Student Loans
According to Lending Tree, Americans owe $1.74 Trillion in federal and private student loan debt as of the second quarter of 2024. This figure includes federal and private loans and reflects a significant burden on borrowers, impacting their financial decisions and overall economic mobility. This is why Student Loan Repayment Assistance programs are becoming more and more popular, especially among younger employees.  While companies theoretically could be as generous as they would like to be, the tax-deductible amount for student loan repayment benefits provided by an employer is typically limited to $5,250 per employee per year. This amount can be excluded from the employee’s taxable income and often is the threshold where companies set their level of benefits. As of recent data, the average monthly student loan payment in the U.S. is around $400 to $450. However, this amount can vary widely depending on factors like the total amount borrowed, interest rates, and repayment plans. Some borrowers may pay much less or significantly more, especially if they have higher levels of debt or are on income-driven repayment plans. Companies that do not currently offer Student Loan Repayment Assistance Programs, should consider offering student loan repayment assistance for several compelling reasons: Attracting Talent : This benefit appeals particularly to younger workers who may be burdened by student debt, helping to attract top talent. Employee Retention : Supporting employees with their loan repayments can enhance loyalty and reduce turnover, as employees appreciate companies that invest in their financial well-being. Enhanced Productivity : Financial stress can negatively impact productivity. By alleviating some of this burden, companies can foster a more focused and engaged workforce. Positive Employer Branding : Offering this benefit can enhance a company’s reputation as a caring and progressive employer, making it more appealing to potential hires. Tax Advantages : Employers may benefit from tax deductions related to student loan repayment assistance, making it a financially savvy option. Workforce Diversity : This benefit can help create a more diverse workforce by supporting individuals from various educational and socioeconomic backgrounds. Increased Job Satisfaction : Employees who feel supported in their financial responsibilities are likely to have higher job satisfaction, contributing to a positive workplace culture. Overall, student loan repayment assistance can be a strategic investment in both employees and the company’s future success. Student Loan Repayment Assistance Programs (LRAPs) can typically be used to repay both private and federal student loans, depending on the specific terms of the assistance program. Here is a breakdown: Federal Loans : Most LRAPs are designed to help with federal student loan repayment since these loans are more common, and some programs are tied to federal loan repayment structures (like Public Service Loan Forgiveness). Private Loans : Some LRAPs, especially those offered by employers, may also allow you to use the funds for private student loans. However, this is less common, and it is essential to verify whether the program covers private loans before relying on it for that purpose. A Student Loan Repayment Assistance Program (LRAP) can significantly enhance someone’s financial plan by reducing the burden of student loan debt, allowing more flexibility within a monthly budget and allow more people to take advantage of more opportunities for financial growth. Here is how an LRAP can help build a more robust financial plan: 1. Accelerated Debt Repayment By receiving assistance with student loan repayments, you can pay off your debt faster, which reduces the amount of interest that accrues over time. This allows you to become debt-free sooner, which is a critical step toward financial independence. 2. Improved Cash Flow With the LRAP covering some or all your monthly loan payments, you’ll have more disposable income. This extra cash flow can be directed toward savings, investments, or other financial goals such as: Emergency Fund : You can build or replenish an emergency fund, which helps you handle unexpected expenses. Retirement Savings : More funds can be allocated toward retirement accounts (e.g., 401(k), IRA), helping you take advantage of compounding interest and employer match programs. Homeownership : If homeownership is a goal, having less debt can improve your debt-to-income ratio, making it easier to qualify for a mortgage. 3. Reduced Financial Stress Knowing that a portion of your loans is being taken care of by an LRAP can alleviate financial stress, leading to better financial decisions. Reduced anxiety around debt frees up mental energy to focus on long-term financial planning and wealth-building strategies. 4. Ability to Pursue Career or Educational Goals With loan payments handled, you may feel freer to pursue career opportunities that align with your passion or interests, even if they offer lower initial salaries. Similarly, you could potentially pursue further education without the weight of previous loans. 5. Increased Creditworthiness Regular and timely repayment of student loans, with the help of an LRAP, will positively impact your credit score. A strong credit score is key to accessing better terms on other financial products like mortgages, auto loans, or personal loans. 6. More Room for Investments With assistance in paying off student loans, the money saved can be invested in assets like stocks, real estate, or other income-generating ventures, helping you grow your wealth and diversify your financial portfolio. 7. Tax Benefits (for Employer-Sponsored LRAPs) Some employer-sponsored LRAPs are tax-free (up to a limit, currently $5,250 per year under U.S. federal law through 2025), meaning you receive this benefit without increasing your taxable income. This is an added advantage as it helps you reduce debt without increasing your tax burden. 8. Reduced Overall Debt Load By lessening or eliminating student loan payments, you can allocate resources toward reducing other high-interest debts, like credit cards or personal loans. This allows you to improve your overall debt-to-income ratio and lowers your financial risk. Student Loan Repayment Assistance Programs can play a significant role in an employee’s current financial plan and will have an ongoing impact in the future. The faster a person can pay off debt, contribute to retirement and start to grow their net worth, the better. Even just a few years head start can aid compound growth and put employees on the road to financial freedom.
