College expenses continue to rise, and many new graduates will enter the workforce with thousands of dollars in student loan debt. Older employees might have children and grandchildren who will be attending college in the future and will want some way to save money for those expenses.
For these employees, benefits such as an employer-sponsored student loan paydown plan or a college savings plan such as the state-sponsored 529 plan can go a long way in ensuring the financial health and well-being of your employees.
But which do you offer your employees? How do you choose which would benefit your employees the most?
College savings primer: 529 vs. student loan paydown plans
The 529 college savings plan tends to be one of the most familiar benefit offerings that employers provide. States or state agencies sponsor these plans and thus provide some essential tax benefits. As long as the funds are used for qualifying education expenses, the withdrawals will be considered tax-free disbursements. Any funds used for non-qualifying educational expenses will be considered taxable. Until that time, all contributions are completely tax-deferred.
According to the U.S. Securities and Exchange Commission, there are two types of 529 plans. The prepaid tuition 529 plan locks in a tuition rate at eligible colleges and universities, only covers mandatory tuition and fees, and are backed by the state and guaranteed investments. In contrast, 529 college savings plans do not lock in tuition costs, cover a wider range of qualified education expenses, have no limits on with enrollment open all year. These plans are not guaranteed by the state, so the 529 college savings plan come with a higher market risk.
An employer-sponsored student loan paydown or debt relief plan will be designed by the employer to help employees cover the cost of repaying their student loans. This can take many forms.
For example, an employee might contribute 5 percent of their net earnings to the plan while the employer contributes a matching sum that is considered taxable income on the employee’s paycheck. Or the company might reimburse an employee for a portion of what they’ve paid in student loans for the entire year. More companies are offering this benefit, and employees are loving it!
Student loan paydown plans will vary according to the size of the company, how much it would be able to contribute and the specifics that make the most sense for both the company and its employees. The company could offer to pay a portion of student loan interest as long as the employee makes regular payments on their student loans. Or the plan could offer to pay one full student loan payment a year. Employers set the limits on what they can contribute, but even regular small amounts can help ease the burden of student loans your employees may be weighed under.
Choosing the right one
Currently, 529 plans can only be used for qualifying education expenses while attending college but cannot be used toward paying back student loans. If your employees use money from the 529 to pay toward loan debt, they will be required to pay income taxes on the amount and an additional 10 percent federal tax penalty. So, that could easily add up to a 30-40 percent tax obligation after withdrawing the funds. The 529 plan would benefit those who plan to save for future college costs.
Those who have already graduated and now have to pay back their student loan debt will want a benefit that can cover their past college costs. America’s student loan debt has reached an all-time high at $1.3 trillion and continues to grow. Student loan debt can cause financial strain on your employees, and providing a benefit that helps to ease that burden will go a long way in improving the morale of your employees. The IRS categorizes student loan paydown plans as additional wages and taxes them at the normal employee rate.
How to choose
When offering employee benefits, it’s important to look at your overall company and its makeup to determine which benefits packages will be the most appealing to your employees and the most effective for your company in attracting and retaining talent. One such category of benefits to consider are those benefits related to covering the cost of college.
Before deciding which benefit would be the best to offer your employees, take stock of your employees. Are most of your employees older or have been out of college for several years? Are they mostly younger or only a few years out of college with student loans on their minds? You can find out what your employees need the most through employee surveys or having round-table discussions to learn about what they need.
Emeka is the founder & CEO of PeopleJoy, which provides employee retention solutions to CEOs and business leaders that struggle with high costs of turnover and retaining millennial talent.
Previously he founded and launched a mobile app publishing company that was acquired in 2015. Prior to that he worked as Director of Product at a fintech startup and as a Wall Street analyst. Emeka received his B.S. in Electrical Engineering from Rutgers University and his MBA from Harvard Business School.
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