Is There a Downside to Employers Paying Student Loans?

By | 2016-05-11

Slowly but surely employers are starting to embrace a new trend to attract and retain Millennial employees. It is not a huge signing bonus, flexible work schedules or monitors setup around the building streaming cat videos (I guess that is a thing).

Instead they are dusting off those pocket books and offering to pay a portion of the employee’s student loans.

If you are a consistent reader of this site – you know that I have a drawn out student loan story that is near and dear to my heart – basically I was a dumb ass in college and have been paying for it ever since.

I drew you in with the title (or tried to) and we will get there but I need to set the table first:

Why is this trend growing?

Retaining young employees has become an increasingly competitive endeavor as the typical millennial (age 25-34) stays in his or her job for an average of only three years at a time*

In other words, they need a way to buy some loyalty from the Millennial crowd

The average class of 2015 graduate with student-loan debt will have to pay back a little more than $35,000**

From a Millennial survey comparing benefit offers: The average respondent prefers student loan repayment nearly 2X more than 401K. ***

We have Employers that need to attract younger workers and younger workers that are attracted to getting rid of their student loan debt. A few companies are finding a way to facilitate that problem: Peanut Butter,, Gradifi and EdAssist.

How could this be a bad thing?

I absolutely love that this problem is being looked at from new angles and companies are trying to get employers to assist with the bill – my problem is this being equated to a “new age 401K” – which feels wrong for the below reasons:


401Ks are a tax advantaged vehicle, student loan assistance is not, anything a company pays towards student loans will be filled as taxable income.

Debt Payoff vs Retirement Investing

Let’s say a company offers to pay an extra $100 a month until your loan is paid off, on a loan with a 5% interest rate and a starting balance of $35,000, 10 year term, monthly payments $371.23

You would save over $2,500 in interest, your company would pay about $8,700 in benefits (it would also cut 2.6 years off you repayment schedule)

If that same $100 was invested in a 401K every month up to the $8,700 and it generated a 6% return for 8.7 years you would have made $2,151.81. Not that impressive compared to the debt payoff, but look what happens to the $10,851.81 ($8,700 plus $2,151.81)

  • After 20 years  —- $20,599.98
  • After 30 years  —- $36,891.42
  • After 40 years (about normal retirement age) —- $66,066.91

Significant difference over time – which could be lost out if you chose student loan payments over 401K contributions.

Illustrative only, returns are not guaranteed, the year calculations start from the first monthly contribution

Saving after loans are paid off

After you destroy your student loans and the money stops coming in from your employer, the big question is What are you going to do with the money you previously sent to your loans? 

I hope the answer is: I proved that I can live without that money every month, so instead of spending it, I am going to save it every month forever.

What probably happens: Student Loans are mandatory to pay back, saving is not – the money is probably blown with the “I worked hard to pay off my student loan” justification.

This is how I justify paying extra on my student loans every month – once I am done that money is earmarked for a monster savings rate bump.

A few other questions I would ask

  • Do I have to pay the money back if I leave the company – That is the arrangement with my current employer regarding continuing education (if I leave within a year I need to pay money back)
  • Do I get to choose what loans the money is applied to – I hope you can apply it to the highest interest rate.

If this is straight up here is some money to help with your student loans, no strings attached, we are still matching your 401K then obviously don’t leave it on the table.

Take Away

Millennials are obsessed with paying off their student loans and becoming debt free – while that is a GREAT trend, I want people to look at the bigger picture and fully scope their options. At the base level this is a math problem, you compare the interest savings, with expected/realistic returns and make a decision. I worry that the equations are not even being ran and “paying off student loans” is the default answer.


Action Items: If you are currently paying extra on student loans did you compare to the long term benefits of your 401K? Does your employer pay for your student loans? If so, what is the arrangement?


  • *
  • ** of-2015- youre-the- most-indebted-ever- for-now/
  • ***Peanut Butter Published Survey – You can download/reference here

22 thoughts on “Is There a Downside to Employers Paying Student Loans?

  1. Stefan @Mllnnlbudget

    Very thought provoking post! I know that my company helps pay student loans as well as 401k match so the option is pretty easy. I do not have student loans so not sure how any of this works but you ask a great question, do you have to repay the money should you leave? Also do you pay the payments back with interest? Questions I do not know but something everyone taking advantage of these plans should! This is the new way to attract people but only time will tell if it is successful.

    1. Apathy Ends Post author

      That’s awesome! I hope more companies start doing that, it’s a sweet perk if done the right way

  2. The Green Swan

    Interesting post, I had never heard of this before but it’s not surprising. I’m curious now if my employer has gotten with that trend.

