If you have federal student loans, chances are you're sweating the start of October. That's because a COVID-era moratorium on loan repayments is due to expire, meaning those bills will once again come due.
You're not alone—indeed, tens of millions of Americans are in the same financial boat.
That's why today's Weekend Tea is centered around programs that can help you deal with some of that debt, including a (relatively new) method where workplaces can provide student loan repayment as an employee benefit.
The Tea
Oct. 1 isn't just a pivotal date for tens of millions of Americans with student loan debt—it's a noteworthy date for the U.S. economy as a whole.
Back in March 2020, the CARES Act enabled the U.S. Department of Education to pause eligible federal student loan payments and set interest rates at 0%—one of numerous governmental efforts to insulate the economy from COVID-19's wreckage.
However, that pause is coming to an end. Interest already began accruing again on Sept. 1, and Moody's Analytics Chief Economist Mark Zandi recently told Newsweek that, come the start of October, "some 21 million borrowers will need to resume their payments, with the average payment of about $300 per month." That amounts to about $75 billion, or 0.3% of GDP (But Zandi says once you back out a few million borrowers who simply can't or won't start repaying, as well as people who can still afford to spend despite resuming repayments, that comes to 0.2% of GDP—still a meaningful dent.)
If you're among the Americans who are about to resume repaying your federal student loans, though, you still have a few avenues of relief—though some are admittedly better than others.
Refinancing
When you refinance a student loan (whether it's federal or private), you're typically aiming to a.) lower your interest rate, b.) lengthen the term of the loan so you're able to make smaller payments over a longer period of time, or c.) both.
Refinancing for a lower rate makes good financial sense when interest rates are dropping—but interest rates have been skyrocketing in the other direction (up), making now a terrible time to try to refinance your student loan.
You should only try to secure a longer payoff period if you simply can't make the current monthly payment, however, because doing so increases how much you'll pay over the entire life of the loan.
Income-Driven Repayment (IDR)
Income-Driven Repayment (IDR) plans allow you to set a monthly student loan payment based on what you can afford given your income and family size, over a certain period of time. And if you make payments across the whole term, your remaining balance is forgiven.
The Department of Education offers four IDR plans—Saving on a Valuable Education (SAVE), Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR)—that have somewhat different terms and qualification standards but operate under the same general premise.
YATI Tip: It'd be crazy to invest money before you pay off your student loans, right? Well, actually …
For example, the SAVE plan sets your monthly student loan repayment at 10% of your discretionary income for 20 years (if all loans are undergraduate) or 25 years (if any loans are graduate or professional study). Anyone with eligible federal student loans can use SAVE.
You can check out all the different types of IDR plans at StudentAid.gov.
Public Service Loan Forgiveness (PSLF)
A Public Service Loan Forgiveness (PSLF) plan allows you to have the remaining balance on your federal loan forgiven after you've made just 10 years' worth of qualifying payments (120 payments) while working full-time at a "qualifying employer." Qualifying employers include any U.S.-based government organization, eligible not-for-profit organizations, the Peace Corps, or Americorps. Payments typically have to be made under IDR plans.
You can learn more about PSLF plans at StudentAid.gov.
Student Loan Repayment as a Benefit
Where we'd really like to spend some ink is on another form of student loan assistance that is only a few years old, and that's about to become a lot more relevant as student loan repayments resume.
And that brings us to our guest for this week.
The Take
To tell us more about student loan repayments as a benefit, we're talking to Mick MacLaverty—a student loan expert, but also CEO and co-founder of Highway Benefits, which helps employers offer student loan repayments as a benefit.
What you might already know is that many employers already offer educational assistance, like paying employees' tuition toward college degrees and professional certifications. However, thanks to the CARES Act, employers can now put money toward employees' student loan payments in a tax-advantaged way, much like they can with 401(k) contributions and health savings account (HSA) contributions.
We sat down with MacLaverty to answer a few questions to help you learn more about this benefit. Here's what he had to say.
Young and the Invested (YATI): Anecdotally, I've seen plenty of companies offer things like tuition assistance. But I've rarely seen this benefit, and you actually mentioned prior to this interview that only 8% of companies currently offer it. Is student loan repayment as a benefit pretty new?
Mick MacLaverty: A bit of a history lesson: [Student loan repayment as a benefit falls] under Section 127 of the tax code, as does tax-free educational assistance, which is what you were just referring to. So Section 127 allows for tax-free educational assistance up to $5,250 per employee per year. (This number was based on the average cost of pursuing a four-year degree back in 1978 and actually hasn't changed in over 40 years.)
So during March 2020, during the CARES Act, the government did two things with student loans that were pretty impactful:
- The government put a pause on all federal student loans and interest on those loans. So anyone who is holding a federal loan (which is more than 95% of all loan holders), all of a sudden, you don't have to make any payments, and interest will not accrue.
