The Student Loan Employer Program Landscape
Take a second and picture your employees finally free from student loan debt. Can you see them engaged and working efficiently, no longer anxious about their money situations? We’re talking about a less stressed workplace, higher 401(k) participation rates, and less absenteeism and turnover. This is what a student loan employer program could help bring to your company.
But what is a student loan employer program?
It’s a way for businesses to offer student loan repayment assistance to their employees either through contributing to a repayment plan or pointing them toward a service. And it can be an awesome way for you to show your team that you care about them as people, are invested in their futures, and that you want to help.
The thing is, the student-loan-employer-program landscape is a mixed bag. There are some good options. And, well, there are also those that are just trying to make a buck. Some even promote refinancing—kicking the student loan can down the road. To find the best program for your employees, you’ll need to look closer and read the fine print. Otherwise, you might end up inviting a wolf in sheep’s clothing into your employee benefits.
Student Loan Refinancing
Refis are some of the most common types of student loan employer programs in the market today. They’re everywhere. With this approach, private lenders pay off your employees’ student loans and then become their new lender, promising a lower interest rate and better repayment terms.
For some borrowers who are struggling with their current rate and repayment terms, refinancing may seem like a good idea. The problem is that most borrowers don’t need to refinance. In fact, doing so could put them at unnecessary risk. How? Private lenders often offer variable interest rates with their refi programs. These variable rates allow the lender to jack up interest rates in the future, making it even harder for borrowers to pay off their loans on time.
Another problem? When borrowers transition their government loans to a private lender, it strips away a lot of the benefits that were baked into their original student loan agreement, like teacher loan-forgiveness eligibility, loan discharge or forgiveness upon death or permanent disability, deferment, forbearance, cancellation and affordable/income-driven repayment options.1
Student Loan Debt Consolidation
When consolidating student loans, the main goal for borrowers is to roll them all into one lump payment. It’s similar to refinancing, but typically only federal student loans can be consolidated.
The problem with consolidation is that, even though the borrower is typically getting a better interest rate and lower payment, they actually end up lengthening the life of the loan. If the goal is to get out of student loan debt, then extending the life of that loan obviously isn’t the answer—even if the borrower gets a lower monthly payment.
Another con of student loan consolidation is that borrowers can’t refinance to lower their interest rates after they consolidate. Instead, they’ll be stuck with the rate they get until they pay off the loan. That could lead to them paying thousands more!
Non-Tax-Advantaged Repayment Programs
Then there are options that allow you to actually make a dollars-and-cents contribution toward helping your team pay down their student loan debt faster. Again—you’ve got good and bad options to choose from.
One option is a non-tax-advantaged student loan repayment program. You can probably tell what’s wrong with that right away—it’s not tax-advantaged. This is an important detail—if you’re going to offer a repayment plan to your employees, it needs to be a tax-advantaged plan. Otherwise, you’re just throwing money away or raising your employees’ taxable income, which could make them have to pay more in taxes. (And they won’t find that very helpful.)
And since you have tax-advantaged options, there’s really no reason to offer your employees a program that would come back and hit them in the wallet. So, now that you know which plans you don’t want, let’s dive into how The CARES Act opens up the door to the tax-advantaged student loan repayment programs you do want.
1. Consumer Finance Protection Bureau, 2017