Sunday, October 4, 2015

Employee Perk?

A friends' employer recently announced a new program whereby the company will pay off a fixed amount of employees' student loans each year for up to five years. With so many Americans carrying student loan balances, it seems like a great perk. Or is it?

I think that this perk will, in fact, do very little to help this particular companies' employees build wealth. The company may receive some positive media attention and reduce employee turnover costs (which is probably actually their goal), but a better long-term impact on their employees' financial well-being could be achieved by teaching financial literacy.

The obvious challenge with offering something like this is that an employer alienates those employees who either never took out student loans or who have already paid them off. Contrary to what the media seems to portray, about 30% of all college students get their bachelor's degree without any student loans. I will concede that some of these students come from wealthy families, but if we define wealthy as the top 1% of the country, then how do you explain the other 29%? These are largely going to be students who either worked part-time while in school and full time in the summer and saved money to pay for an affordable in-state school, or who worked hard to earn a variety of scholarships. Either way, paying your way through school requires work and is definitely possible.
My wife was able to do so successfully, and while I did borrow for my bachelor's degree, we paid it off quickly and did not borrow anything for my much more expensive graduate degree.
That aside though, my problem is not about eligibility or fairness in who receives it. I think the greater problem is the potential attitude of apathy towards paying off student loans and the additional excuses to stay in debt. Very few graduates can expect to have their employer pay off their entire student loan balance under programs like this, yet when it is offered I expect most employees to use the program as an excuse to not pay anything more than the minimum payment.

Another company, PricewaterhouseCoopers, has been in the news lately for their program, which pays $1,200 per year for up to 6 years towards employees' student loans. What is overlooked are some of the other facts. First, Big4 accounting firms are known to have very high employee turnover (~25% per year), so the odds of anyone getting all 6 years of this perk are very slim. Second, if the average student owes $30,000 upon graduation at the average rate of 4.6%, then that $1,200 basically just covers the interest and allows you to pay off your loans in 7.5 years instead of 10 (paying just the minimum payments).

This benefit should truly be treated as a benefit, yet many will sit back, not do the math and assume that the impact of the benefit is much greater than it actually is.

I'm not saying that you shouldn't accept this type of benefit, or that employers shouldn't offer it. What I am saying is that if you are in the position to receive this, do the math, understand how much the assistance truly is, and don't use it as an excuse to not pay down your debt as aggressively as you can on your own. If you pay down all the way to the point that your employer will pick up the rest, fine. But just like you should be building a stash of cash for a rainy day fund, you should also be building a stash of cash just in case that benefit goes away (either from the company changing policy or from your switching employers).

Personally, I'm thrilled to not have any student loans. If my employer were to offer something like this, I would just miss out on it. But I would rather be debt free than be like some of my co-workers who lament only being able to deduct $2,500 in student loan interest. Let me repeat that for emphasis…they are paying more than $2,500 per year in interest on their student loans. I don't know about you, but I'd rather have that money work for my future than throw it away.

Earn interest don't pay it.

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