Brokerage Ops the September 2016 issue

The Ramen Noodle Effect

Brokers take aim at student debt.
By Daryl Lease Posted on August 29, 2016

Nineteen cents is the cost per serving for ramen noodles, the go-to meal for cash-strapped college students everywhere. But it’s not just for dorm rooms anymore. It’s the sort of culinary option that millennials have to carry with them into the working world—and maybe reintroduce to their dinner table in their retirement years.

That’s because of the second number—$2,726.03—the amount added every second of the day to America’s student debt, according to a national debt clock launched this year by financial website MarketWatch.

By Oct. 1, student loan debt across America will be approaching $1.4 trillion, or roughly $35,000 for the average loan recipient. It’s triple the debt borne by grads just two decades ago, and it has eclipsed credit card and auto loan debt.

And there’s no sign of a letup. The student debt clock is expected to climb to $2 trillion by 2022. The loan burden has far-reaching effects, causing millennials to put off getting married, buying a home, starting a family and saving for retirement.

Two thirds of millennials with student loans say they have a hard time meeting household expenses each month, according to PricewaterhouseCoopers. Nearly half rely on credit cards to pay for necessities they couldn’t cover otherwise, and—not coincidentally—half also say they struggle to pay the minimum due on their cards each month.

All that accumulating debt is catching the attention of entrepreneurs like Tim DeMello, a Bostonian who serves on the board of trustees of his alma mater, Babson College. After hearing a presentation on student loan debt a few years ago, he quickly grasped the problem—and saw an opportunity.

When he read that millennials will compose 50% of the workforce in 2020 and 71% of them are graduating with massive loan debt, he says, “I started to think about how to capture value.”

DeMello’s company, Gradifi, is one of numerous startups to emerge in the past two years with special platforms enabling employers to help their young workers pay down their loans.

As the debt clock ticks, brokers are starting to notice those platforms and size up their potential role in what some observers and participants think could become one of the biggest developments in retirement planning since the creation of the 401(k).

“I think there’s tremendous value here for the broker to get involved and facilitate the whole conversation,” says Shane Bartling, a senior consultant with Willis Towers Watson. “This space is going to grow quickly.”

The Battle for Talent

PricewaterhouseCoopers captured headlines last year with a surprising new program—a pledge to pay up to $1,200 a year on student loans held by its associates and senior associates. It was the first major acknowledgement by a corporate leader that student debt had become a disruptive force in the workplace.

PwC officials said they wanted to ease the financial burden on employees struggling with student debt and help them save more for retirement. They framed it as addressing an urgent societal problem.

“We all have a stake in helping young people build healthy financial futures faster because that in turn allows them to contribute to our communities and society more broadly,” PwC vice chairman Tom Codd said when his company announced the plan.

But the loan assistance programs can also be seen as a recruitment and retention tool. “It’s effectively a re-characterization of a hiring bonus,” Bartling says.

PwC hires more than 11,000 students a year via campus recruiting, and 45% of its employees graduated from college in the past five years. Under its plan, PwC will pay a maximum of $10,000 to employees from entry level to six years of service.

Employers hope the program will build loyalty and foster a sense of personal investment in their company’s success. There’s already evidence of that in tuition reimbursement programs, which are a staple at many companies.

I think there’s tremendous value here for the broker to get involved and facilitate the whole conversation. This space is going to grow quickly.
Shane Bartling, senior consultant, Willis Towers Watson

A recent analysis of a tuition reimbursement program at Cigna found the insurer got a 129% return on its investment by saving in turnover and recruiting costs. Employees who took part in the program were also more likely to later earn promotions.

Student loan assistance is relatively new to benefits offerings, but research shows young workers are eager to see it grow and will weigh it heavily in their job searches.

A survey by the nonprofit American Student Assistance found three quarters of students said a student debt program would be a decisive factor in choosing between companies. Career website Beyond found 89% of job seekers were specifically looking for student loan repayments in benefits packages and preferred that benefit over vacation time. Other surveys show job seekers rank it close to—and even above—health insurance and 401(k) programs.

Brian Griffin, president and COO at The Plexus Groupe, says he’s not surprised to see the growing interest in the student loan problem, given the attention paid by presidential candidates on the campaign trail.

Although he’s not sure programs like Gradifi’s will gain traction, Griffin sees potential, pointing to the wide range of innovative benefits he’s read about that are now being offered to appeal to younger workers. Those perks range from shipping breast milk home from moms who are traveling on business, to paying for life coaches, to guaranteeing income to spouses for 10 years in the event of an employee’s death. “There’s a fair amount of things out there that firms are looking at to differentiate themselves and get the best talent they possibly can,” Griffin says.

