It’s becoming more popular for employers to add financial wellness resources, or additional benefits to their total compensation package to help employees reduce their financial stress. Employer-sponsored debt repayment programs are one of the options employers are starting to consider to help their employees. These programs were created to help younger employees who may not be able to save much, if any, for retirement while they are still carrying student loans. Though, one could argue that employees of all ages feel like they can’t afford to save enough for retirement due to other debts they’ve taken on to buy a home, or the rising cost of living.
How common are these programs?
In the U.S., about 17% of employers offer some kind of student loan aid. But according to a 2021 survey by the Employee Benefit Research Institute, an additional 31% of employers were planning to begin offering the benefit in the next few years, as reported by CNBC. The most common programs seem to only focus on student loans.
This is a newer benefit on the Canadian scene, with only a handful of companies currently offering this type of option to employees. Part of the reason for this may be that in order to send funds directly to an employee’s loan account, employers have to set up a program managed by a third party. They can’t generally do this on their own. Marmot Benefits is the first Canadian company to offer employers the ability to add student loan repayment programs to their total compensation package, and is now working on mortgage payments as an additional option. While employers could choose to offer an additional cash amount to an employee’s paycheque as a student loan repayment benefit, this is essentially a raise and might trigger equity concerns across the workplace. Further, just topping up a salary may not result in the same improvement that dollars directed right to a debt would have because employees may not end up directing those funds to the actual loan, defeating the purpose of the benefit.
How do these programs work?
Formal employer-sponsored debt repayment programs send funds from each pay directly to the lender, and are applied to the selected employee’s loan. There is a behavioural benefit to the way these programs work. Paying funds directly to a loan account will make people more likely to keep at it. It’s easier to keep extra funds flowing to their loan payments if it’s automatic through their payroll, and they don’t have to see those funds hit their personal account and leave again. And employees can’t easily re-advance student loans or traditional mortgages, unlike a credit card, which helps them stay on track. This is also why employer-matched group RRSP and 401(k) programs are so effective. Out of sight, out of mind. Before we know it, our accounts are growing or, in the case of debts, shrinking.
This type of program can make it seem like the debt is reducing faster without as much effort or stress, which can have a more palpable impact on an employee's stress level since they don’t have to move the money out of their account and put it towards the loan. It’s very easy not to feel the impact of a raise. When someone gets a bump in salary but doesn’t give that money a job, it can often be as if they really didn’t get a raise at all. The same thing can happen when extra funds are added to their pay, but it’s left to them to make sure those funds hit the loan account.
Are these programs fair to all employees?
Most employer-sponsored debt repayment programs focus on student loans. There is definitely a potential issue of fairness here, especially for employers who are just adding extra funds on each pay for select employees who qualify for the benefit, and not for other employees because they don’t happen to have student debts. Employees of all ages can have student loan debt, so it does not necessarily exclude any age group, but it’s less common for employees in their 60s to carry student loan debt compared to those in their 20s. Employees who’ve managed not to carry any debt are losing out on a benefit, which may be unfair. It’s worth noting that in the U.S., non-discrimination rules don’t apply to student loan repayment programs. Of course, that doesn’t mean it’s fair.
To make a more fair benefit, employers could consider offering an equivalent benefit to other employees to cover other types of debts, or additional matching options within their group retirement plan up to the same maximum employer contribution. Either way, gaining employer-sponsored benefits should require the employee to put some skin in the game.
A great example of the way employers can provide a fair benefit is Abbot’s Freedom 2 Save program. Employees can participate in the company’s 401(k) program and elect to redirect their minimum 2% contribution to their student loan. Then, Abbot will still contribute their 5% portion to that employee's retirement via their 401(k). This sort of offer would be completely fair to all employees if each receives a 5% match for a minimum 2% contribution to their group retirement savings program.
Let’s face it, financial stress is one of the main sources of stress for most employees, and something has to be done. Employers are paying for the financial stresses their workforce carries since it reduces production, creates general distraction and increases turnover. So for employers, it’s worth investing in programs that have the greatest chance of reducing money stress.
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