By Victoria Simons & Anna Helhoski
Employers nationwide are beginning to offer a new perk to their increasingly indebted millennial workforce: assistance in paying down student loans. A new study by NerdWallet found undergraduate student debt holders could shave off nearly three years of payments and have $4,100 cut in interest from what they owe by taking advantage of a typical employer contribution program.
This new type of company benefit typically offers workers with student debt regular contributions toward loan repayments — with a lifetime limit. Companies that recently announced they will be offering the perk include PricewaterhouseCoopers, Natixis Global Asset Management and Fidelity Investments.
For this report, NerdWallet looked at how much a company contribution benefit could potentially reduce payments for student loan borrowers, who have an average debt of $29,400 for undergraduate loans. By making minimum monthly payments and applying the company benefit, the amount of time a borrower spends paying off the loan principal is reduced — by three years, on average. And shaving three years off a repayment plan saves three years’ worth of interest payments, totaling about $4,100 for the average borrower.
We also compared the perk to a more common money-saving option, student loan refinancing. Refinancing of federal and private loans cuts the interest rate, which can yield significant savings in interest paid over the life of the loan. An undergraduate debt holder with the average amount of debt who takes advantage of the company perk and refinancing can save nearly $4,300 in interest payments.
Advanced grads stand to benefit, too
Those with undergraduate debt are not the only ones who can save from a combination of the employer benefit and refinancing. Advanced degree holders with higher debt can benefit even more: Those with a Master of Business Administration or a law degree can save upward of $7,000 or $13,000 in interest, respectively.
To provide an idea of the savings from employer programs and refinancing, NerdWallet looked at four different scenarios in which one of the three degree-holders (B.A., MBA and law), having graduated in 2012, chooses a payment option.
- Scenario 1: The debt holder with an average loan sticks with a standard 10-year term. This is the baseline scenario wherein the borrower does not take advantage of potential savings options.
- Scenario 2: The debt holder receives an employer contribution perk of $167 per month over a five-year period, for a lifetime limit of $10,000.
- Scenario 3: The debt holder makes on-time payments for two years on average student loans and then refinances.
- Scenario 4: The debt holder opts to refinance student loans after two years of on-time payments and takes part in an employer contribution plan over a five-year period at $167 per month for a lifetime limit of $10,000.
Here’s how much each of the three types of debt holders could save in these scenarios:
Keep in mind, however, that federal student loans have important benefits that you will lose if you refinance, including income-based repayment programs, loan forgiveness after a certain number of years of payments, and interest-free deferment. A decision on refinancing such loans must take these benefits into account.
Undergraduate degree holders
Without employer contributions or refinancing, an undergraduate degree holder with an average debt of $29,400 winds up paying nearly $10,000 in total interest during a standard 120-month loan term. By enrolling in an employer contribution plan, the same undergraduate would save $4,121 in interest and shave off 32 months of repayments. By only refinancing, an undergraduate degree holder would save less — $931. By combining the employer contribution plan with refinancing, the grad could save $4,264.
The following chart illustrates how much more quickly these graduates can pay off their student loans by using this new company perk, as opposed to sticking with the standard term.
MBA degree holders
MBA degree holders have an average debt of $52,805 and pay $21,104 in interest over a 10-year repayment term. By taking advantage of an employer contribution plan, these graduates could save over $5,000 in interest. They’ll also shave off an entire year of payments. By refinancing, these degree holders can save $3,754 in interest over the life of the loan. The combination of refinancing and enrolling in an employer contribution plan garners even more interest savings — a total of $7,181.
LLB or J.D. degree holders
Law graduates typically have high debt — an average of $147,535. Over a standard 120-month loan repayment term, the average law grad will pay a whopping $57,531 in interest. Because the overall loan debt is so high, refinancing can save a lot. By refinancing alone, a law degree holder can save up to $9,525 in interest. The average law grad who enrolls in an employer contribution plan can save $5,329 in interest. By combining the savings from an employer contribution program and refinancing, a law grad can save $13,017 in loan interest.
