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More than a paycheck: How employers can help employees pay off student debt

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For today’s young workers, the starting gate to the American Dream has been moved back substantially. These individuals face far greater financial challenges than did their predecessors. Not only are college graduates carrying much more debt into their working years in the form of student loans, but employees are now largely responsible for saving for their own retirement. Recognizing these challenges, some employers are stepping up to help.

The percentage of college graduates with student debt has exploded, and so have the average debt amounts. Seventy percent of the class of 2014 graduated with student loan debt, as compared to 49 percent of graduates 20 years earlier.1 Meanwhile, the average amount borrowed more than tripled over this period, from an average debt amount of $10,349 in 1994 to $33,050 in 2014.2

At the same time, traditional pensions have largely been replaced by 401(k) plans as the workplace retirement plan of choice of employers. With 401(k)s, employees who fail to make contributions early in their career not only lose the value of those contributions in the form of lost retirement wealth, but also lose the impact of compounded earnings on those contributions over multiple decades. The consequences are even greater when an employee fails to contribute enough to a 401(k) plan and, as a result, forfeits a potential employer match. Employees with student loan debt are at much greater risk of not being able to retire securely if they are unable to contribute to a 401(k) due to their monthly student loan payments.

While most young employees may not be losing sleep today about their retirement, many are feeling financial stress resulting from their student loan burden. Even minor bills can create pressure, as funds to pay those bills may be unavailable due to the size of monthly student loan payments. Big decisions, such as getting married, buying a home, or having children, may also need to be delayed due to financial considerations.

Is there a way for employers to help young workers deal with these challenges? There indeed may be. In 2015, a handful of employers began offering student loan assistance programs to help their employees manage their student loans. These programs come in a variety of shapes and sizes. Some offer assistance with loan consolidation, or education about loan repayment and loan forgiveness programs, while others take the shape of employer-matching programs, whereby employers provide a match to pay down student loan debt or match an employee’s student loan payment with a contribution to a 401(k) program.

Employers who are thinking about lending their young workers a helping hand should follow three simple steps. First, acknowledge that, although other generations may have had it tough, today’s new generation of workers are facing a steeper climb to financial success. Second, if you haven’t done so already, embrace automatic enrollment for your 401(k) plan so new employees have to opt out if they don’t want to start saving for retirement. While many employers have taken this step, more need to. Finally, consider offering a student loan assistance program. Employer-provided benefits programs have evolved over time based on the current needs of employees and the potential payback to employers. Today’s employees need help with student debt. It’s time for another evolution.

 

 Footnotes

1 Kantrowitz, Mark, “Who Graduates with Excessive Student Loan Debt?,”p. 2, 2015. http://www.studentaidpolicy.com/excessive-debt/
2 Ibid.

 

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About the Author

James (Jim) Mahaney is a vice president with the Strategic Initiatives unit of Prudential.

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