- Student debt may decrease suddenly and in a surprising manner. The Biden Administration is expanding a student loan repayment program in a manner that will widely forgive student loans; because this change did not re quire congressional approval, it may go unnoticed by many employers.
- Employer benefits packages could suffer. With a decrease in student loan payments, companies may possibly see decreased demand from employees for retirement plans that offer matches on student loan debt payments.
- The opportunity for better employee support is here. Despite concerns over employee participation in retirement plans, benefits experts note that there is an opportunity for organizations to offer more holistic financial wellness benefits to employees.
The Biden administration is seeking to provide Americans with another alternative to alleviate their student loan debt by restructuring the parameters of an existing Department of Education program.
While this updated program has the potential to relieve a great deal of students’ loan burden, it also could undermine employer efforts to encourage participation in retirement plans under a new provision in the Secure Act 2.0, as well as stymie a key recruitment tool for some enterprises.
Solving America’s student loan debt crisis has been one of the top items on the Biden administration’s legislative agenda. After its first attempt at easing student loan debt was blocked in the courts, the administration is eyeing a different path: The Department of Education is seeking to significantly restructure an existing income-driven repayment plan (REPAYE); this process may go unnoticed by some because it does not require congressional approval.
Under the current program, graduates must pay 20% of their discretionary income toward their student loans for 25 years before the remaining amount is forgiven. Under the updated program, graduates would make payments for only 20 years before the remaining amount would be forgiven.
Further, they would be required to repay only an amount equal to 5% of their annual income over $31,000. (This threshold is set at $31,000, or 225% of the federal poverty guidelines.)
Potential Effect on Organizations
The primary concern for this potential change lies in retirement benefit offerings, specifically when it comes to the implementation and administration of retirement match programs that are incentivized in the Secure Act 2.0.
If employees and job applicants are less burdened by student loan payments, a program that offers matching funds based on those payments — as offered in the Secure Act 2.0 — would no doubt be less appealing to them. Given the choice of paying nothing or paying $1,000 that will earn them a small match from their employers, employees will be more inclined to pay nothing. That may mean decreased demand for retirement programs that offer matching funds, like the type created by the Secure Act 2.0.
Exactly how much this will impact an organization’s benefits program remains unknown, but now is the time to think about how your organization might best prepare for these potential changes.
Before you think about making changes, you want to consider the impact the program could have on your employees and how you can better serve them, said David Amendola, senior director in the retirement practice at WTW.
“We’re waiting for further guidance from the Department of Education about how it’ll work…It’s a really terrific program that will help lots of people,” Amendola said. “The more people who understand these changes the better. These programs aren’t typically easy to understand or grasp and the application process is tough.”
Amendola noted that organizations can use the program as an opportunity to be of service to their employees. He recommends that employers use the program’s potential challenges to their advantage by partnering with a vendor that will walk employees through the process.
By taking this approach, he said, employers can differentiate themselves from other companies, which will make it easier to attract and retain top talent.
Regardless of what occurs with the student loan forgiveness program or REPAYE, there will still be lots of employees with student loan debt. Some will hold private loans and others will simply be ineligible for the programs.
“The problem isn’t going away,” Amendola said. “We’ll still have $1.7 trillion in student loan debt when the next round of graduates comes up. The problem will persist. Employers will still be well served to provide these benefits to employees.”
Opportunity for Employers
Organizations could also view these changes as an opportunity to revise their overall benefits and offer a more holistic approach, said Bennett Hadley, financial security leader at Segal.
“Student loan repayment programs are just the tip of the iceberg when it comes to differentiating benefits employers can offer,” Hadley said. “The Education Department’s proposed IDR (Income Driven Repayment) plan may begin to address the student debt crisis, but we face a much broader financial wellness crisis in this country.”
That’s where employers can step in and offer holistic financial wellness programs. Hadley recommends including financial education, coaching, budgeting tools, emergency savings accounts, caregiver support, (non-student) debt management and more.
Offering this level of support might be time-consuming and costly, but it could be a major differentiator that sets your company apart from the typical benefits package offered at other organizations. This kind of benefit also is likely to appeal to those grappling with student debt, providing complementary benefits, while also appealing to a broad collection of employees at various stages in their careers.
Another benefit companies can take advantage of is tuition reimbursement. Andrea Meyer, director of benefit services at WorkSmart Systems, noted that tuition reimbursement is a tax write-off for companies that also allows employees to upskill and learn new skills.
“From easy talent acquisition to increased productivity and tax credits, these programs are critical to your continued business success in the future,” Meyer said.
Ultimately, employers should utilize these changes as an opportunity to better serve their employees by addressing many of the financial challenges they’re facing.
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