How companies are chipping in
Private industry is starting to take notice that many of its younger workers owe for their college degrees. In recent months, three large companies moved to offer student loan debt repayment benefits.
PricewaterhouseCoopers says it will pay $1,200 a year for employees with one to six years of work experience, as much as $10,000 total. Natixis Global Asset Management will give $10,000 to workers with federal student loans; employees will be eligible to receive a $5,000 lump sum after a five-year work anniversary and $1,000 a year for the next five years. Fidelity Investments’ Step Ahead Student Loan Assistance program will contribute up to $10,000 toward eligible employees’ student loan debt.
Those employed in certain public service and education positions are already eligible for student loan forgiveness and repayment programs, but this is the first time debt repayment perks have been offered in the private sector. Currently, 3% of the companies surveyed in 2015 by the Society for Human Resource Management say they provide student loan repayment programs as part of overall employment benefit packages. But don’t be surprised if it becomes a bigger trend among employers, says Bruce Elliott, manager of compensation and benefits at SHRM.
Job seekers are “going to be really evaluating employers and packages, not only on the base salary and bonus, but also the types of benefits they absolutely want,” Elliott adds.
In a recent study by Beyond, a career networking website, 89% of job seekers said they believe companies should offer student loan repayment in employment packages. It makes sense that millennials are demanding student loan repayment benefits as part of overall compensation packages, Elliott says. Adults ages 18 to 34 are the largest generation in the U.S. labor force, according to the Pew Research Center. They’re also a generation saddled with more loan debt than ever. Students who graduated in 2014 have a current average individual principal of $28,950, according to the Institute for College Access and Success. And that’s not counting interest.
It’s important to note that student loan debt holders may end up with fewer dollars from the contribution than they think. Student loan repayment benefits are still taxed as income — unlike some other longstanding benefits, such as retirement matching contributions.
Considerations before refinancing
For employees who refinance their student loans, we assumed in our calculations that refinancing is the best option for them. You might qualify for refinancing and, upon exploring all repayment options, decide it’s not the best route for you. Choosing to refinance is beneficial only if you have a good credit score, steady income and job security; you’ve made steady payments on your loans; most of your loans are private; and you have fairly high debt — lenders often have minimum loan balance requirements to qualify for refinancing, such as $7,500 in total outstanding loans.
Refinancing involves having a financial institution or private refinancing company roll your existing loans into a single loan at a lower interest rate. You’ll choose a new loan term, generally ranging from five to 20 years, which could be longer than your original terms; borrowers should take care that the new term isn’t so long that it reduces the savings of a lower interest rate.
Over the term of the new loan, you’ll have just one monthly payment, and ideally you’ll pay less in interest as well.
The study explores four scenarios for three different degree-holders (B.A., MBA and law) who graduated in 2012.
Since APRs are higher on private loans than federal loans, the study assumes 100% of an employer match would go toward paying down the private loan first before using the contribution for the federal loan. We assume the debt holder will still be making the necessary minimum payments on any federal loans while the contribution goes toward private loans. When the program ends — after five years and the employer has contributed the lifetime $10,000 — the debt holder’s monthly payments will return to the standard amount.
The study makes a few assumptions about the debt holder. The first is that he or she will be employed by the time student loan payments begin — typically six months after graduation. The study also assumes the employer will begin contributing as soon as the debt holder has to start paying back student loans. In some instances, though, this perk may not kick in until an employee has been with the company for six months or more. The study also assumes that employees will stay with the company for five years in order to receive a maximum contribution of $10,000 in increments each year.
Data sources for the study:
- Federal APR stats come from the Department of Education
- Private APR stats come from the CFPB
- Refinance APR stat comes from Credible
- Average bachelor’s debt is from TICAS
- Average undergrad-plus-graduate debt is from the Department of Education