Economic Perspective –  There is $1.8 Trillion of outstanding student loan debt of which most payments begin again for borrowers this month. The average monthly payment for borrowers is $200 – $300 per month, which equates to around 5% of the U.S median annual salary. Based on these numbers at the household level Wells Fargo analysts believe that the restart will be “ a relatively contained headwind ” for the U.S. economy. Personal Finance Perspective – When economists are looking at the big numbers, in aggregate, student loan repayment restart does not look so bad. When you get down to the individual level, $200 – $300 per month can mean the difference between saving money or being “in the red” …meaning spending more than your take home pay. We all pick and choose how we spend our money. Some people spend upwards of $100 a month at Starbucks. Other people might spend extra at the gym that has the “nice towels” as a form of self-care while they sweat. Some of us just want to keep watching commercial-free streaming services. Whatever choices people make as to where they spend their hard-earned money, student loans are back and there are ways to pay them off and pay them down without ruining all our fun. Here are a few ideas on how to not let your loan payments get you down: Company benefits – See if your company offers any student loan payment relief, as this has become an increasingly popular benefit. If your company does not offer this benefit, share this list with them of 20 companies that do. Ask for a raise – Talk with your boss and let them know that your loan payments are restarting and that it is creating financial stress. Employment is still tight and giving you a raise will most likely be less expensive than hiring and training your replacement. Consider loan consolidation – More and more borrowers are managing their budgets better by extending the terms of the loans or using an Income Driven Repayment plan. Both options can take some of the burden off your monthly budget. Please note, you want to take the time to fully understand the impact of whichever option you choose. Refinance your loans – This is different from consolidating loans. If you have Federal Loans, you are often better off staying in the Federal System. That is where you could potentially qualify for forgiveness programs and potentially take advantage of new payment plans like the newly introduced SAVE plan. If your loans are already through a bank and therefore not Federal loans, it is worth looking at refinancing. There can be bonus offers, lower rates or longer terms that might make it attractive to lower your monthly bills. Whenever you refinance any debt, it is critical to weigh the pros and cons. You may get a lower payment now, but a higher number of payments to pay off the loan completely. Budget – Knowing how much you should or should not spend on discretionary items is important! I realize that sticking to a budget is not as fun as getting a raise would be, but having a sense of what money is coming in and what money is going out each month is critical to long term financial success. Plus, you might not get the raise, and living within a budget is completely in your control. Regardless of how much money you make, in most cases, you could find a way to outspend your income. Prioritize your spending – Some expenses are “essential” – rent/mortgage, electricity, food. Other expenses are discretionary like Starbucks, streaming services, going out to dinner or a show. The goal here is not to encourage you to become a hermit, but rather to be more intentional about hitting a goal like traveling to Rome, Nashville, or Bali. It is simple to overlook details when purchasing everyday items or splurging on an impulse buy. It is when these behaviors become the rule versus the exception when it can hinder your ability to achieve bucket list types of goals or saving a bit extra for a downpayment, paying down student loans or saving a bit more toward retirement. Aggressively pay off your loans – If you have multiple loans, this might be a way to get to a more manageable monthly payment. Attack the smallest outstanding balance first, so that you can eliminate that payment. This is commonly referred to as a “Debt Snowball Method.” Pay off one balance at a time, then you have more money to put toward the next smallest loan balance. This payment method can be compared with the “Debt Avalanche Method,” which is where you attack the loan with the highest interest rate first. The Avalanche method will save you more money in the long run, but it might take longer for you to feel the benefit in your monthly payment. Take advantage of the “On Ramp” (delaying making payments on federal student loans but interest still accrues). Because of some serious drawbacks to the “On Ramp,” this should only be used if the borrower is in a short-term pickle. Some of these challenges include interest accumulation (which will in turn increase the total owed on the loan) and missed payments tacked on to the end of the loan, hindering progress made toward any of the loan forgiveness programs. So, while loan repayments starting up again may not create a major headwind for the U.S. economy, it can create some headwinds for each of us as individuals. As these loans start to pop back up on your monthly ledger, put some thought into how you want to deal with them. Do not let them get in the way of other financial goals by making a plan. As discussed, your plan may include increasing income, reducing other expenditures, or restructuring your loans through loan consolidation/refinance. Weighing these options and figuring out how they fit into your financial plan can be challenging. Speaking with a financial professional who is well versed in the various options can bring peace of mind to the decision-making process. The views expressed represent the opinions of Breakwater Capital Group as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed. 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