Sharing the student debt load

More than 40 million federal student loan borrowers will be required to resume payments Feb. 1, after a freeze of nearly two years that also dropped interest rates to 0%. 

For many advisers’ clients, the pause in required monthly payments has provided breathing room, giving them time to pay down other debt, save up for homes or build their emergency savings. 

But for many others, especially those who faced unemployment during the pandemic, the payment freeze has been a financial lifeline. That hasn’t been lost on employers, who now more than ever are juicing up benefits in order to help fill vacant roles in a labor market that is favoring workers more than it has in the past. 

One adviser’s client, a pediatrician, saw her income drop during the pandemic as fewer patients made office visits, said Erik Kroll, a financial planner at Hilltop Financial Advisors.  

With the pause on federal student loans, “she went from a $1,300 monthly payment to a zero-dollar monthly payment,” Kroll said. The client’s loans were originally outside of the federal system, but she consolidated them so that they fell within it, making her eligible for the payment freeze, he noted. 

The pediatrician has more emergency savings now than she did prior to the pandemic and is well prepared for when payments resume, he said.  

“That was a pretty big win for her,” Kroll said. 

BE PREPARED TO PAY AGAIN

When the payment freeze began in March 2020, it was set to expire in six months, but it has been extended multiple times. In August, the Biden administration renewed the moratorium for what looks to be the last time. Some Democratic members of Congress voiced support for the latest extension but argued that it did not go far enough, instead pushing for loan cancellations of up to $50,000. Meanwhile, several Republicans in Congress criticized the latest extension, noting that it would cost the government an estimated $20 billion, in addition to the $76 billion that resulted from the prior rounds of loan pauses. 

“For a lot of people, [Feb. 1] will be the first time entering repayment in two years,” said lawyer Adam Minsky, whose practice is focused on student loans. Minsky said he is advising clients to budget for those payments, and, since two federal service providers are changing at the end of the year, make sure their contact information is up to date and they have documented their payment histories. 

Those who opted to make payments have chipped away more quickly at balances because of the 0% interest rate, and borrowers who are on public-service loan forgiveness programs have also benefitted, he said. 

“A lot of those folks are now closer to achieving eventual loan forgiveness under that program without having made any payments,” Minsky said. 

Advisers also said they encouraged clients to put the money they would have spent on loan payments aside, so they didn’t get used to having extra money every month. 

“As the Jan. 31 deadline approaches and student loan forgiveness looks unlikely, I will work with clients on an individual basis to determine if it makes sense to make a large lump sum payment to reduce their overall loan balance before interest begins to accrue again,” Justin Green, founder of Assist FP, wrote in an email. 

Adviser Diane Pearson of Pearson Financial Planning said she took on three clients during the pandemic who were affected by the payment freeze. All three clients set the money aside — for emergency savings, paying down credit card debt or contributing to an IRA, she said. 

“They didn’t get used to the extra money being in their checking account and spending it. When payments go back into effect, they’re not going to feel it either way,” Pearson said. “There’s a psychological aspect of ‘out of sight, out of mind.’” 

BRACE FOR THE INEVITABLE

For recent grads who have student loan debt but have never had to make a payment, Feb. 1 could give them a jolt. 

“Some borrowers may be shocked to see how much their monthly payments are, especially for new graduates who might find out their loan balance and monthly payments for the first time,” Saki Kurose, a certified student loan professional at Insight Financial Strategists, wrote in an email. “The default repayment plan is a standard 10-year plan … If that repayment option does not work for your budget, you should consider enrolling in one of the income-driven repayment plans that you qualify for.” 

Those plans require payments of 10% to 15% of a grad’s discretionary income, or in the case of parent borrowers, 20%, Kurose said. 

“It is very important to explore federal student loan repayment options before the payments resume and understand the short/long term implications on your financial situation,” she said.

For employers that are fighting to recruit talent, that need is obvious. Many have gone beyond tuition assistance, adding perks such student loan contributions or 401(k) matching contributions for those who are paying down loans. 

STEP AHEAD

In 2016, Fidelity Investments added a perk called Step Ahead, which provides up to $10,000 per employee in student loan payments.  

“We did it because we heard our employees and managers say they were putting off major life decisions,” such as buying homes, saving for retirement or building emergency savings, due to student loan payments, said Amanda Hahnel, head of student debt retirement at Fidelity. “That was really concerning to us.” 

The company, which now offers a similar service for its employer clients, has contributed payments to more than 12,000 of its employees’ loans, representing about $58 million in principal and $27 million saved on interest. Cumulatively, that has saved the workers a total of 17,000 years in payments, Hahnel said. 

Fidelity is beginning a push to hire about 9,000 new workers, largely for customer service and tech roles. Having attractive benefits, such as the student loan repayment program, is an effective recruiting tool, Hahnel said. 

[More: Fidelity doles out perks to high-net-worth private clients]

About half of Fidelity workers who have since been hired and have student loans said that it was a major factor in their decision to work for the company, and the attrition rate among participants in the program is 75% lower than those who don’t use the benefit, Hahnel said. 

It’s also a matter of supporting diversity and inclusion, as women and people of color carry disproportionately higher amounts of student loan debt, she said. And while younger workers are the most likely to have such debt, baby boomers with student loans have the highest balances, on average, she said. 

“Student debt isn’t going anywhere, and it’s certainly something [employers] can help with,” Hahnel said. 

TAKING THE 401(K) ROUTE

Congress is currently considering legislation that would specifically allow employers to contribute to 401(k) accounts for workers who don’t direct any of their earnings to the plan but are paying down student loans.  

“This is such an exciting area of policymaking because we are anticipating about a 40% uptake following the passage of the SECURE Act 2.0 within 12 months,” said Laurel Taylor, CEO of FutureFuel.io, a company that works with employers and individuals on student loan debt. “We would imagine near 100% adoption within 36 months” among the roughly 49% of employers that provide 401(k) matches already, she said. 

About 70% of recent grads entering career fields have student loans, and it takes them an average of more than 17 years to pay those off, Taylor said. Such workers are also in high demand. 

“This is largely a population that has not participated in any retirement savings previously,” she said. A matching contribution from the employer “is going to be maybe the only retirement savings that much of our educated population has.” 

Taylor experienced the burden of debt repayment firsthand, having spent 12 years to pay off her graduate and undergraduate loans, she said. But her mother was also affected, having funded part of her education. 

“Student debt is a family attribute,” she said. 

Since the pandemic began, FutureFuel.io has grown by about 1,600%, with the usage of its services more than doubling, Taylor said. 

A CASE STUDY

In 2018, Abbott Labs received a private letter ruling from the IRS that allowed it to make 401(k) matches for employees who were paying student loans. The company was the first to request that arrangement, and some other employers have since followed, though many are reportedly waiting on a legislative change for those kinds of matches. 

Abbott’s program, Freedom 2 Save, provides a 5% company match in the 401(k) for workers who spend 2% of their pay on student loans. The firm has a goal of making $10 million in 401(k) matches under that program by 2030, Diego Martinez, divisional vice president of benefits and wellness, said in an email. 

“We know that Freedom 2 Save gives us a competitive edge in recruiting and retaining the best and brightest workers and helping those employees attain financial success. Anecdotally, employees have told us Freedom 2 Save was the deciding factor in coming to work for us,” Martinez said. “One of our clinical specialists used Freedom 2 Save to help pay down nearly $60,000 in student loans over two years while saving for retirement at the same time. She’s now saving money to buy her first property.” 

Related Topics: Student Loans