To Lisa Kottler, senior vice president for retirement services at NFP, student debt benefits are “something new in the quiver” for firms looking to attract recent college graduates. “If you’re recruiting millennials who are looking squarely in the eye of a large student loan, this could absolutely be something that would be attractive to them,” Kottler says.

Bartling agrees. “In our research, we’ve seen a high desire amongst employees to have a wider variety of benefit offerings and more choice,” he says. “This student loan option plays well into that mindset of choice and customization.”

As unemployment continues to fall and the size of the workforce shrinks with the retirement of baby boomers, the market is tilting toward employees. “It has the potential to be a significant differentiator in the battle for talent,” Bartling says, “and that directly contributes to the employers’ bottom line and their ability to be innovative and develop new product. I think this is an area that is ripe for new growth.”

Small but Growing Quickly

Although a number of startup companies have developed platforms to administer student loans for employers in recent years, the programs remain relatively obscure. “I was a little taken aback because it’s something I hadn’t seen before,” says Bruce Elliott, manager of compensation and benefits at the Society for Human Resource Management. “When PwC announced it, everybody was talking about it.”

Other companies have followed suit, primarily in the finance and computer industries. Fidelity Investment launched a program this spring that will pay up to $2,000 a year to workers with student loans, with a lifetime cap of $10,000. Natixis Global Asset Management also offers up to $10,000 to its employees, and tech company Nvidia will pay up to $30,000 to employees who have graduated in the past three years. The textbook rental company Chegg and online food delivery company ChowNow are among other companies that have rolled out programs.

While Willis Towers Watson found only 4% of employers offered student debt programs to employees last year, another 3% said they’re planning to launch programs this year, and 19% said they’re looking at it for 2018.

If all those companies follow through, it would mean one in four employers will be offering some form of student debt aid before the end of the decade—a rapid pace of growth in just a few years.

“The data indicate it’s a relatively small subsection offering this benefit right now,” Elliott says. “I can see that’s going to change.”

Bartling, of Willis Towers Watson, says he expects job seekers will soon view the programs as “a fundamental part of the overarching employee benefit program for any worthwhile employer.”

If you’re recruiting millennials who are looking squarely in the eye of a large student loan, this could absolutely be something that would be attractive to them.
Lisa Kottler, SVP for retirement services, NFP

Gradifi’s DeMello says the trend is unfolding much more rapidly than he anticipated. “I thought it would be fast but not this fast,” he says. “If you take the Fortune 100 companies, we’ve probably been contacted by 40 of them so far. Those companies wouldn’t always be considered early adopters of something new.”

DeMello says Gradifi, which handles PwC’s program, has helped 120 companies set up programs so far, with the employee base ranging from 100 to 100,000. His firm is still in the process of launching those programs, with 20 to 30 scheduled to launch each month in the fourth quarter of this year.

Other major vendors in this space include, which administers Fidelity’s programs, SoFi, EdAssist and Student Loan Genius.

SoFi announced this spring it had surpassed the $1 billion mark in funding student loan refinancing through corporate partnerships, working with companies such as Microsoft and major law firms. It also offers employer contribution plans.

“It’s truly the hottest employee benefit since the 401(k),” Catesby Perrin, head of business development at SoFi, said in the announcement, “and it signals to employees that their companies are invested in their success and addressing the most pressing financial concerns they have right now, not just 40 years down the line.”

How Can We Help?

Debt assistance takes several forms. Some employers begin by offering assistance in refinancing and restructuring loans.

“Once you’re out in the job market, you’re likely to have a better credit rating, and through your employer, you may have some group purchasing power that gives you access to a network of lenders that have more favorable terms than you got as a college student,” Bartling says.

The next level of service is a program that directly builds retirement savings. It’s a specialty of Student Loan Genius, whose founder, Tony Aguilar, started the company after struggling with a $100,000 student debt of his own. Prudential Retirement recently partnered with the firm to offer the service to its clients.

Under these programs, employees make payments on their loans each month and receive an equal amount in their 401(k) plans courtesy of their employers. It’s a contribution above and beyond whatever matching rate the employer offers, and it’s tax-free until retirement.

Student Loan Genius, like Gradifi and other vendors, also offers a platform that enables employers to make direct payments on the employee’s student loan debt. It’s not tax-free, at least for now, but it’s a direct route to a quicker payoff, which would reduce the interest paid, and freedom from crushing debt. SHRM’s Elliott points to an analysis by the financial website NerdWallet that found the average undergrad can cut close to three years of payments and $4,100 in interest through a typical loan pay-down program.

