In a recent post at the Atlantic, Amy Merrick cast a skeptic’s eye on the growing trend of student loan assistance benefits among US employers, arguing that these benefits may not be as helpful to employees as they seem. “For one thing,” Merrick notes, “the student-loan industry is notoriously opaque and difficult to deal with”:
By the time college students graduate, they may have accumulated loans from a number of different places. In contrast with credit-card companies, which typically provide in monthly statements what’s called a minimum-payment warning,student-loan servicers don’t have to tell borrowers how long it will take to repay their loans if they contribute only the minimum every month. … Last year, the [US Consumer Financial Protection Bureau] reported complaints from borrowers that student-loan servicers inexplicably returned payments from employers, applied funds to the wrong account, or made other servicing errors that took months or even years to resolve. In some cases, the benefit affected people’s eligibility for loan-forgiveness programs.
She also points out that student loan assistance is not tax-advantaged in the same way a 401(k) plan or a health savings account is. These payments are treated as regular wages for tax purposes, so employees have to pay income tax on them even as they go directly toward paying off their student debt. A bill that would introduce more favorable tax treatment for student loan benefits was introduced in the House of Representatives in February 2017 but has been stalled in the House Ways and Means Committee ever since and was not addressed in the tax reform package Congress passed last December.
Merrick leverages these points to question whether student debt benefits are really any more valuable to employees than a raise. There are obviously issues to be worked out in the implementation of these relatively new benefits, and of course Congressional action to improve their tax treatment would make them more valuable, but to dismiss them outright at this early stage is premature. For all the media attention they get, student loan benefits remain comparably rare: According to our forthcoming analysis of education benefits at CEB, now Gartner, just 7 percent of organizations offer them. Akhil Nigam, the head of emerging products for Fidelity’s workplace-investing division, tells Merrick that up to 90 percent of the employee student loan payments they process have no issues: Not a perfect track record, but hardly sufficient cause to throw out the baby with the bathwater.
This critique also ignores how employees actually feel about these benefits. Our data shows that student loan reimbursement is even more effective at driving perceptions of total rewards than other education benefits like tuition reimbursement. Further research conducted by American Student Assistance found that 90 percent of young employees (who make up the plurality of today’s workforce) would commit to a job for five years in return for help with student loans. So student loan reimbursement can drive both attraction and retention, particularly of younger workers burdened by debt. For employers, that’s a bottom-line benefit.
Another thing not considered is the psychology of the employee. Contrary to Merrick’s assertion, employees value a dedicated student loan repayment benefit or tuition reimbursement program more highly than a cash reward of the same value. Take for instance the $1,200 a year benefit offered by the Boston advertising agency Connelly Partners, the example she cites. For someone making $50,000 a year, that would equate to a 2.4 percent increase in base pay. Although the effects vary by region, our data shows that employees tend to value education benefits (including, but not limited to, student loans) almost as much as a 5 percent increase in base pay, so the perceived value of the benefit to employees may be greater than their cost to the employer.
A benefit to help employees pay off their debt also signals to employees that the company cares about them, which can have a major impact on engagement and loyalty. It also encourages employees to get out of debt, which they might not do with a cash reward of equal value. Student loan benefit programs can have an opt-in/opt-out structure to give employees flexibility, but also nudge them towards paying off their loans.
To address issues around the lack of transparency from student loan issuers, employers or program providers like Fidelity can also give employees more tools and information to obtain a clearer picture of their loan situation: when will they be free from student debt, what federal and private refinancing plans are available, etc. As with savings plans, such information is not always easy to understand or to come by, and employers should do what they can to bridge that information gap. The problems Merrick identifies, even those that are valid, are not insurmountable and hardly add up to a reason for employers not to offer this benefit—especially when most organizations still don’t.