Lately, there’s been a lot of news surrounding federal student loans. Whether it’s the end of the repayment pause or the Supreme Court’s decision to block President Biden’s broad one-time forgiveness plan, there are plenty of headlines for benefit pros to keep up with when it comes to student debt.
More than 43 million people have federal student loans of some form, totaling nearly $1.6 trillion in debt. The likelihood that large swaths of your workforce are impacted by changes in the student lending landscape is high.
What follows is a review of the latest news on federal student loans and how it may impact your employees, along with tools that can help you assist employees who are navigating all of these student lending developments.
Federal Student Loan Repayment Pause is Ending
Since March 2020, tens of millions of federal student loan borrowers have had the option to take a break from paying back their student loans without accruing additional interest. Over the last three years, the Biden administration has extended the pause five times. With the recent signing of the debt ceiling bill, however, he no longer has the legal authority to extend the pause when it ends on September 1, 2023.
While interest on federal student loans will resume on September 1, the first post-pause payments likely won’t be due until October 1. There will also be an “on ramp” to repayment — borrowers won’t be reported as delinquent if they are late with payments through September 2024.
What Benefit Pros Can Do
To make the transition to repayment as smooth as possible, HR leaders may want to give employees access to one-on-one sessions with a financial planner. This can help any employees with federal student debt come up with a plan to manage repayment without sacrificing other aspects of their financial wellness.
You might also provide access to a student debt specialist or coach, who can offer guidance on whether refinancing with a private lender could lead to a lower interest rate and/or lower monthly payment.
In addition, now may be a good time to look into offering student loan repayment benefits. Thanks to the CARES Act, employers can provide up to $5,250 annually for an employee’s student loan repayment through 2025. Employees won’t pay income tax on contributions made by their employers toward educational assistance programs, yet the employer also gets a payroll tax exclusion on these funds.
The Status of Student Loan Forgiveness Efforts
In August 2022, President Biden announced a plan to cancel up to $20,000 of debt for anyone who received a Pell Grant to attend college and up to $10,000 for borrowers earning less than $125,000. The Biden administration believed it had the authority to do this under the HEROES Act, a 2003 law that gives the Department of Education the power to forgive student loan debt during a national emergency.
However, the plan’s roll-out has been in limbo since a lawsuit brought by a coalition of conservative states made its way to the highest court. On June 30th, the court’s conservative majority found that federal law does not authorize the program to wipe out nearly half-a-trillion dollars in debt and blocked the plan. This means borrowers will need to start repaying their loans in October without any debt relief.
What Benefit Pros Can Do
While broad one-time forgiveness is off the table, student loan and financial wellness counselors can help employees determine if they are eligible to participate in other forgiveness programs, such as Public Service Loan Forgiveness.
The Biden administration also recently introduced a new, more generous income-driven repayment plan called Saving on a Valuable Education (SAVE), which will replace the widely used Revised Pay As You Earn Repayment Plan (REPAYE). Under SAVE, borrowers’ monthly payments are limited to 5% of their discretionary income for those with undergraduate debt (10% for those with graduate debt). In addition, discretionary income will be redefined as earnings above 225% of the poverty guideline (or $32,805 for a single person). This will allow many borrowers to make $0 monthly payments, and save all other borrowers at least $1,000 per year, according to the Biden Administration .
Two other perks of SAVE: Any unpaid interest will not accrue (so the borrower’s debt will not grow) and those with loans up to $12,000 will have their debt forgiven if it’s not fully repaid in 10 years (each additional $1,000 in debt adds one year to that timeline). Borrowers can sign up for this plan ahead of payments resuming this fall.
Recommended: Strategies to Pay Back Federal Student Loans
Changes to Loan Servicing Could Complicate Return to Repayment
Millions of borrower accounts have been transferred to new loan servicers since they last made payments back in 2020. According to the Consumer Financial Protection Bureau (CFPB), more than 17 million federal student loans have already been transferred, and more changes are expected in the coming months.
While the transition may be smooth for some borrowers, others will need to create new logins with their new servicers, re-enroll in autopay, and/or update their payment information. With some 40 million people resuming repayment all at the same time after a three-year moratorium, these servicing changes could result in confusion, lost and late payments, surprise late fees, and further challenges for borrowers returning to repayment.
What Benefit Pros Can Do
HR leaders can encourage employees with federal student loans to get ahead of the rush by logging into their StudentAid.gov account as soon as possible. Doing so can give borrowers critical information on their loan’s current servicer, along with a chance to make sure their contact information is up-to-date on StudentAid.gov.
You might also want to provide guidance on how to manage a servicing change. In many cases, borrowers will need to set up an online account with the new servicer in order to access their student loan information. Once they have an account, they will be able to confirm what repayment plan they are on, determine whether they need to change their plans, or request a change to their payment amount under an income-driven program. Those who were on auto-debit before the student loan pause may need to re-establish auto-debit, even if their loan servicer has not changed.
SECURE 2.0’s New Tool for Helping Employees with Student Loan
The SECURE 2.0 Act which passed the House on March 29, 2022, addresses student loan debt by permitting employers to make matching contributions to retirement plans based on employees’ student loan payments. The purpose of the provision is to assist employees who may, because of their student loan debt, decide against making elective contributions by payroll reduction and as a result, miss out on employer matching contributions.
Although some employers started offering student loan benefits under their defined contribution (DC) plans before SECURE 2.0, those benefits aren’t true matching contributions and create administrative complications that SECURE 2.0 largely alleviates.
Under the new provision, employers would not have to obtain any student loan documents or evidence of payment. Employees just have to certify that they made eligible loan payments on an annual basis. The provision can be a stand-alone benefit, or part of a bigger benefits package.
What Benefit Pros Can Do
Companies that employ a significant number of individuals with federal or private student loan debt may want to consider implementing the program, as it offers multiple perks for both employers and employees.
Providing your employees with benefits that help them save for retirement — and that recognize the challenges they face with repaying student loan debt — can increase employee productivity, satisfaction, and retention. It can also help you compete for employees in a competitive market by showcasing your willingness to invest in your employees’ careers.
The SECURE 2.0 student loan provision goes into effect on January 1, 2024. While the law itself does not provide many details, it is expected that the IRS will release regulations in the coming months.
Looking for ways to help your employees navigate the student loan landscape? SoFi at Work’s student loan education, refinancing, and repayment benefit platforms can offer the tools you need to support your employees and promote their overall financial wellness.
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