More companies every day seem to be rolling out benefits to help employees pay off their student loans. While getting a few hundred dollars a month could certainly help a lot of borrowers pay back their loans faster, there are problems with these programs that usually don’t get discussed in the media.
Here’s why employers offering student loan repayment might not have as big an impact on employee finances as you’d think.
Reason 1: Employer student loan assistance gets offered instead of higher wages
Once you’ve paid off your student loans, your employer now has a four-figure dollar amount they no longer need to contribute to your taxable income because it’s not deductible for the employer.
Unlike employer retirement contributions, student loan contributions stop when the debt is gone. Furthermore, employees without student loans don’t receive this benefit in the form of higher wages.
Regardless of whether you have debt or not, an employer student loan benefit can often be a way for an employer to save money when the employees would have been better off with the same dollar amount in higher permanent wages.
Reason 2: You feel tied down to a job because of student loan assistance
The top reason workers stay in a job is because of comfort. When you have a big financial benefit, it might make you want to stick around longer than if you had the same amount of money given to you in salary.
I waited to quit my job just because of a one-time bonus my employer paid out in the summer. The money ended up being unimportant to my long term well-being, and I could’ve started traveling around the world much sooner if I had decided to dump this benefit.
Similarly, my mom and father-in-law both delayed their retirement because of relatively small $1,000 to $5,000 sums they earned with an additional year of service.
My mom used to say she couldn’t retire and give up “[her] money” to her employer.
Student loan assistance could end up being a similar psychological hurdle to employees quitting for better jobs.
Reason 3: Employers contributing to your loans can raise your monthly payment
Companies that pay off student loans want to help, but they are not your financial advisor or student loan consultant.
They won’t know if you need forgiveness or full repayment, and employer student loan assistance plans are all based on the assumption that you will pay back your loans in full.
Perhaps that’s because executives and human resources professionals who sign up for these programs do not understand the rules of student loan forgiveness.
Imagine a company like Banfield that contributes to its employees’ student loans. Many of these employees are veterinarians who owe more than two times their income in debt and need to be using forgiveness strategies.
The couple-thousand-dollar contribution per year raises their taxable income, however, increasing their student loan payment the following year by 10% of the amount the employer contributed.
If you’re not allowed to reimburse yourself for income-driven payments, then employers forcing you to use the payment on principal could raise your cost of loan forgiveness by increasing your monthly income-driven payments with little benefit.
Reason 4: Some employers only highlight one refinancing option
Some refinancing companies will partner directly with employers to offer special perks like bonuses and discounted rates. While this is certainly a welcome practice, you always need to shop more than one company for the best refinancing deal.
Most of the companies that offer refinancing through an employer student loan benefit plan are ethical, manage the employer’s student loan payment contribution, and try to educate employees on their numerous options.
Some companies, however, try to offer a deceptively low price to the employer so they can get access to a huge pool of employees to push refinancing as the only recommended solution.
There’s a clear analogy here with employers who opt to pay nothing for their 401(k). That employer attracts high-fee investment companies that are happy to earn bigger profits by charging high fees on workers’ retirement savings instead of a reasonable flat fee to the employer upfront.
Reason 5: Employers that pay student loans stop you from taking any risks
Remember, your employer’s goal is to keep you in your seat earning more money for the company than your salary and benefits cost to pay. I can’t criticize because that’s capitalism, and not everyone wants the stress and risk of running a company.
Some businesses are better opportunities than others, however. Owning your own medical or dental practice, for example, is a lot less risky than starting a pizza restaurant and has a much higher upside.
Student loan repayment assistance can make you afraid to leave the comfort of your employer for fear that you might not earn enough to pay back your loans in full.
Usually the opposite is true. By becoming your own boss, especially with skills learned during graduate education, you likely will give yourself increased earning capacity that will empower you to pay down your loans faster.
Here’s when employers offering student loan repayment is good for you
Obviously, all things equal, you would love for your employer to give you a contribution to your student loans each month.
Some employees might not make extra payments on their own, and with a typical undergrad debt burden of $30,000, extra payments go toward principal and allow you to pay down the balance even faster as interest charges decrease with the declining balance owed.
Just make sure you still negotiate for higher pay and don’t let the benefit become golden handcuffs preventing you from taking smart risks.