Perspectives. Employers explore student loan assistance strategies. By Randall K. Abbott

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1 Perspectives Employers explore student loan assistance strategies By Randall K. Abbott

2 As a member of the Baby-Boom generation, I was able to graduate from college debt-free thanks to a reasonable tuition, part-time jobs, work-study and more than a little help from my father. For Millennials (those born between 1980 and 1995) and Gen Z (born between 1996 and 2010), stories from Dad or Grandpa of a debt-free graduation sound fairly incredible. Today, 69% of graduates leave college with average loans of roughly $30,000 or more. 1 Student debt is now the second largest liability on household balance sheets after the home mortgage bigger than all car loan debt, credit card debt and home equity loans. 2 Some economists observe that this burden leads young adults to delay starting families, buying homes and saving for retirement. And, it certainly creates a financial worry for young adults that inevitably leads to some level of stress, affecting overall well-being. With Millennials now representing a key and growing workforce cohort, corporate America is also becoming sensitive to the debt challenge they face. Roughly two-thirds of the nation s student debt is held by people over age 30, 3 and their prolonged financial stress for a decade or more after they graduate can have a potentially negative impact on productivity. And, as employers compete for talent, student loan assistance is seen as a way to modernize benefits to respond to a clear need. This new employer interest has given rise to a spectrum of approaches, ranging from counseling to financial assistance programs and a suite of new vendors eager to provide services. In general, employers are expanding their financial well-being programs to include student loan assistance programs in the following categories: Student loan counseling: Counseling resources that are often web-based, including information and financial modeling tools. Counseling may also be live via telephone. The goal is to help employees understand the range of options that may be available to better manage their loan obligations. Student loan consolidation: A third-party service engaged by the employer to assist employees in loan consolidation and improving repayment terms by matching unique employee needs with an optimal financial vehicle and institution. Student loan repayment matching: Employer agrees to match an employee s student loan repayments (typically through payroll deduction) up to a certain dollar amount. Student loan repayment assistance: Very similar to an employer match, but the employer provides a dollar allowance not matching the employee s payments. Instead, it specifies a dollar allowance, for instance, up to $3,000 a year. These broad definitions highlight the range of approaches that often overlap, and variations certainly exist. For example, a program might well include financial counseling, consolidation and some form of employer contribution to the debt. Or, only one dimension might be in place. In general, counseling can range from web-based to live counseling. Vendors assisting with loan consolidation are typically agnostic about the financial institutions they select, since individual circumstances will vary. Matching or allowance programs can be administered in-house or outsourced to a third-party specialty vendor. Why student loan programs appeal Employers believe these approaches recognize the changing needs of their workforce and can benefit younger Gen X workers as well as Millennials and Gen Z and as these workforce cohorts supplant the fast retiring Baby Boomers and grow in importance to the organization. Leading employers, especially those in sectors where top talent is critical to success, see student loan assistance programs as an opportunity to creatively enhance their benefit portfolio in a highly competitive market for young and up-and-coming talent. They also accentuate a growing suite of employer-offered services related to financial planning or financial well-being activities. Based on a late 2015 Willis Towers Watson survey, 4% of employers currently have a student loan repayment program, but by 2018, that number is projected to grow to nearly 20%. 4 In fact, given that employer interest has burgeoned in the few months since the study, it s quite possible that the projected increase could accelerate even faster. 1. U.S. News and World Report, 2014 Graduates Had Highest Student Loan Debt Ever, October Federal Reserve Bank of New York Staff Reports, Staff report No. 668, Measuring Student Debt and Its Performance, April U.S. News and World Report, 2014 Graduates Had Highest Student Loan Debt Ever, October Willis Towers Watson Voluntary Benefits and Services Survey. The survey was completed by 317 employers, representing 9.2 million employees in November willistowerswatson.com

