Companies help workers pare student debt so they can start saving
Employers can offer to match payments on student loans “We really like the effect it has on our ability to recruit”
Young people have heard the advice again and again: Begin saving for retirement as soon as possible. But before they can start to build their nest eggs, many twentysomethings have to retire student loan debt. “It’s the biggest weight on my life right now,” says Nolan Grace, a 24-year-old who graduated from Purdue University with what he calls “very significant” loans.
Luckily, Grace’s employer, BP3 Global, is helping him with loan payments. The Austin-based software-services company uses a platform called Student Loan Genius to let it match as much as $100 per month of Grace’s debt payments. “We really like the effect it has on our ability to recruit,” says Scott Francis, BP3’s chief executive officer. He says college students seem to be more interested in that benefit than in the company’s health-care and retirement offerings.
CEO Tony Aguilar, 31, helped start Student Loan Genius, also an Austin company, in 2013, building up its customer base to include 45 companies. Employees at companies that have contracted with Student Loan Genius have more than $61,000 in student loan debt on average, and their monthly payments are usually more than $500 a month.
Aguilar, who graduated from college with more than $100,000 in student loans, says he knows as well as anyone how the burden is holding back an entire generation. U.S. educational debt rose to $1.2 trillion last year, six times more than in 2003. The average recent college student has $31,000 in debt. A study released in February by the Center for Retirement Research at Boston College estimates that growth in student debt will eventually increase the share of Americans who will have inadequate income at retirement by 4.6 percentage points, to 56.2 percent.
A January report by Facebook, which analyzed public posts and polled thousands of users anonymously, found that only 13 percent of people age 21–34 see being able to retire as the definition of financial success. Their No. 1 indicator of financial success is being debt-free. How can people stay focused on the faraway dream of retirement when they’re obsessing over meeting monthly debt payments? Aguilar says the way is to link the two. His company can sync a company’s 401(k) program with college loan bills. In March, Student Loan Genius rolled out a feature allowing employees who make a monthly student loan payment to get a matching employer contribution to their 401(k). “Not only are we helping the student loan problem, we’re helping people save as well,” says Aguilar.
The money goes further since 401(k) contributions aren’t taxed until the funds are withdrawn, whereas matches for the employee’s monthly loan payment are taxed upfront. Ultimately, it’s up to employers to decide how to structure the benefit—to encourage retirement planning, or student loan payments, or both. Aguilar is also supporting a bill, sponsored by both Republicans and Democrats in Congress, that would allow employer matches to student loan payments to be tax-exempt.
Companies in Student Loan Genius’s 401(k) benefit program will need to navigate the knotty rules the federal government imposes on retirement plans, says Marcia Wagner, managing director of the Wagner Law Group in Boston. So-called nondiscrimination tests prevent highly paid employees from getting too much extra benefit out of 401(k) plans compared with lower-paid workers. Student Loan Genius says such rules aren’t a problem, because those with student loans tend to be closer to the bottom of the pay scale.
Alicia Munnell, a Boston College professor who’s the director of the Center for Retirement Research, says linking student loan payments and 401(k) contributions is a “nice idea” whose appeal may be limited. “If every company offered this type of benefit, it would help debt-laden college graduates get an earlier start on retirement saving,” she says. “But every company won’t.” The best way to help young people save for retirement would be to improve how 401(k) plans are designed, she says, by adding features (which workers can opt out of ) that automatically enroll them and raise the contribution rate over time. The bottom line Austin startup Student Loan Genius has a service that lets companies sync retirement savings and student debt payments.