Employers are realizing that putting total control of retirement decisions in the hands of their employees was a bad idea. Older employees are delaying retirement due to underfunding of their retirement portfolios and market volatility. The end results are increased healthcare costs for companies to support an aging employee population and decreased upward mobility for younger employees. Many employers have taken steps to solve the underfunding problem for future generations of retirees through auto-enrollment and auto-escalation in defined contribution plans. However, they have been unable to solve a continually nagging problem. How do they retain their millennial employees?
Human Resources leaders now have a new secret weapon for solving the millennial employee retention issue. The $1.2 trillion of outstanding student debt new hires are facing. According to a recent article publishing in the Wall Street Journal, 70% of seniors took out loans for their education and are carrying an average of over $37,000 in student debt. More and more companies such as Fidelity, PricewaterhouseCoopers, and SunTrust are launching employee debt assistance programs, in response to the record amount of student debt new employees will have accrued by the time they enter the workforce.
Employers are using debt assistance programs as a tool for recruiting top candidates, employee retention and increased productivity. Studies have shown that simply paying someone a higher salary does not lead to better financial decision-making. Debt assistance and financial wellness programs on the other hand, can foster better financial responsibility. For example, an employer contribution of $100 per month on top of the employee’s minimum monthly payment can reduce loan repayments by three years.
Despite these benefits, here are some challenges that CEOs and Human Resources leaders will want to consider before launching a debt assistance program:
1. It comes at an additional cost.
Your company will need to find additional resources to fund a debt assistance plan, or transfer funds from existing programs, e.g. year-end bonus pools, signing bonuses, etc. To justify the additional expense of a debt assistance program you should establish a baseline for measuring its effectiveness. For example, if your goal is to reduce recruiting costs and improve employee retention, you can set a baseline by calculating your annual costs of recruiting and voluntary employee turnover.
2. It may not be seen as an equitable benefit for all your employees.
Unlike 401(k) matching plans and healthcare plans which are accessible to all your employees, debt assistance programs are only accessible to employees with debt. To appeal to a broader employee base, you may need to revise existing benefits packages or consider offering complementary services and financial benefits, such as emergency savings contributions or financial counseling. Before launching make sure you have a clear understanding of your employee demographic and who within your company a debt assistance program might benefit.
3. It’s a taxable benefit
There is a bill being worked on in Congress that would make a debt assistance program tax exempt for the employer. Until the bill is passed, you and your employee will need to pay taxes on any assistance they receive. Even without a tax exemption this can still be a valuable benefit. Through the extra payments to principal with debt assistance, you can help your employee accelerate repayment of their debt. For example, let’s say your employee has $37,000 in student debt at 4.66% annual interest. If you contribute an additional $100.00 a month, you will cut 2.4 years off of the 10-year repayment term and save them $2,417 in interest over the life of the loan. When assessing the tax impact of debt assistance on your employee, keep in mind you are saving them thousands of dollars in interest payments.
Another important thing to consider is that your employee may also be able to deduct the interest they pay on a qualified student loan. Generally, the amount they can deduct is the lesser of $2,500 or the amount of interest they actually paid. The interest deduction is subject to a phaseout, which means the amount of the deduction gradually decreases and phases out completely if and when their modified adjusted gross income (MAGI) amount reaches the annual limit, which is currently $80,000 ($160,000 if filing a joint return).
If attracting top talent and millennial retention is important for your organization, a debt assistance program is a great tool to have as an employee benefit. However, you should also consider the challenges you might face in implementing a program, and how it will fit in your overall compensation package.
This is guest post written by Emeka Oguh . Emeka Oguh is the founder & CEO of PeopleJoy, a financial wellness benefits provider. PeopleJoy helps companies recruit and retain valuable employees through financial wellness programs that include student loan repayment assistance and financial counseling.
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