Millennials Choose Student Loan Relief Over A 401K. How Can We Help Them With Both?

Today’s college education comes with a sharp price tag attached to it, and its colossal costs extend well beyond the classroom. A generation of new workers is entering the workforce at a severe disadvantage because they are saddled with enormous debt—debt incurred by pursuing a higher education.

This is not news to anybody. Everybody is talking about it, even politicians. But all their talking points during stump speeches and debate back-and-forths seem fixated on helping future students—great, noble even—but what about the students who have already graduated and just entered the workforce, yet remain in debt because of their student loans?

It’s time for us to start asking about these students who are already in debt and for us to do something to make the situation better.

The Times Have Clearly Changed

In the wake of the Great Recession, college graduates have entered the workforce seeking out their piece of the American Dream, facing hurdles far beyond what previous generations did when they left the halls of higher education to join corporate America. Tuition has increased at unprecedented rates, and recent graduates struggle to simply make ends meet – never mind attain some version of the American Dream all other generations before them were promised.

According to a recent survey from Iontuition, nearly half of respondents said they would prefer student loan repayment assistance over a 401k plan; 55% of student loan borrowers also said they would prefer help with repaying their student loans rather than a company-sponsored healthcare plan.

Simply put: Their challenges are different from our challenges.

That’s why we launched a student loan debt relief program at Motus to support our employees. Though the program is part of our winning corporate culture, the downside is that it’s inefficient because the student debt relief amounts are subject to FICA and Medicare withholdings, federal taxes, and often even state taxes depending on where the employees live. Student debt relief programs don’t get the same preferential tax treatment as retirement accounts, which means employees (and their employers) are taxed on the student loan benefits as if these dollars were regular income.

This might explain why such plans are extremely rare. The Society for Human Resource Management reports that only 3 percent of employers currently offer student loan relief benefits. This makes sense, in practical terms, because the programs are not fully benefiting the students since the government is taking its share in taxes—twice.

A Plan is a Start, But it’s an Imperfect Plan

At Motus, our curiosity constantly drives us, so we sought to learn about the real urgencies of our Millennial employees and discovered they don’t want or need a corner office with a spectacular view; they want and need financial assistance because their total debt is more than 5 times what ours was when we graduated college. As a progressive employer keen to the needs of our millennial hires, we launched our student loan debt reduction program to fix the student debt dilemma for our people. Participants who qualify can receive $5,000 after their first year of employment, and $1,000 every year after to assist in paying off debt due to educational costs.

Except our employees won’t get this money. Well, not all of this money. Our company is taxed on each payout, and then the employee is taxed again on that amount. Yes, double taxed.

Why aren’t politicians talking about this?

Millennials are the most educated generation in America’s history, but their education has come at a steep price. The Federal Reserve reports that student loan debt in the United States now tops $1 trillion. This debt is held by more than 43 million borrowers, who owed an average of nearly $27,000 at the end of 2014.

It’s also important to note that Millennials surpassed Boomers and Xers as the largest contingent in the global workforce in 2015; by 2020 they will make up 50% of all workers, and as much as 75% of the workforce by 2025. Since their numbers are only growing, the urgency for action on this issue cannot be overlooked.

At Motus, we deal with taxes and tax-related issues as a business, so we understand reimbursement, but we can’t understand why both employer and employee are being—let’s just say it—penalized for trying to alleviate student loan debt. Our company is trying to do our small part to assist our new hires, but there’s truly a gap in what their needs are, and how they are being met by an outdated tax system.

What Can We Do About It?

We’re sticking to the program at Motus because we believe it’s the right thing to do. Offering a benefit like this allows us to attract the best talent to join our company and encourages employees to remain with us to reach the maximum payout and their maximum potential. It may not eradicate all of their debt, but it sure will help.

Congress should act to adjust the tax code so student loan reimbursement benefits are not taxed as income for employees or employers. Right now, the talk is all politics without substance. Platitudes are not enough. The conversation needs substantive new direction. If politicians really want to affect change, one very basic truth needs to be examined: Why are employees being taxed on a student loan relief benefit even after the employer has already been taxed?

We need to call on federal government policymakers to take this on their mantle and push the issue down the middle of the aisle. This is not a democratic issue or a republican issue, it’s a people issue—a common sense issue. As long as you care about the sustainability of the middle class, this is a no brainer. It’s a benefit to everyone—including more senior-level workers or so-called “highly-compensated employees.”

Take, for instance, 401k plans. These are a popular benefit at most companies today, but employees at all levels have to participate in order for the plans to pass the IRS’ discrimination test. The IRS requires all companies offering 401k plans to pass a discrimination test to ensure that all employees are treated equally and fairly. To verify this, a company’s employees are divided into two groups: Highly compensated employees (those who earned more than $120,000 in tax year 2015) and those not highly compensated. The contributions of highly compensated employees, as a group, cannot exceed the average contributions of those not highly compensated as a group, by more than about 2%.

If you have a lot of younger workers who do not or cannot participate in a 401k plan, it affects the older workers and puts the older workers’ retirement benefits in jeopardy. Because Millennials are interested in paying down their debt and not participating in a 401k plan, it impacts other employees’ ability to maximize their 401k value. This occurs because the plan could lose its tax-qualified status and all contributions would have to be distributed back to the plan participants—which means employees lose their 401k plan and will owe more taxes for that tax year.

But how can younger employees think about saving for retirement—it seems so far off for them—when they are barely breathing beneath their current student loan debt in the here and now? Clearly this is an issue that affects everyone in the workforce, not just younger workers. Every employee should care about this, and about rectifying the gap in logic about the taxation on student loan reimbursement programs. Policymakers and businesses need to come together to figure out a way to fix this, so that debt relief programs like ours can actually alleviate student debt and its pressures without a double tax burden—and help all Americans save for a future.

The Bottom Line

At Motus, we strive to meet the needs of an evolving workforce every day. We’re not perfect; few companies are. But for us, nothing is more important than the people we work with—and we want to take care of them—because our people define our culture, our winning culture.

A college education has now become a costly enterprise, and starting a new career under a mountain of student loan debt simply isn’t fair. It’s long past time for the government to look at this issue from the recent graduates’ perspective—all who just want their piece of the American Dream.

The Author

Craig Powell

Craig Powell is a visionary who leads companies to become authorities in their respective industries. A leader with an affinity for cultivating strong relationships and securing strategic partnerships in order to rapidly scale, he’s also an avid proponent of creating a solid culture dedicated to the principles of transparency, communication, and individual responsibility. When not leading the charge toward the future of mobile workforce management, Craig sits on the board of the charitable organizations Your Grateful Nation and Beat the Streets.

Read more by Craig Powell

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