Americans are drowning in student loan debt. The average person (as of 2016) graduates with $37,172 in debt. That's a tremendous burden and businesses are doing the right thing in helping their employees pay down this debt.

That's the general consensus, but it's not actually the best use of your benefit dollars. Here's why.

Student loans are voluntary

Yes, rich kids can get through school without student loans, Yay. But, I'm not talking about that. You choose where you go to school. Or, at least, you choose where you apply. There are good choices and bad choices. A choice to go into massive debt for a degree which doesn't have a high return on investment is a bad choice. If you've chosen massive debt for a degree that does have a high ROI, well, that's a choice you've made.

By giving new employees money for paying down debt, you reward the bad choices and encourage current students to take more loans.

You can actually pay student loans with your paycheck

Giving people a fair paycheck means they can use it to pay down student loans if they so desire. So, your paycheck is smaller if you don't have student loans. That is illogical and, also, a bad deal for employees.

When future raises are calculated, they are usually done on a percentage basis. Bonuses are the same. It's better for the employee to have a higher salary than it is to have a lower salary plus a loan repayment fund. 

Student loan repayment benefits have a disparate impact.

Technically, you can graduate from college at any age. (My own grandmother graduated from college at the age of 72. Yes, she was awesome.) But, the vast majority of recent college graduates are in their twenties. Offering them additional money sounds just as much like age discrimination as targeting Facebook job ads to people between the ages of 22 and 30

While plenty of people carry student loan debt for many, many years, this is a benefit that targets the young over the not so young. 

Tax benefits aren't that great

The IRS just issued a Private Letter Ruling that says that yes, you can give 401k dollars in exchange for paying down student debt. So, instead of "matching" 401k contributions, you "mirror" them. Jane makes a student loan payment using post-tax dollars (i.e. regular money) and the company puts money into her 401k with pre-tax dollars. That sounds great.

And it is great. But that's where the benefits end. If the company simply contributes towards your student loan payment, that's considered income. Which means you pay taxes on it. But, it's not included in your salary for increases and bonuses. In an email to me, Adam Carroll explained, "employees that receive student loan repayment assistance must treat that as income. Which also means that they're paying taxes on the help... 2 steps forward, 1 step back it seems!"

What should you do instead?

Pay everyone a fair salary. Let them make student loan payments if they want. Have a 401k program that is "opt-out" instead of "opt-in." That way, everyone, young and old, borrower and saver, gets a fair paycheck and a fair set of benefits. 

Published on: Oct 8, 2018