Why Student Loan Debt Is an Employer Issue

A financially strapped worker is a human-capital issue—and a prospective job-hopper.

Employers interviewing potential candidates are looking for a “diamond in the rough.” This usually means they are searching for one with specific credentials or that “it” factor. But in today’s work force, a true diamond in the rough can mean something else—finding an employee who is not saddled with crippling student-loan debt. Unfortunately, employers may have more luck finding actual diamonds.

The Stats

The statistics of student-loan debt, as compiled by the Federal Reserve, are staggering. For the Class of 2018, fully 69 percent of students took out student loans with an average debt of $29,800. Perhaps more alarming, 14 percent of their parents took out an average of $35,600 to supplement their child’s debt burden. In total, over 45 million Americans owe over $1.56 trillion in student loan debt; approximately $521 billion more than the country owes in credit-card debt. And unlike credit-card debt, student loans are not automatically dischargeable in a Chapter 7 or Chapter 13 bankruptcy filing. Each year, thousands of young people graduate from school immediately carrying a financial burden their parents never experienced. This burden will affect their out-
look on potential jobs and their future choices.

For this Millennial workforce, getting that dream job that fulfills their life’s desires takes on new consideration. Can that dream job pay their student loans? Is it preferable to work in the public, or not-for-profit sector to take advantage of potential student-loan-forgiveness programs?

Employers find themselves interviewing workers who are not seeking a job because of the rewards of the career, but because of the paycheck or the ability to repay student loans. Someone who takes a job purely for salary will be quick to abandon that job for a higher one. That leaves employers, especially of entry-level workers, facing constant turnover and instability.

The Options

Faced with this new reality, how can employers navigate the Millennial workforce? Many employers have created programs to assist their employees with their loans and incentivize them to stay. A Defined Contribution Plan allows an employer to match the student loan payment paid by the employee in a manner similar to a 401(k) match. The student creates a plan account that the employer pays into throughout the employment. In August 2018, the Internal Revenue Service, in a Private Ruling Letter, stated that such a contribution would not be a taxable event. This ruling makes the program a very attractive option for an employee. However, there are risks in this, as the ruling is not codified and any employer participating in this program runs the risk of a reverse ruling in the future. Congress is moving to rectify this by the introduction of the Employer Participation in Recovery Act of 2019 (H.R. 1043) which codifies the IRS Private Ruling with a tax-free employer match of $5,250.

Another option for employers is a straight match of student-loan payments, regardless of the tax obligations. While this does provide the benefit to the employee, it brings with it inherent issues. Is this match considered a bonus, or is it an increased salary? How does the employer properly withhold tax from these payments? Additionally, without a defined-contribution plan account, it is dependent upon the employee to properly use these funds for student loan payments. This raises a trust issue between the employer and employee and a question of oversight. However, if done properly, it provides a way to transform an unmotivated worker into a motivated one.

The Future

The only certainty on the future of student loans is that the problem is not going away. Politicians from both sides of the aisle have proposed legislation and
ideas on how to address the issue. In his 2020 budget proposal, President Trump called for ending the Public Service Loan Forgiveness Program, ending subsidized student loans and changing federal repayment plans. On the opposite side of the spectrum, Elizabeth Warren is calling for a program to cancel up to $50,000 in student loan debt for all Americans and create universal free public colleges.

The odds of either idea becoming law are slim. Something will eventually be done in Washington, but until that time, employers must deal with the realities they face during each interview. The candidate they are seeing has a different reality than just 10 years ago. As with anything, the innovators survive. The sooner an employer accepts this new world, the faster it will find a way to create a positive, successful work force.