The New 401(k)? Providing Student Loan Support as an Employee Benefit

BY Carrie Snider | November 27, 2023

Decades ago, a clever benefits consultant spotted a provision in the federal tax code, section 401(k), that would allow employers to create a tax-friendly way for their workers to save for retirement. The rest is history. As of this year, Americans have more than $7 trillion invested in their 401(k) accounts.

Today, employees are having a different kind of problem: debt. More specifically, student loan debt. They need help digging out so they can then turn to saving. Thankfully, there’s a way for employers to help. Mick MacLaverty, CEO and co-founder of Highway Benefits, discussed the topic “Providing Student Loan Support as an Employee Benefit” during a recent From Day One webinar.

The Student Loan Problem

The sad numbers: the U.S. is approaching $1.8 trillion in student loan debt. This equates to about 46 million Americans, who average have about $40,000 in loans and around $400-500 a month to pay. For employers, that means about one third of their workforce is struggling financially.

This massive problem has become more severe recently. During the pandemic, loan repayment and interest was paused, but resumed on Oct. 1. That means many recent college grads are scrambling to figure out how they’re going to make payments.

“It’s more or less a dam that's been built up of this pent-up student loan problem that we now have to address,” MacLaverty said. “This is a massive problem.”

The government offered a way for employers to help. In March, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, they expanded Section 127. This allows employers to pay up to $5,250 per year of an employee’s student loan, tax free. The program is voluntary, but companies are seeing the benefits.

Focusing on Talent

At Highway Benefits, which helps companies offer this benefits program, MacLaverty said most of their clients want to offer student loan repayment benefits for two reasons: attracting talent or retaining talent.

“On the attraction side, only 9 percent of companies currently offer student loan repayment as a benefit,” MacLaverty said. For potential employees comparing different benefits, this is a great way to stand out.

“On the retention side, no two companies are alike in how they should or would want to roll out this program,” he said. Companies can choose to offer the max amount available, but may offer less to start, with more given to employees who stay.

“So, if you’ve been at the company for one year, you might get $100 a month, but if you've been there for three years, you get the maximum benefit. Employers are creating an environment that encourages employees to stay and provide a financial incentive to do that in a tax-free way.”

Highway Benefits is a hub for companies to get started quickly and easily, especially to ensure they comply with the laws. Highway Benefits can help companies find out who on staff is eligible, then help the company figure out the best dollar amount that makes sense for them, and ultimately make the student loan payments on their behalf.

Journalist Kelly Bourdet moderated the discussion with Mick MacLaverty of Highway Benefits (photo by From Day One)

Why not just offer a higher salary or a $5,000 annual bonus to help employees? One big reason is that the student loan repayment benefit dollars are tax-free. That benefits the employee, but it also reduces the taxable income of the business.

“This is arguably the most effective compensation dollar you can give someone if they have student loans,” he said. “Every dollar contributed goes right into their loan account.”

Value-Added Benefits

But there is another piece to this, MacLaverty added. A company that offers this benefit to employees is showing a degree of care and humanity that employees look for and appreciate more than ever.

“You are telling them, and showing them, ‘I care about your financial well-being.’” It’s not just throwing cash at them to do what they want with it, but putting in the extra effort to help solve a problem for them. “So every month, in addition to whatever your payment is, you’ll get a little bit extra, and we'll get you out of debt faster. Wow, what a story that tells prospective or current employees.”

For the employees who don’t have student loans, MacLaverty said they appreciate working for a company that offers it. Not every benefits package is a one-size-fits-all. Not everyone takes advantage of the benefit but for those it does help, it makes for a better employee and a better work environment.

Only 2% of companies offered this type of benefit in 2017, 4%  in 2018, and 8% in 2019. Then student loan payments were paused, but now that people are back to paying them again, MacLaverty anticipates an uptick in companies that offer this benefit.

The extended Section 127 is slated to expire at the end of 2025, however, the original Section 127 was started 30+ years ago as a short-term program but kept getting extended. MacLaverty believes the same will happen with the student loan repayment benefit, and hopefully the max benefit dollar amount will increase.

Highway Benefits is seeing about 40% of company clients offer $100 a month per employee, about 50% introduce tenure rules, and about ⅔ offer a multi-tier rule system. Those who are eligible for the benefit and are taking advantage of it? Ninety percent. Clearly, people want this.

MacLaverty said they’ve gotten emails from employees who are ecstatic about the help they’ve received in paying their student loans.

Employees are even emailing their total rewards and HR teams with testimonials like, “‘I’m out of debt. I now don't have this burden hanging over my head and I can live freely.’’

Editor's note: From Day One thanks our partner, Highway Benefits, for sponsoring this webinar.

Carrie Snider is a Phoenix-based journalist and marketing copywriter. 

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