It’s truly the hottest employee benefit since the 401(k), and it signals to employees that their companies are invested in their success and addressing the most pressing financial concerns they have right now, not just 40 years down the line.
Catesby Perrin, head of business development, SoFi

Savings can be higher for grad students. An MBA grad can save $7,000 in interest, and a law school grad can cut $13,000, according to NerdWallet.

There’s little indication that young workers will get a grip on student loan debt without help from employers. According to the Department of Education, nearly half of borrowers were not making payments on their federal loans at the start of this year, and one in six were in default on loans worth $56 billion.

In a recent survey commissioned by Citizens Bank, more than half of borrowers said they had no idea when they’d pay off their loans. The majority expressed regret they’d borrowed so much, and a third said they wouldn’t have gone to college if they’d realized how much the debt would weigh on them after graduation.

College tuition, meanwhile, continues to accelerate. Average tuition rates nationwide have surged more than 1,000% since the 1970s, alongside an average 40% decline in state funding for higher education.

Fidelity officials say they were surprised when their employees ranked student loans as one of their biggest problems. The company estimates that about a fourth of its workforce has student debt.

It’s Not Just Millennials

An estimated two million Americans age 60 and older had unpaid, long-ignored student loans in 2013, according to the Federal Reserve Bank of New York. That’s triple the number less than a decade earlier.

Retirees are seeing their Social Security checks garnished, with the amount they owe mushrooming because of interest. “Some may think of student loan debt as a young person’s problem, but as it turns out, that is increasingly not the case,” Sen. Bill Nelson, D-Fla., said during a Senate Special Senate Committee on Aging meeting after the Fed’s numbers were released.

The problem for older workers may increase as more baby boomers move into retirement, some carrying debt they incurred while helping their children go to college. It’s something of a general squeeze, with one quarter of boomers saying they’re now also paying for the care of their aging parents.

Now, as companies focus this new benefit on attracting younger workers, some question how that will resonate with more seasoned staff who are also saddled with debt. “I think the challenge is you’ve got other employees who are going to say, ‘What about me and the things that I need?’” Griffin says.

PwC officials raised concerns about that early on, DeMello says, but concluded benefits programs routinely offer features that don’t apply to everyone, such as financial assistance for employees who adopt a child.

“They thought there might be some issues, but there just haven’t been,” DeMello says. “I think the reason is it’s such a large societal problem, the employees in the organization say, ‘I’m glad my company is doing something about it.’”

The concern about parity could be addressed by an approach DeMello says an increasing number of employers are now taking. They offer employees $100 a month for a special benefit, such as a gym membership or inclusion in a student loan program. 

DeMello says the interest in a broader range of benefit options is growing. “I’ve been really amazed at how open employers are to looking for ways to help their employees,” he says.

Where Do Brokers Fit In?

Brokers can find opportunity on multiple sides of this equation. “There is a significant and growing need on the part of employers with help selecting a vendor and implementing a program, particularly given the rapidly evolving products,” Bartling says. He points out the need for rigorous due diligence checks on vendors and notes that Willis Towers Watson is working with a few dozen employers on student loan programs, often in a broader reevaluation of their benefits offerings. He says clients have shown an interest in evaluating close to a dozen vendors in the initial stages.

DeMello agrees. “I think people are really starting to understand it and employers are either going direct to us or they’re going to a benefits broker and saying, ‘What can you tell me about this new benefit?’”

Some may think of student loan debt as a young person’s problem, but as it turns out, that is increasingly not the case.
Sen Bill Nelson, D-Fla.

On the other side, brokers can serve as a relationship builder for the vendors in this space. Bartling says vendors are eager to engage directly with Willis Towers Watson. “It obviously helps them from a relationship standpoint to get to know the clients, to get to know the issues and the opportunity more effectively,” he says.

“There’s certainly a value added from the perspective of all parties.”

Financial Wellness

NFP’s Lisa Kottler is not sure whether programs offered by Student Loan Genius and Gradifi will catch on. But she says they could mesh well with financial wellness initiatives that are rapidly become a standard feature at many companies.

“I think more and more employers are recognizing it’s difficult for people to save for retirement if they’re burdened with student loan debt and consumer debt, as many Americans are,” she says. Financial wellness programs are designed to bolster retirement as well as address more immediate concerns in the workplace,

including job performance. According to PwC’s survey of millennials, 81% of young workers with student debt report they’re financially stressed, and half say it’s a distraction at work. One third admit it’s hurt their productivity. “We see in our research, both broad workforce research and specific client research, strong correlations between an employee’s financial well-being and productivity, performance, absences and also healthcare costs,” Bartling says.

