Student loan debt in the United States totals $1.5 trillion. The country’s total national debt recently passed the $22 trillion threshold. That means student loan debt alone makes up roughly 7 percent of our national debt. Of that $1.5 trillion debt load, $1 trillion is carried by Millennials alone.
Your 20s and 30s are supposed to be the time of your life when you start planting roots for the future: buying a house and car, saving for retirement, starting a family. Fifty million people today in their 20s and 30s aren’t able to do that at all. They’re having to put off homeownership, put off retirement savings, put off starting a family. All because of student loans.
We can’t think of this as isolated to one specific group of people. Millennials already make up the largest demographic in today’s workforce. When the biggest generation of active workers cannot afford homes, cars, vacations and, most of all, families, that has knock-on effects for everyone. Less money being spent on not just big-ticket items but regular consumer goods is a drag on the whole economy.
Despite the widespread ripple effects that student loan debt has on us as an economy and a society, we still don’t make it easy for borrowers to get out from under that debt. Student loans can’t be discharged in bankruptcy; interest rates are excessively high (e.g. rates of 6.8 percent are common); and refinancing options can box in debt holders from taking advantage of income-based repayment plans when their financial security may depend on those plans.
The risk of default for student loan debt is 20 percent. Despite this, the Federal Reserve has expanded the market for student loans. Schools have taken notice not by cutting tuition, but actually raising tuitions that fund new student centers, dorm buildings, athletic facilities – nothing that actually enriches higher education itself, but is gobbling up those students’ future debt all the same. Something needs to give. This is not a sustainable way for millions of people to live. We need to rethink how we deal with student loan debt. And it actually doesn’t take some crazy, outside-the-box, reinvent-the-wheel kind of rethinking, either.
There are three very practical solutions, in the works right now, that we can and should implement so millions of people can finally get a handle on the student debt crisis and win long overdue relief.
Make employer-led student loan repayments a tax-free benefit
The IRS already allows for employers to reimburse their employees’ college tuition (up to $5,250) tax-free. But what about the tuition that workers have already racked up just to get degrees and qualify for those jobs in the first place?
There are two bills making their way through Congress right now that do just that. The House of Representatives has introduced H.R. 1043, which would apply the same tax-free benefit that employers and employees enjoy for tuition repayment toward student loan repayment (also up to $5,250). At the same time, the Senate is considering The Employer Participation in Repayment Act of 2019, which seeks to do the same thing. Altogether these two bills have amassed over 100 cosponsors from both sides of the aisle. It is absolutely incumbent that Congress muster the political will to combine and pass these two bills into one law. Expanding tax exclusion status to nearly $5,300 of employee student loans – a figure that’s tantamount to about 15 percent of the average borrower’s student loan debt of $37k – may be an incremental step in the grand scheme of things, but it’s one that would provide major relief right away.
Codify the ‘Abbott Plan’
One of the biggest albatrosses of student loan debt is that it prevents borrowers from saving for retirement. When you only have enough money on a month-to-month basis to direct toward either your student loan payments or your 401(k) plan, and not both, borrowers are naturally going to choose the loans that are due imminently and not the decades-down-the-line retirement option. The Chicago-based healthcare company Abbott Laboratories found a way around this problem for their employees by introducing a new plan where the company makes a tax-free contribution to a worker’s 401(k) plan – even if that worker doesn’t make a contribution of their own – as long as that employee is also repaying their student loans. Tying the two together ensures that employees who previously had to make a choice between paying down debt and saving for retirement no longer have to focus on accomplishing the former before starting on the latter. Instead, they can focus on one while their employer works toward assisting with the other.
The IRS gave Abbott the greenlight for this plan, but the ruling so far applies only to them. Codifying the Abbott Plan – either through a wider IRS ruling or through legislation – would be a major step forward in helping employees build retirement savings while simultaneously paying off student loan debt. At the same time, employers win out by getting to enjoy tax-free status with 401(k) contributions, instead of making taxed payments directly into the employee’s loans.
Create an HSA or FSA for student loan debt
Employers are increasingly offering their workers options for health-savings or flex-spending accounts for healthcare. By the end of 2017, companies around the country were providing over 22 million HSAs, with the total sum of money poured into these accounts topped at $45 billion. As of 2018, 56 percent of employers offered HSAs and 63 percent offered FSAs. Clearly there’s an appetite among both employers and employees for setting up spending accounts to cover healthcare costs – so why aren’t we doing the same with student loan repayment?
A tax-deductible or tax-free ‘student loan spending account’ would yield two major benefits. For the student loan holders, it provides a new avenue for paying down loans either tax free or through a tax deduction. That, in turn, means millions of primarily middle-class workers win a new tax break on their student loans. The second benefit is for the government: by easing the tax burden on borrowers’ student loan repayment, you reduce both the risk and rate of defaults. Over 20 percent of student loan holders are already defaulting; within five years that number is expected to hit close to 40 percent. Reducing the student loan default rate isn’t just good for the financial health of the borrowers, it would also save the government billions of dollars in defaulted loans and more than make up for any revenue loss that comes from a new tax deduction/exemption.
These are far from the only solutions for bringing student debt relief. But what these policy ideas do represent are some of the quickest and easiest ways to start making real change in the lives of both the student loan borrowers and the companies that employ them right now. We owe it to both employees and employers to take fast and effective action on this crisis. There’s no time to waste.