    1. Apathy Ends Post author

      I checked, mine doesn’t unfortunately, but I did send a few articles over to HR for reference.

  3. Mrs. FE

    As long as the companies are offering both 401(k) and student loan contributions, I don’t see much of an issue. Unfortunately, there will always be those individuals who choose not to manage their income wisely. If they get their debt paid off, at least they won’t burden the rest of the population by going into default and creating higher taxes for everyone else. – Mrs. FE

    1. Apathy Ends Post author

      That is a good point, the “downside” is more opportunity cost than anything.

  4. FinanceSuperhero

    My employer offers tuition reimbursement, but it is very limited. I am currently paying down my remaining student loans with great intensity. I will be investing the savings when the time comes in a month or two.

    1. Apathy Ends Post author

      Yes! I wouldn’t expect anything less from a superhero!

  5. Michelle

    I know quite a few people who have employers who pay for their student loans. Almost all of these people feel stuck at their jobs now because they have to work at that company for 1-2 years after the last payment by their employer. I would think that’s a huge downside, especially if you realize that you don’t like your job or the employer!

    1. Apathy Ends Post author

      Very interesting, I assumed there was a catch – thank you for confirming!

      I would hate to be trapped and have to pay my employer back to stop working for them.

  6. Latoya @ Life and a Budget

    You’ve offered a great point! I’m leaning more toward the 401k personally. My employer offers a 401k match and I’m learning ot live on less of my income while I save towards retirement. I’m saving a little more than what is required to get my company match, but time is limited and it goes by fast. I’ll get those loans paid off eventually, but not to the detriment of my retirement.

    1. Apathy Ends Post author

      I am doing something similar, saving a ton and paying my student loans off a little slower (still paying extra every month, but not crazy amounts

  7. Rob @ Money Nomad

    This is a very interesting perk. And I can see pros and cons to each side. Although the tax benefits are lost of a 401k, I do know many people who’s student loan interest rates are just as high (or higher) than what they would have received in the stock market. I think a business that offered both would be able to provide a lower wage and still draw in all kinds of applicants.

    1. Apathy Ends Post author

      I had some loans over 8% and heard up to 10.5% depending on the loan type!

      I agree, if a company offered both they could get away with lower entry level salaries and still pull candidates

  8. Dr.J @ MedSchool Financial

    The student debt issue is an important one, and one that is also near and dear to my heart as I write on this topic on several platforms in addition to my own. Part of the problem is that the math equation is never taught to begin with, and for those that are unaware or choose to be oblivious. The best thing to do is to eliminate them before they grow out of control by the time they finally realize it. Interesting post and thanks for sharing

    1. Apathy Ends Post author

      Thanks for commenting – the math equation was never showed to me

      I realized how much trouble I was in when I got my tax document and saw the total interest for the year on 80K of loans

  9. Financial Samurai

    Funny you mention this. A couple old colleagues started a company to do EXACTLY THIS… provide more companies the option to help retain their employees by paying off their student loans. I just don’t think young folks nowadays stay around long enough to care though…. kinda like ADHD sufferers. Am I wrong? Was I a fool to stay at my last firm for 11 years and have my 401k and profit sharing from them compound?!


    1. Apathy Ends Post author

      You aren’t wrong, once the loans are gone I doubt people will stick around for the long haul.

      Looks to be quite a few companies popping up to assist with this problem, some are pushing legislation to make a tax advantaged system as well

  10. Millennial Boss

    Didn’t realize that was a thing that employers were offering now! I have always received tuition reimbursement and my recent employer I believe offers loan consolidation – but I recently just paid off mine and my fiancé and I are attacking his right now! Personally, I’ve invested in my 401k while paying off my student loans in parallel. It worked for me but I think many people would argue that the debt needs to go first.

    1. Apathy Ends Post author

      Nice! We are saving a ton of money while paying off some debt, if we wanted to we could be debt free (outside of our mortgage) in a year, but I don’t want to sacrifice our savings rate

  11. [email protected]

    Free money is great! Except it’s never really free. A lot of positions in healthcare will pay your loans, but then pay a lower salary in exchange, and they often make you stay for five or ten years to get the full ‘benefit.’

    My neighbor works in another industry and her employer paid off a big chunk of her loans, but then she had a baby and switched to part-time. She had to pay the employer back because she hadn’t been there full-time for the required five years. Ouch.

  12. Gail

    Very interesting! The company I work for offers both, but you’re eligible for them after different milestones of being with the company (You can get assistance with loans and furthering your education before you can get 401k matching). I’m almost due to start getting my 401k matched and I’m probably more excited than most about that ?. Like Stefan said, can’t wait to see if this works out for companies or not.


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