The key role that student debt plays in employee financial well-being — and next steps for employers

Since the restart of student loan repayments in October, the impact of carrying student debt has been made increasingly clear. Studies indicate that student loan debt reduces retirement savings — a finding that makes sense considering nearly four in 10 Americans can't cover an emergency expense using cash. Student loan payments add a financial burden to an already strapped workforce, providing them with less buffer to devote to short- or long-term savings.

Around one in five U.S. adults have student loan debt, making it an important issue for employers to consider when thinking about their financial benefits packages. And the impact of debt is not equal: Black college graduates owe $7,400 more than white college graduates — a debt gap that triples four years after graduating. Gender disparity in debt grows around 3% each year as well. Our data supports this: in a survey of a small sample of full-time workers earning low and moderate incomes, Commonwealth and the Defined Contribution Institutional Investment Association found the majority of respondents with student debt had over $10,000 in student loans — and respondents who are Black, Latinx or women were significantly more likely to have over $50,000 in debt than white respondents.

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There are a number of mechanisms that employers can examine as they consider the best ways to support their workforce through student debt repayments. As with all financial benefits, it's important to take into account the diverse needs of your workforce. Workers earning low and moderate incomes are likely to have a different set of requirements than those earning higher incomes, and meeting all of their needs might mean a multi-pronged solution to student debt repayment benefits.

SECURE 2.0 Policy for Student Debt
While policy decisions around student loan forgiveness remain in flux, a Student Loan Match Provision in SECURE 2.0 provides a gateway for employers to help with student debt repayment, allowing employers to make matching contributions to retirement plans based on the employees' qualified student loan payments. 

It's not surprising that efforts have been made to link student loan repayment to retirement. The pausing of student loan payments during the pandemic served as a demonstration of how they hinder financial security. According to Fidelity, the student debt payment pause correlated with an increased participation in retirement savings, with 72% of student loan borrowers contributing at least 5% to their 401(k), compared to 63% prior to the payment pause. There has also been a 5.8 percentage point decrease in student loan borrowers with a loan out against their 401(k) during the pause.

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Tapping into the Student Loan Match Provision in SECURE 2.0 may seem like the most practical option for many employers, but there is the possibility of unintended consequences around equity. Just as student debt burden falls more heavily on workers earning low and moderate income, and those who are Black, Latinx, and women, access to retirement plans is also inequitable. Employers deploying in-plan options to provide student debt support should monitor the usage data through a DEI lens and explore out-of-plan options as well if the in-plan solution is limiting DEI impact. 

Out-of-Plan Options
Another option made possible through the CARES Act pandemic relief law allows employers to pay up to $5,250 per year towards an employee's student loans, tax-free for both the worker and the business, as an expansion of an existing tax break. It's important to note that this tax break is set to expire in December 2025 without further intervention from Congress.

Outside of policy, employer guidance around financial issues is often effective. Companies can help workers understand their repayment options, including eligibility for government assistance programs, or partner with providers in the student loan space to help with loan consolidation and refinancing. Offering guidance, loan consolidation and refinancing is not without risk, and employers should carefully review provider offerings to ensure they meet the needs of their specific workforce.

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Regardless of the solutions chosen by the employer, inclusively designing benefits for all workers is the key to creating student debt solutions that are fair and equitable across a diverse workforce. By that, we mean focusing on intentional design for positively impacting all workers. The ultimate goal of financial benefits is to give workers agency over their financial lives, and that's done by designing products that meet the needs, wants and aspirations of people living on low and moderate incomes. Through thoughtful inclusive design, we can improve outcomes for everyone. 

As we enter a new year full of economic uncertainty, student loans are weighing heavily on the minds of employees. There is an opportunity for employers and solutions providers alike to build high-impact solutions and benefits packages that reduce the student debt burden — a major issue for employees across the board.