The $1.6 trillion debt time bomb. The 21-year shackle.
Bigger than credit card debt. Bigger than auto debt. Not bigger than mortgage debt – but then again, who can buy a house if you’re grappling with monthly student loan payments and if your retirement seems like a shimmering dream because you’re fighting with monthly student loan payments?
Increasingly, companies across the U.S. are stepping in to help employees pay down their balances through benefits programs that can help borrowers shave years off their repayment timetables. The Society for Human Resource Management has estimated that 8 percent of U.S. employers have such offerings in place, which, of course, means that 92 percent of them don’t.
In an interview with Karen Webster, Tuition.io’s CEO Scott Thompson said that much of the conventional wisdom about student debt is incorrect, so the magnitude of the problem is not fully realized, at least not yet, by employers who may not be cognizant of how employee indebtedness can impact corporate bottom lines — not to mention the nation’s longer-term economic prospects.
First, start with the interest rates themselves and the amount that is shouldered. While some might surmise that the federal government is doling out student loans at 2.5 percent to 3 percent, consider the fact that federal lending its capped — for undergrads — at $57,500, and that’s over the length of a four-year degree. Hardly enough to cover the cost of a typical undergraduate education, and for some institutions of higher learning, not even the first year. Borrow beyond that amount and rates top 6 percent or 7 percent. Grad school debt is even more expensive, with interest rates at the double-digit percentage rates.
Then there’s who’s shouldering the debt. Think the debt is confined to the millennials — that they’ll eventually figure it all out and pay it off? Think again.
Multi-Generational Ripple Effects
As Thompson relayed to Webster, the age segment that carries the most student debt spans the 30- to 39-year-old range. The group that has the highest student loan delinquency rate, he continued, are those ages 40 years old to 49 years old. The fastest-growing segment in terms of taking on debt? Increasingly parents and grandparents are signing on to loans — at age 60 and above. Moreover, he said, student-loan debt is the variable that is driving increasing numbers of older borrowers and cosigners into bankruptcy.
It’s a pressure that’s long-lived, he continued, noting that it can take as long as 21 years to pay off a student loan — often requiring that borrowers work several jobs to meet the monthly expense roster and pay down what they owe for higher education even as academic costs skyrocket.
“The(ir) parents are actually doing the responsible thing,” said Thompson about the decisions to cosign, “but the parents are left in a really hard place particularly if they don’t have savings.”
Parents who, quite literally, sign on to help are faced with choices that are less than ideal — they can take out a home equity loan, put the payments on their credit cards or take out hardship withdrawals from their 401(k)s. The result: The loan debt creates financially strapped borrowers a couple of decades away from retirement and financially strapped elders whose income streams may be limited to Social Security benefits and interest from their retirement savings.
The ripple effect is palpable, and with lots of ripple effects, said Thompson, that can take its toll on employers. The debt to income ratio that the just-out-of school borrowers carry means they can’t take on other debt instruments such as credit cards — so those borrowers job hop to find jobs that help make those ends meet.
“By classic banking definitions, th(ose) employees are broke,” said Thompson. Faced with paycheck challenges of meeting all those obligations, he said, these employees start to job hop, pursuing higher salaries in a desperate attempt to pay down what is owed. Churn, of course, hits employers, who have to hire and train new workers, with all of the costs that go along with retraining a workforce.
Adding salt to that wound, so to speak, is that these same workers have to make the hard tradeoff between paying off their debit and funding their retirement accounts. Guess what wins? Also, at a 21-year repayment rate, those employees are in their early 40s before they can even start to think about saving for retirement. Along the way, the opportunity to buy a home, a car or accrue enough discretionary income to spend, which drives our economy, is muted.
Tuition.io is a tech platform that sits in the middle of the process, helping client companies structure plans that reduce the overall student loan burden via loan consolidation, refinancing or other programs, and then transfer money to the loan servicers to pay down the employee’s student loan debt.
Thompson said that programs are flexible, where companies can set dollar amount limits, or whether funds are disbursed to employees or the loan servicer. Tuition.io’s tech platform was built to accommodate any number of variations on that theme, some of which are brought to them by the employers themselves, who see an opportunity to think creatively about how to deliver a valuable benefit to a part of their workforce that is overloaded with debt.
Thompson said that an important part of the Tuition.io offer is counseling that can design a program that fits the unique needs of the borrower and the employer. Eligibility is determined by the parameters set by the employer – obviously being an employee in good standing, but also in being a borrower in good standing and not being behind on their monthly payments.
“We determine how many people [within a firm] are eligible what they're eligible for,” he said. Tuition.io also onboards and verifies the employee. “We then bill the employer. We get paid by the employer. We run a ledger against the funds that we just received. Then we push it through the ACH network to the loan servicers. That's the simplest view of how this works,” he said.
As examples of the flexibility of the loan repayment benefits (spanning health care, financial services, government entities and others), he pointed to the program developed with CSAA Insurance Group, a AAA Insurer. Dubbed the “Employee Choice Program,” employees can opt to direct up to 4 percent of their employer match benefit to paying down their debt. Shaving down the principal saves thousands of dollars over the course of the loan’s life in interest payments, while also allowing participants to save for retirement.
“We are just leveling the playing field in this instance for people who find [saving for retirement] unaffordable. the good news is you're going to get them to a much better financial place really fast,” he said.
In another example, earlier this month within the health care space, Montefiore St. Luke’s Cornwall in New York said that employees could convert unused paid time off into contributions that pay down debt, up to a maximum of $5,000 annually. That’s especially attractive, Thompson maintained, in an industry where healthcare professionals typically lose their PTO that accrues past a certain point — and their schedules are notoriously hectic, so much so that taking PTO is no sure thing. In addition, healthcare firms that offer the ability to cash out PTO usually mandate hefty discounts on those cashouts.
“There are all kinds of variations on this. So you’ve got to be a tech company like us to administer those plans,” he told Webster, adding that the student loan repayment programs are attractive enough that certain employers can offer the debt paydowns as a sort of signing bonus.
As he told Webster of the companies enabled by Tuition.io to offer student loan repayment programs “they’re saying to their employees that ‘if you stay with me for the next five years I can help you get rid of your student loan. That's a compelling benefit.”