3 More complex programs that incorporate Section 125 cafeteria plan provisions and 401(k) match redirection are emerging or under discussion, enabling employees to elect how a specified amount of employer dollars can be directed to a choice of student loan repayment, 401(k) match or paid time off. rules and proprietary state funds if the employer has a multi-state workforce. Nonetheless, it is being explored and adopted by a small number of leading employers. The vendor landscape Employers see numerous value-added reasons for exploring and potentially implementing student loan programs of some type because they: 1. Support employers broader financial well-being efforts, including commitments to overall health and well-being of employees that can lead to higher worker engagement and productivity 2. Enable employers to address a broad social concern that s not going away anytime soon and create a message they can incorporate into recruiting and retention efforts, as well as their Employee Value Proposition (EVP) (this can be viewed as a key differentiator in attracting and retaining younger workers) 3. Provide both value and benefit to the many employees who lack full understanding of their debt obligations 4. Are simple to deliver through a variety of third-party vendors that have emerged to support and execute employer efforts 5. Infuse a halo effect and general brand lift to the whole organization, so they benefit and attract even those without student debt Student loan assistance design No one design exists for all these arrangements; however, there are some typical attributes. For instance, a matching or allowance program usually include some service requirement (e.g., a year s service) and a maximum annual match amount, often with an overall program maximum benefit. To date, maximum dollar ranges vary from $1,500 to $5,000 or more. More complex programs that incorporate Section 125 cafeteria plan provisions and 401(k) match redirection are emerging or under discussion, enabling employees to elect how a specified amount of employer dollars can be directed to a choice of student loan repayment, 401(k) match or paid time off. By nature, these are more complicated and necessitate careful design, advance election, a higher degree of administration, potentially discrimination testing and close scrutiny by legal advisors. As loan assistance has emerged as a benefit, we have also seen a focus on helping employees fund their children s college education via matching amounts to a qualified Section 529 savings plan. This can be challenging due to the multiplicity of state-based A host of vendors has emerged offering web-based educational services, financial modeling tools, counseling to match employee needs to the best consolidation or restructuring options, payroll deduction facilities to support employee repayments, and employer matching or allowance arrangements. Some are an adjunct to a traditional employee assistance program (EAP) while others are specialty service providers dedicated to student loan assistance. These specialty vendors are largely new and, as a result, often lack long-term references and sufficient corporate growth data. Processes and staffing are still in their first generation, which can create risk due to newly developed administrative systems and recently trained staff. These vendors can prove somewhat more challenging to vet for those employers with significant credentialing requirements and/or rigorous data security and penetration testing standards. However, vetting is important, given the vendors may be subject to varying degrees of financial stability. 3 Perspectives: Employers explore student loan assistance strategies

4 The regulatory and tax environment Presently, employer contributions to repayment of student loans are considered taxable income to the employee but are deductible as a business expense to the organization either as employee wages or as a fringe benefit. Employers, vendors and others are lobbying the federal government to allow employer contributions as a tax-free benefit to employees, much like health coverage. Employers should also be aware of potential conflicts with state law and ensure that any deductions do not exceed state minimum wage payments to employees. (Note that states differ on how much can be deducted from an employee s paycheck.) 5 Putting it all together The student loan assistance program from counseling to repayment is a differentiated and attractive arrangement that has benefits for many Gen X, Millennial and Gen Z employees. The offering also has considerable appeal for employers seeking to broaden their appeal as an employer of choice. The programs can be offered as a distinct benefit or as part of a choice design that allows an employee to select from a variety of options such as a 401(k) match or student loan repayment. 6 Both program design and available specialty vendors are nascent, and employers must carefully evaluate program structure, vendor selection, legal guidance and communication. Programs that provide counseling, modeling tools and refinancing assistance carry the smallest potential risk while match and allowance programs are more complicated due to the payroll deduction facilities, concerns about state laws and the manner of employer subsidy. The programs can be offered as a distinct benefit or as part of a choice design that allows an employee to select from a variety of options such as a 401(k) match or student loan repayment. While new and evolving, student loan assistance programs can be a highvalue addition that responds to a significant workforce need. Given the generational workforce shifts, these programs present an opportunity for employers to compete for talent in a new way. For employers seeking to align their brand, reward strategy and EVP, a student loan assistance program can be a key element in updating benefits to meet the needs of a new workforce. About the author Randall K. Abbott is a senior strategist and a North American Leader in the Health and Benefits practice of Willis Towers Watson. He has consulted to many of the nation s largest employers on benefit strategy and design within the broader total rewards construct. He has been an early proponent of evolving student loan programs. The author gratefully acknowledges the primary research and thinking of his colleagues Mary Tavarozzi, Amy Hollis and the Willis Towers Watson Voluntary Benefits team. 40% 5. As a benefits advisor, Willis Towers Watson does not practice law or offer accounting advice. Employers should seek guidance from legal and tax counsel when exploring these arrangements. 6. Such choice arrangements can vary considerably and naturally have implications under Section 125 cafeteria plan rules related to constructive receipt and qualified benefit status as well as applicable 401(k) plan rules, including discrimination testing implications. 4 willistowerswatson.com

5 About Willis Towers Watson Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 39,000 employees in more than 120 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com. Copyright 2016 Willis Towers Watson. All rights reserved. WTW-US-16-ICP-3039 willistowerswatson.com