. Kat Tretina, a personal finance writer, knows about this firsthand because her previous employer offered this match at the end of the year. "Whatever you paid toward your loans," she says, "it would match, up to $2,000 a year."
That provided her with extra motivation, not only to repay her student loan debt as soon as possible, but to also make sure she didn't leave free money on the table. Tretina owed $8,000 in student loans at the time, and she was making extra payments to take full advantage of the company matching program.
"I qualified for the full $2,000 for two years," says Tretina, "so I eventually got $4,000 to pay off my loans. I'm now 100 percent debt-free, which is a huge relief and allows me to pursue my other financial goals, like investing."
Burr believes that programs like this are helpful to both young people who make up the bulk of those with student loans and also to employers.
"Over 44 million people with student loan debt is a tremendous labor pool," says Burr. "Many companies are struggling with employee engagement and retaining talented individuals. With millennials changing jobs on average every two to three years, the cost associated with turnover will continue to impact organizations small and large."
Burr is confident that student loan repayment benefits can be instrumental in resolving these issues.
Choosing Between a 401(k) or Debt Repayment Program
One of the most popular employment benefits on today's job market is a 401(k) matching program. While the matches can vary from one employer to another, this program gives employees a boost in growing their retirement savings.
Young people struggling to pay off their debt, however, might have a hard time contributing money to their 401(k), which can mean missing out on extra money from your employer toward your retirement. And even if their employer also offers a loan repayment program, they may not be able to take advantage of both. That's because student loan repayment benefit programs may come with some strings attached.
Tretina, however, was lucky because she was able to take advantage of both. "My job didn't have restrictions," says Tretina. "You simply had to be employed at the end of the year to qualify for the match. And they offered a 401(k) match on top of the student loan match, so I didn't have to sacrifice my retirement savings, either."
Not everyone is as fortunate. Some workers have to choose between paying off their student loan debt or investing in a 401(k). It's not an easy choice. A 401(k) helps you prepare for retirement whereas paying off your loan quickly means you free up your funds for the future. There might be other catches too with loan repayment programs including lower wages and a contractual obligation to stay with the company for a certain number of years.
Change Is Coming
Growth and expansion of the student loan repayment benefit are also somewhat stifled by the lack of clear government policies and regulations. Today when a company provides a student loan repayment benefit, this contribution is taxable to the employee. But one company has received permission from the IRS to implement a program that would provide tax benefits to workers repaying their student loan debt. Abbott Laboratories has announced it will give employees who put 2 percent of their eligible pay toward their student loan debt the equivalent of a traditional 5 percent company "match" into their 401(k) account.
"The game-changing ruling means a win-win-win situation for employers, employees and benefits program sponsors," says Beecher.
The ruling applies only to Abbott Labs, who specifically asked the IRS to allow this program, and so far the IRS has been reluctant to issue broader guidelines. Still, Beecher is optimistic.
"As of yet, we can't take this to the bank and say that it has the ultimate seal of approval," he says, "but what we may see over the next six months is a more rapid adoption of these types of plans, which will force the IRS to comment on this on a more permanent basis."
Repayment Benefits Might Become Mainstream Soon
Employer-based student loan repayment programs can be a great way to pay off your debt much faster than you would be able to on your own. If your employer offers a student loan repayment benefit, this is a good benefit to consider.
"There's an acute need for the student loan repayment benefit now in the market," says Beecher. "Companies are feeling like it's an absolute need to gain and retain their best employees. If student loan contributions become tax advantaged similar to 401(k) retirement plans, we could see adoption among companies skyrocket, with an even greater benefit to the employees."