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, tuition.io, 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.
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?
- **http://blogs.wsj.com/economics/2015/05/08/congratulations-class- of-2015- youre-the- most-indebted-ever- for-now/
- ***Peanut Butter Published Survey – You can download/reference here https://www.getpeanutbutter.com/