Quick quiz: What do all of these companies have in common? The Nevada brothel chain Moonlite Bunny Ranch, accounting giant Price Waterhouse Coopers, asset management company Natixis, and online learning company Chegg?
Answer: This group of strange corporate bedfellows are all part of an exciting new trend that could help solve one of the single biggest worries of young workers—student debt. As employers, they are offering payments to reduce at least some of their workers’ student loans as an employee benefit.
More employers are expected to start offering the benefit soon because of its popularity with young workers. In a July 2015 survey, IonTuition found that around half of the student borrowers who were interviewed said they would rather have their employer help pay off their loans than contribute to their health care or 401(k) retirement plans.
It’s certainly a wonderful benefit to the lucky graduates who get it and one that’s much needed. Outstanding student loan debt now exceeds $1.2 trillion, and the Consumer Financial Protection Bureau estimates that more than one fourth of the loans are delinquent or in default. In concrete terms, more than 10 million Americans are at financial risk and jeopardizing their creditworthiness.
So can we count on employers’ generosity to solve one of the biggest problems facing young people today? Not unless some changes are made. Here’s why:
- It isn’t reaching the people who need it most. The loan payment benefit is not yet helping the most troubled student borrowers. Most of the firms currently offering it, such as PWC and Natixis, hire elite, highly skilled college graduates who typically have few problems paying back their student loans, in part because they command good salaries. The workers who need the help the most are low-wage borrowers who owe less than $10,000. Many of them never completed their studies and attended community colleges or for-profit schools. These low- and middle-skilled workers are far more likely to find jobs at Walmart than PWC and don’t have the market power to demand higher wages or extra benefits such as student loan repayment.
- It addresses only part of the problem. For many low-income borrowers, student loans are just part of a larger debt problem. Too often, student borrowers are provided loans without adequate information about what kinds of careers their programs of study will lead to and what their likely earnings will be after completing their studies. Earnings are clearly related to the ability to pay back loans: A graduate with $50,000 in loans who’s earning $25,000 a year is in a far different place from a graduate with $25,000 in loans and a $50,000 salary. Just as a growing number of employers offer health wellness programs, employers today need to help their workers improve their financial wellness.
- Current tax rules diminish its impact. The benefit is less financially advantageous than it may seem, because employer contributions to student loan repayments are taxable. In other words, employees have to pay taxes on the amount their employer pays on their debt. Moreover, employers don’t get a tax deduction for the amounts they match for employees.
A bill to address the tax problem—to make employer-provided educational assistance non-taxable—has been introduced by a bipartisan group in Congress. But that alone could only further the socioeconomic divide. It would make the benefit even more attractive to the highest wage workers (who tend to pay a higher tax rate). And taxpayers would have to make up the lost tax revenue some other way, which raises the possibility that lower income taxpayers struggling with their loans would essentially be subsidizing the student loan payments of the rich.
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Instead, a few tweaks to the legislation could harness this new business trend to better solve this growing economic crisis. Because student borrowers who have the greatest problem paying their loans are ones who didn’t graduate, using the benefit to encourage graduation would be desirable. For example, it could be available only to students who have graduated. But far more important would be capping the tax exemption. Remember that most students struggling to repay loans owe less than $10,000. That would be a good first step toward encouraging employers to offer the benefit to the low-wage workers who need it most.
Mark Schneider is Institute Fellow and vice president at American Institutes for Research. He is also the founding president of College Measures and a consultant to the MONEY College Planner.