A giant financial services company is betting that young people care as much — if not more — about their employers paying off their student loans as they do about paying for retirement.
Fidelity Investments introduced a program Thursday that will let employers make regular payments to their employees’ student loan accounts, much the way companies already pay into their workers’ 401(k)s or health care savings accounts.
“We’ve seen big demand for a benefit like this, from both large companies and small,” said Kenneth Ericson, a Fidelity vice president. “It’s a significant tool that can be used to recruit new employees and retain existing ones.”
Some smaller financial services companies already facilitate this type of benefit program, such as First Republic Bank and startups like Student Loan Genius and SoFi.
But the entry into the market of Fidelity Investments — one of the country's biggest mutual fund, money management and financial planning companies — is a sign that student debt relief may soon become a mainstream benefit that employers will have to offer to remain competitive.
The shift towards companies paying off some of their employees' student loans, however, is raising the eyebrows of some education experts, who say it does little to address the country's real problem with student debt — and may even exacerbate borrowing or tuition costs.
The idea that employers paying off loans is a way to alleviate the student debt crisis is a "backwards way of thinking about things," said Kevin Carey, the director of higher education policy at the left-leaning New America Foundation.
"It's one step further away from the much more sensible idea of actually lowering the cost of higher education. Instead it just makes debt a little easier for a few people."
The real drivers of the student debt crisis are people who weren't able to graduate from college, Carey said, or who have low-wage jobs. Those employers aren't likely to offer benefits like paying off student loans; many don't even offer retirement savings. "The kind of employers that are going to want to do this are going to be recruiting well-off college grads," Carey said.
Jason Delisle, a fellow at the right-leaning American Enterprise Institute, wrote on Twitter that he could see such programs driving up borrowing by students. The programs, he said, are incentives to take out student loans, "even if you don't need it. You're turning down free employer benefits."
Fidelity’s new student debt contribution plan -- which it already offers to its own workers and will be marketing to other big employers -- lets companies make payments that go directly to employees’ loan balances, with Fidelity serving as the administrator and payment facilitator.
Employers are typically looking to contribute monthly lumps towards student loan payments, said — anywhere from $50 to $500, said Akhil Nigam, who works on product development for Fidelity. The payments aren’t dependent on the size of loan balance — though some companies have said they want to offer more sizable contributions to employees who stay at the company longer. Many companies cap the total they're willing to contribute.
Fidelity has seen broad interest from companies across the spectrum, said Nigam. “One company told us, ‘I’m thinking of rolling it out because I’m losing my warehouse workers to the place across the street that’s offering another 50 cents an hour,'” said Nigam. “And then there’s, ‘I’m a technology company where workers are already making more than $100,000, and I need to pay them more.'”
A tiny fraction of companies, just around 4%, now offer student loan payment programs, said Mark Kantrowitz, a student loan and financial aid expert based in Skokie, Ill. But that number is likely to rise for a simple fact, he said: Millennials care more about paying off their student loans than they do about saving for retirement — a far-off concern for people who are juggling more immediate financial obligations.
“It scratches where it itches for a lot of millennials,” said Greg McBride, the chief financial analyst at Bankrate, which operates a consumer finance portal for comparison shopping. “They view student loans as their most pressing financial concern.”
Offering student loan payments as a benefit could prove to be a strong employee recruiting tool, McBride said. “If you’re interviewing, and one company’s offering student debt relief as part of their benefit package, that’s going to resonate with a lot of young people,” he said.
For now, companies that elect to offer this benefit must make the student loan contributions based on the size of the employee’s paycheck after taxes have already been taken out — unlike with 401(k)s, which are based on a worker’s pre-tax salary or wages. But a number of bills in Congress are looking to make such contributions tax-exempt.
“People forget that tax-free retirement plan contributions to 401(k) plans started the same way, only about 35 years ago,” said Kantrowitz. “Once enough prominent employers began offering them, there was pressure on Congress to exclude the benefit from income.”
Making student loan contributions tax-deductible — either for employers or employees — amounts to offering another taxpayer-funded benefit to mostly high earners, Carey said. And because it won't reduce the cost of college or help those who are struggling most, he added, there's no clear public benefit, the way there is for retirement and healthcare subsidies.
"This is just subsidizing the cost of higher education," Carey said, "for what is almost sure to be a disproportionately affluent sub-segment of the larger college-going population."