With 44 million Americans owing an estimated $1.67 trillion in student debt, there has been much focus on how to help individuals pay down their balances.
The pause on federal student loan payments has been extended into September 2021, and this past December’s stimulus package included the extension of a provision for employers to help their employees pay down student loan debt.
Originally introduced as part of the CARES Act in April, the provision was slated to expire at the end of 2020 and has been extended for five years, until December 31, 2025. It allows employers to contribute up to $5,250 tax-free to an employee’s student loans each year, meaning the money paid is considered tax-free to both employee and employer. The provision modernizes a longstanding tax exclusion for tuition reimbursement by now offering the $5,250 as a combined tax-free limit, one that can be applied for student debt repayment, tuition reimbursement—or both.
Interest in the new provision has been strong—and Fidelity Investments can claim first-hand knowledge of this by virtue of student debt repayment progress being realized by its own employees.
Fidelity’s own benefits team, which adopted the new tax treatment in April 2020, estimates the provision will save each Fidelity employee participant an average of about $500 in tax relief, totaling more than $2 million in estimated annual savings cumulatively across approximately 4,500 employees. Several of the program’s participants also receive tuition reimbursement benefits.
“Our employees told us they were putting off major life decisions such as buying a home, saving for retirement and even having a family due to their student loan debt,” said Tom Vogel, head of financial benefits for Fidelity Investments. “Since our student loan assistance program began in 2016, more than 12,000 Fidelity employees have saved $58 million in principal plus about $27 million in interest payments with an average savings of $7,000 per person.”
That can move the needle, Vogel added. “We’ve heard some employees have been able to move up their planning because of the benefit, which is exactly what we wished to achieve. We are pleased our employees will benefit as well from the extended tax relief,” he said.
Having the ability to work on various other life savings goals in addition to paying down student debt is a primary reason Fidelity is seeing many plan sponsors adopt this program, added Asha Srikantiah, head of Fidelity Investments’ student debt program for Workplace Investing.
“Student debt repayment benefits from an employer allows employees to breathe easier, knowing they have help tackling stressful debt, and with this provision, they’re not getting taxed for it,” Srikantiah said. “For employers, the tax savings offers another compelling reason to offer a student debt benefit, in addition to possible improved retention, as we’ve seen that employees taking advantage of the program had a turnover rate 52% lower than those that were eligible, but not enrolled.”
Healthcare workers: highest student debt
In a Feb. 9 press release, Fidelity said it has seen a spike in the number of plan sponsors interested in adopting a Student Debt Benefit, especially healthcare employers. This is perhaps no surprise, as year-end data from Fidelity shows employees working in the healthcare industry have high student debt burdens—$690 a month, $100 a month greater than the closest industry. The data is derived from nearly 200,000 loans reported using Fidelity’s Student Debt Tool.
“Healthcare workers are on the front line every day taking care of us during this pandemic, but also struggling the most with student debt,” said Srikantiah. “Our research suggests women and people of color are also disproportionately impacted. Given the heightened stress we’re all experiencing, it’s important to recognize how tightly tied financial stress is to emotional well-being. Paying off debt can have a positive impact financially, as well as with health, work and life overall.”
Fidelity data also show student debt impacts all generations and occupations. Perhaps surprisingly, Baby Boomers with student debt actually lead the pack over other generations, owing in part to Parents Plus loans secured for their children. Of note, the extended tax-free provision does not aid individuals with Parents Plus loans, as the debt must be incurred for one’s own education.
Unfortunately, Fidelity research also shows many individuals are delaying contributing to retirement or are taking out loans against their 401k, an action that is literally borrowing against one’s future to pay for the past. These loans can obviously have a negative impact on 401k balances—particularly among younger retirement savers, who have a longer time horizon and greater potential to save more.
SEE ALSO:
- Why Student Loan Help is the ‘It’ Employee Benefit for 2021
- Student Loan Debt on Front Burner for Biden?
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