- The other thing they did is they looped in student loan repayment as a benefit into Section 127.
So it's not a new law or a new rule. In essence what they did was bucket us under the same umbrella.
YATI: Would you be able to give us an idea of the nuts and bolts of how this works?
Mick MacLaverty: So when you work with Highway, the company is actually in charge of or in control of creating their [Section] 127 plan. Companies can choose again the amount that you can contribute; the maximum is $5,250, so that's $437.50 a month. But if a company wants to contribute 50 bucks a month, 100 bucks a month, 200 bucks a month—or maybe the company wants to say, "If you're an employee and you've been here for a year, you get $50. If you've been here for two years, you get $100 to increase retention," companies can do that as well.
The company will generally send an email out, communicate with their employees that they're going to contribute to employees' loans, then employees will click and enter. An employee can enroll in under five minutes just by entering their existing student loan credentials. Then the employee connects their loan and they're up and running.
YATI: Can you run us through the math to show us how student loan repayment compares to other benefits?
Mick MacLaverty: Your health, vision, dental: That is kind of table stakes. Beyond that, a 401(k) or 403(b) is generally a very desired benefit amongst employees to help them save for retirement. Beyond that, mental health has been very top of mind recently, maternity benefits and fertility benefits have also been top of mind. I think student loan repayment as a benefit has been whiffing there for a little bit, but now it's in the conversation right alongside those benefits.
The student loan repayments benefit is one of the best dollar-for-dollar benefits you can spend on. If you were to give an employee a $5,250 salary increase, you'd also have to pay $400 or so on payroll tax as well. That's a cash outlay of [well more than $5,000], but the employee would receive far less because the employee has to pay almost 30% income tax on those dollars. So, in essence, the company pays $5,250 + $400, then the employee only takes home $3,500.
With student loan repayment as a benefit, the company is contributing up to $5,250, and the employee is receiving up to $5,250. Every dollar contributed goes into not employees' pocket, but into the account of generally their largest financial stressor.
Employers and people teams want to provide tangible benefits to their employees. If a third of the workforce is about to make a student loan payment for the first time in three years, that has become extremely relevant. How is someone going to come up with $400 or $500 a month out of nowhere when inflation is high, they have car payments, credit card payments, mortgages, kids? Any way that a company can help alleviate financial stress for an employee is generally a good attraction retention tool.
YATI: So, 8% of companies currently offer student loan assistance, but you sent me a factsheet that said 31% of companies are "contemplating" offering it. That's an awfully wide gap. Do you have any idea how serious this "contemplating" is? Is it just wishful thinking, or do you actually expect companies to act on this feeling?
Mick MacLaverty: I can tell you that we've seen an increase in companies actually offering the benefit. Back to what I mentioned: In March 2020 during the CARES Act, the government put a pause on federal student loans. So you have tens of millions of people basically saying "out of sight, out of mind, I don't have to deal with this." Thus, over the last two to three years, because employees weren't talking about it and it wasn't top of mind when their employers asked "Hey, what benefits would you like to see?" student loan repayment as a benefit was just a "would be nice to have" benefit.
But now that interest has resumed on loans, and loan payments themselves are due soon [at the start of October], things have changed. The conversation has generally gone from "this is nice, we're thinking about this" to "Hey, how do we actually implement this? We're doing budgeting now and I want to make sure we can get this in this year's cycle."
YATI: You mentioned before that in addition to 401(k)s, that 403(b)s are an attractive benefit. That leads me to ask: What types of organizations can use this benefit? Is it not just private business, but nonprofits, too?
Mick MacLaverty: Absolutely. Any company can offer this benefit.
There are some rules in place, however. For instance, if you own more than 5% of the company, you're only allowed to take 5% of the total monthly dollars into your own account. So, for instance, if a dentist owns his own practice, he or she would not necessarily be able to just say, "Oh, you know what, I'd like to take $5,000 this month and put that into my loan account instead of salary." That, you can't do.
YATI: Do employers get any benefits from offering education assistance?
Mick MacLaverty: It's a great way to attract employees—you can stand out in the crowd, saying "Hey, we're one of the 8% of companies that will put our money where our mouth is and help you get out of the debt you took to get a job at our company." And for those companies who are trying to retain their employee base—employee churn can cost up to 100% of someone's salary just to replace that person—this is more or less a great form of kind of churn insurance on your employees.
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Like we mentioned before, student loan repayment is currently a rare benefit, with only 8% of employers offering it. So right this second, it might not be a viable choice for most people who are about to resume paying off their loans.
But that could change soon. So if you're looking for a job, ask prospective employers if they offer this kind of assistance. And if it's something you'd like to see pop up at your own workplace, bring it up with HR and see what they have to say.
Riley & Kyle
Young & The Invested (Soon to be WealthUp)
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