Saving for retirement is one of the more pressing financial wellness issues today’s workforce faces, and it can be exacerbated by debt. The Center for Retirement Research at Boston College says the percentage of Americans who will retire with inadequate income will rise to 56.2% with these student debt levels, up from 51.6% today. More than half of students say they’d prefer the money they now spend on health insurance to go instead to their student loan debt. And nearly half said they’d prefer a student debt pay-down program to a 401(k) savings plan.

“I think what concerns me more than anything else is that the younger generation prefers this benefit over 401(k),” Elliott says. “The sooner you start saving for retirement, the more secure the retirement is going to be.”

But for many, retirement is being delayed. A third of millennials have taken money out of their retirement accounts to pay for other expenses, and more than half expect to do so in the future, according to PwC’s survey of young workers.

More than a third of millennials with student debt said in that survey they’re not currently saving for retirement—a surprising number given the prevalence in 401(k) auto enrollment in workplaces and the low number of employees who opt out. Only a third of millennials say they’re confident they’ll have enough money in retirement, compared with just under half of older workers.

Weak financial management skills are evident in the student debt crisis. A survey of millennials by Citizens Bank found close to half didn’t know how much of their salary they were spending on loan payments and more than a third weren’t sure how much interest they were paying.

Kottler and others express concern that the program could potentially exacerbate these issues, even encouraging college students to take on more debt because they’ll get help later.

“If you look at the research in regard to millennials, there is already a little of that type of mindset,” she says. “That would be the risk here, to think that it’s OK to take out tens of thousands of dollars in student loan debt because down the road their employers are going to help them pay it back.”

But DeMello doubts that will happen, especially given employer payments cover only a portion of an employee’s student debt. “I don’t think someone who is considering taking out a student loan jumps ahead, when they’re 18, and says, ‘I’ll get hired by a company that has the Gradifi SLP in its benefit plan, so let me jack this thing up and go to an Ivy League school,’” he says.

More than half of students say they’d prefer the money they now spend on health insurance to go instead to their student loan debt. And nearly half said they’d prefer a student debt pay-down program to a 401(k) savings plan.

To the contrary, some feel that employer-based student loan assistance programs can help with this problem and build a relationship between the employer and employee. Young workers will begin to look at employers as a source for guidance on sustainable spending and short-term and long-term savings. “That type of relationship could be a tremendous benefit to the employee and the employer in many respects, both for performance of the workforce and health of the workforce,” Bartling says.

In the early going, DeMello says, he is seeing the influence that employers are having on the financial well-being of their employees. When an employer contributes money to an employee’s student loan account, “A lot of times the employee also finds a way to come up with the money themselves,” he says. “They see how they can accelerate this program and get out of debt faster.”

Legislative Game Changer

Elliott, of the Society for Human Resource Management, and others expect this space will boom if Congress passes legislation that would make up to $5,250 in yearly contributions to student debt pay-down programs exempt from income and payroll taxes. The effort is modeled on existing exemptions for tuition reimbursement programs and 401(k) contributions.

DeMello says he expects a bill to pass next year. He and others in the industry are lobbying for the legislation, and they’re joined by employees and employers who’d like to see the plans become tax exempt. “Very few of these types of programs end up being to the benefit of the federal government and the taxpayer,” DeMello says.

This one does, however, by curbing the risk of default—a major selling point because taxpayers are on the hook for much of the $1.3 trillion student loan debt. DeMello says the effort is also drawing bipartisan support in part because of the low cost. The programs are still new and generating relatively little in taxable income in the early stages, so there’s no lost revenue source the federal government will have to replace to compensate for the tax exemption.

“If employers are incentivized to do this, if Congress gives them that incentive, and it can help eradicate debt, then I think advisors would get on board,” Kottler says. Short of that boost, however, she’s not sure if the trend has staying power. “It’s an interesting concept,” she says. “People can’t pay for retirement if they’re beholden to debt. I could see where more try to tackle this, but I think it’s too early to tell if things like this will really be effective.”

Kottler says more hope may lie in auto enrollment and auto escalation programs that are becoming standard at many companies. Few young workers alter course on their savings once they’re signed up, and the savings accumulate. In any event, bailing millennials out of student debt won’t be enough, she says. “I really think it’s going to have to be a two-pronged approach. We certainly want to help them clear up their current debt, but parallel to that, there should be more education, making sure folks don’t get into debt in the first place. I think that’s more where the industry has pivoted, to try to help folks, to really educate them about how detrimental the debt can be.” Griffin says The Plexus Groupe will explore the idea and watch how it’s developing. Regardless of whether brokers have a financial stake in the outcome, he says they need to be able to answer questions and help navigate conversations about the programs.

Bartling believes the wait-and-see period may not last long for brokers. “There’s certainly a need on the part of employers,” he says, “and where there’s a need, there’s an opportunity.”

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