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Pros and Cons of Offering Student Loan Repayment as a Benefit

If you’re looking to breathe new life into your benefits package, consider helping employees pay off their student loans. Starting an employer student loan repayment program has several benefits, but there are also some potential pitfalls. Here’s what you need to know before you offer student loan assistance as an employee benefit.

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What is employer student loan repayment?

Under this type of arrangement, an employer pays student loans for eligible employees. Some firms pay student loan servicers directly, while others give the money to employees. In the second scenario, each employee uses the money to make student loan payments.

Related: The HEROES ACT and Student Loans: What Employers Should Know

Types of student loan assistance

If you want to be an employer paying student loans, there are two ways to structure your program. The first is to offer direct assistance, which typically takes the form of cash payments. You can distribute the funds as part of your biweekly payroll or offer to match an employee’s loan payments dollar for dollar.

The second option is to give employees the opportunity to use discretionary benefit funds to make loan payments. This type of program is more flexible than direct assistance, as it gives employees more control over the benefits they receive.

For example, an employee with no student loans may choose to take advantage of other benefits, while an employee with a high loan balance might want to take the maximum amount of student loan assistance.

Payment structures

Once you establish an employer student loan repayment program, there are four main ways to structure the payments:

  • Recurring: This is the easiest way to set up a student loan repayment program, as you just have to schedule the payments.
  • Employee matching: Some employers encourage employees to pay off their loans faster by offering a payment match. If you take this approach, you’ll set a maximum percentage, much like you would with a 401(k) plan. For example, you may want to match up to 6% of an employee’s student loan payments each year.
  • Lump sum: Offering a lump sum takes the guesswork out of setting up recurring payments or figuring out how much to match. You can offer a sign-on bonus or give eligible employees a lump sum payment each year.
  • Benefits trade: Another option is to allow employees to trade their unused benefits for help with their student loans. For example, if one of your team members doesn’t need your health plan, you can use some of the money saved on premiums to make student loan payments on their behalf. Some companies even allow their employees to trade unused vacation and personal time for student loan assistance.

Related: Employee Benefits: Types of Perks to Offer Employees

Advantages of an employer paying student loans

For smaller businesses, creating an employer student loan repayment program makes it easier to stand out from all the other companies competing to attract quality employees. If you’re one of the few companies in your community to offer this benefit, you may become an employer of choice in your area.

Offering student loan assistance also shows employees that you’re invested in their well-being. When employees know they’re valued, they’re more likely to stay with your company instead of looking for opportunities elsewhere. As a result, creating an employer student loan repayment program may help you increase your retention rate.

Finally, helping employees with their student loans may lead to improved customer service. When team members are satisfied with their working conditions, they tend to work harder. They’re also more pleasant and less likely to allow stress to affect the way they treat customers and colleagues. As a result, offering loan assistance may eventually increase your customer satisfaction ratings.

Related: Employee Retention

Disadvantages of offering student loan repayment as a benefit

Creating a student loan repayment program has several benefits, but it isn’t a magic bullet for attracting and retaining quality employees. Before you offer loan assistance to your employees, be aware of these potential drawbacks.

One of the biggest disadvantages of this type of program is that not all of your employees can use it. For example, you may have more senior employees who already paid off their loans or employees who used grants and scholarships to cover their tuition. Offering a benefit that not everyone can use may lead to some resentment, affecting how employees interact with each other and with your management team.

Another drawback is that starting a new benefits program creates more work for your HR department. Depending on the size of your HR team and the projects they’re already handling, implementing a new benefit program may be challenging.

One of the most obvious drawbacks is the cost of implementing such a program. Whether you offer lump sums or recurring payments, helping employees with their student loans is a significant investment. Before you offer this type of benefit, do a cost-benefit analysis to determine if the potential benefits of the program outweigh the direct and indirect costs.

Launching a successful student loan repayment program

Now that you understand the pros and cons of an employer paying student loans, here are some tips to help you launch a successful repayment program.

Set clear eligibility criteria

When you announce the new benefit, make the eligibility criteria crystal-clear. For example, if you limit program participation to employees who’ve been with the firm for at least 1 year, make sure every current employee and new hire knows they won’t qualify until they hit that 1-year mark.

Do some research

Before you do the work of creating a loan assistance program, do a little research to make sure it’s truly needed. If you have 100 employees and only 25 of them need help with their student loans, then the program isn’t likely to provide much of a benefit. Send out surveys to determine if team members would rather have you help them with their loans or offer some other type of benefit.

Dedicate the right amount of resources

To create a successful program, you must have the right people and processes in place. If your HR team is understaffed, do your best to fill open positions before you start working on a new benefit option. It’s also important to make sure you have enough money to make the promised payments once the program launches.

Frequently asked questions

Is employer student loan repayment taxable?

Under the Consolidated Appropriations Act, you can give your employees up to $5,250 per year in tax-free loan assistance. This tax benefit expires on December 31, 2025, so if you want to give your employees a tax advantage, try to launch your new loan assistance program by the end of 2023.

Is employer student loan repayment the same as Public Service Loan Forgiveness?

No. The PSLF program offers forgiveness to eligible borrowers who work for nonprofit organizations and government agencies. It’s a government program, so each borrower must meet strict guidelines to qualify for loan forgiveness. Employer student loan repayment is an optional benefit provided by some employers. As long as you follow state and federal employment laws, you can structure a loan assistance program in any way you like.

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