U.S. employees of all ages are grappling with a major obstacle to achieving retirement readiness: student loan debt. The nation’s student debt soared past $1.5 trillion this year, putting many workers behind on their financial goals and, in the worst cases, at risk of defaulting on their loans.i
The average college graduate in 2016 left school carrying more than $30,000 in student loan debtii at an average monthly payment of $351.iii For many young people, the pressing need to pay student loans causes them to delay or forego saving for retirement. As they direct their savings dollars toward student loan payments, they miss out on the potential compounding benefits of saving early, as well as any employer matching funds.
Meanwhile, many older employees dip into their retirement savings to pay for a child’s tuition, or they reduce or stop their 401(k) contributions to pay off their kids’ student loans.
Burdensome student loans also present challenges for employers, as employees struggling to balance their financial priorities can succumb to significant stress and health problems, conditions that can trigger low productivity and absenteeism.iv In addition, the effort to make timely student loan payments coupled with a failure to contribute to a company-sponsored 401(k) plan may result in delayed retirement for many.
This dynamic can drive up workforce costs, as companies pay higher salaries, pass up new talent and face high turnover rates among younger workers who lack opportunities to advance.
Plan sponsors have an opportunity to improve this situation, while also strengthening their workforces. After all, a leading reason that people switch jobs is the chance to work somewhere that offers better benefits.v While the rate at which Americans quit their jobs has hit a 17-year highvi, offering benefits such as student loan assistance can help employers remain competitive in the job market, attract top talent and earn employees’ loyalty.
Taking a paternalistic approach to financial benefits goes a long way with benefits goes a long way with millennials in particular, with 56% admitting they feel more loyal to their employer if the employer demonstrates care about their financial well-being.vii
New solutions for student debt
Between policy changes, proposed legislation and technology solutions, plan sponsors and employees may soon have access to a number of tools to help address student debt.
The IRS this year approved a plan sponsor’s student loan repayment benefit as an add-on to its 401(k) plan.viii Under this plan, employees who are making student loan payments can still receive employer matching contributions, as long as their loan payments equal the match threshold. This approach is aimed at accomplishing two goals at once: Workers can pay off student debt and, with the help of the employer, grow their retirement savings. The ruling may open the door for other plan sponsors to add loan repayment options to their defined contribution plans.
On the legislative side, a 2016 bipartisan effort was proposed to help vulnerable graduates avoid defaulting on their student loans through income-driven repayment plans.ix This year, a similar legislative proposal was introduced aimed at creating easy access to affordable, income-based repayment plans for federal student loan borrowers.x
Meanwhile, the private sector is also developing solutions for the student loan dilemma, with a host of startups embracing the challenge. For example, one young firm has developed software to help employers deliver student loan repayment benefits with a goal of wiping out $30 billion in student debt by 2021.xi
While lawmakers and innovators hatch more formal solutions, plan sponsors can take immediate steps to help employees get out from under the strain of student loan debt. Here are three ideas employers can implement now to empower employees who are struggling with debt:
1. Offer educational seminars and one-on-one financial coaching.
Many younger workers have borrowed without understanding the implications of doing so, unwittingly putting their financial and emotional wellbeing at risk. Likewise, older workers’ retirement savings may be compromised as they borrow or intend to borrow for college-bound children. Targeted education and counseling can be beneficial for employees overwhelmed by student debt. A personalized, tailored approach like one-on-one financial coaching can be effective in helping employees sort out competing financial priorities and improve their overall wellness in a private setting.
Millennials value wellness programs in the workplace as much as, if not more than, their generational counterparts.xii Since they engage well with digital resources, an educational webinar could appeal to younger workers who want the convenience of gaining insight from the comfort of their desks. Make it interactive to instill a sense of community – participants will see that they’re not alone in the struggle. Have a fellow employee who successfully paid off their student loans talk about their experience and share tactics for managing debt while contributing to retirement.