I get paid once a month on the 15th (+/- days if during weekend) directly to my bank account.
My fancy iPad and bank account app sends me an alert from my Checking account telling me I got paid – woohoo!
Next to my bank account app is my: Housing App, Car Payment app, Credit Card app, Investment App, and Student Loan app. Technology makes payments and financial management that much easier!
Now, time to make my monthly payments – disclosure, all payments are exact to give a real idea of the magnitude of this problem.
457$ to Rent
140$ for Car
350$ for Credit Card (roughly)
200$ for Investments
300$ for Savings Account
550$ for Student Loans…
Yes, my most costly expense each month are Student Loans. This is more expensive than the apartment I live in. I am fairly confident that I am not alone in the fact that my most costly expense each month is student loans. If you pay any attention to our country’s economic, political, or social climate, you are well aware that student loans are a “hot button” topic. Half of the voting population is drowning in it, while the other half of the voting population is sick of hearing about it.
This isn’t another article complaining about the student debt problem. Realistically, it isn’t going to magically disappear for the people who currently have it. While some ideas might help mitigate it for future University students, this policy will probably not include a “Grandfather” clause to rope us current 20somethings in.
Instead, I want to present an interesting and innovative option to paying these student loans.
Each month, I contribute 3% of my income to my Company’s 401K. This money comes out pre-tax and is automatic. In addition, my company matches up to 6% for each contribution. What a great benefit!
So…. Why don’t we have the same option for Student Loans? It could come out pre-tax (saving the student money in the long term), it would be automatic (making sure the federal government gets their payments), and it would be an attractive benefit for companies to market (making the company a bigger draw for potential employees).
In practice, the employee would be able to “activate” their pre-tax student loan payment, attach their student loan payment information to their benefit’s software program, set a designated amount, and boom; next month, that 550$ is automatically taken out of their check BEFORE tax. Potentially, the employer may add a matching amount as well (to stay competitive with their benefits) like the 401k.
Yes, this would only apply to student loans, but these are the main loans being used by students. Yes, there are a couple different federal loan agencies, but there are also a couple different financial 401k institutions. And yes, not every student has student loans, but not every employee takes advantage of their 401k options.
Let’s break down the benefits for the three parties involved…
First off, not all companies offer a 401k package, and even less offer the opportunity for it to be matched by the employer up to a certain percentage.
However, any competitive company that functions in a competitive market usually do/need to offer the 401k package in order to stay relevant and attract talent to join their workforce.
By also adding this benefit to their overall package incentive, young talent will come flocking to their companies.
If they do not match up to a certain percentage, it will not cost them a single thing. Simply, they will be taking the money out of their employees’ pay before depositing the payment into the employee’s account. Just like the 401k package. In addition, if they do match, they could offer the employee the option to either be matched on their 401k contribution or their student loan contribution. Young adults cannot afford to have 200$ taken from them and put into a 401k account; they need to use that money for real things now like student loans.
Additionally, there is the potential for federally-backed assistance if they offer this benefit….
The Federal Government
Why would the federal government benefit?
Well, for starters, last year the default rate of student loans came in at 11.8%. While that seems high already (1 out of 10 students??) it actually fell from 13.7% in 2014.
For every student that defaults on their loans, the government loses that money. More importantly, it creates a 20something citizen that will struggle to buy/rent a: house, car, apartment, land, buildings, etc for the rest of their life. This is because if you default on your loans, your credit gets shot. This hurts not only the federal government, but the economy as a whole.
Losing money is one thing, but creating a whole generation of young adults who can never contribute to the housing market, the stock market, or the small-business market? That is devastating to the continuing health of our economy.
In addition, by companies having this policy, this almost assures the federal government that they will make their money back. 20somethings are not really skilled at saving money (might be a good thing to teach in high school, public education?) so by having this option, the money is already gone and the monthly loan payment is already paid.
I would also think that the federal government would offer interest reduction for the student if they are in this plan (like how there is a .5% reduction for direct deposit) and I would imagine they would offer business subsidies for companies that offer this as well.
Lastly, the federal government would be able to track exactly how much debt is being paid each month by students. With this program, the government could see how many borrowers fit into each “student loan bracket”. This would help: determine better federal funding policies, make accurate predictions on the economy/federal revenue stream, and find creative ways to help those that are drowning. The statistical benefit of having this information centralized is hard to categorically rate due to the creative ways the federal government could use this, but is enormously beneficial nevertheless.
Now, onto the real winners…
Ah, the individuals receiving the direct benefit of this policy. Aside from the fact that the direct answer to “how would they benefit” centers around the theme that their student loan would get paid off, there are actually many other real benefits to this policy for borrowers (graduates).
They would have a more real-time idea of how much money they actually “take home”. Debt is a concept that is hard for young borrowers to understand. Because we first accrued our debt when we were 18, we did not really have any tangible idea of what this meant. We weren’t being given 45,000$ in hard cash that first year; instead, we were put in an privileged opportunity to live in facilities that existed for the sole purpose of improving ourselves. For the majority, it doesn’t seem like college costs a thing because we were just borrowing it. Of course, there are some that work 40 hours a week while attending college and getting a daily reminder of how much it costs, but that is far from the norm.
Fast forward to graduation and every student taking the final entrance counseling mandated by the federal government. It is here when you first realize the magnitude of your borrowing actions. You get a very black & white picture of: how much money you took, how long it will take to fully pay off, the difference between principle and interest, and how much that interest is really worth.
Now, every month, you walk a very narrow and tight walkway making sure you have enough money to move onto the next one.
At least with this program, you will understand from the get-go how much that actually is. Some, but not all, traditionally make the student payment right when they get paid. Most wait until the actual student loan payment due date is pay. After that, it is a slow crawl until next payday. With this program, you can learn how to budget your money and time better for the next payday, rather than being slammed after you delay your payments.
Now onto the obvious benefit for borrowers —
When I look at my paycheck each week, I see so much of my money being taken away from me for programs that don’t (at least seem) to be directly benefiting me. I personally believe that this benefits society, which benefits me; but still, this is quite a bit of money to always “lose”.
This program would allow you to use this pre-tax haven to pay off your student loans. You wouldn’t need to subtract this from your after-tax income. Instead, you could make you student loan payment before tax, and your actual paycheck that gets deposited into your bank account is free from student loan payments – yippie!
Of course, if it was this easy, it would already be done, right? Someone who writes in run-off sentences and improperly placed quotations can’t be the first person to propose this in writing.
A similar bill has actually been introduced in Congress. The Employer Participation in Student Loan Assistance Act was drafted last Fall (2015) by a group of eight bi-partisan Senators. If passed, it would allow employers to contribute 5,280$ per year pre-tax to their employers. This is different than what I proposed — free money! – but is equally, if not, even better.
While that Act would be supremely beneficial, it would be hard for a vast majority of companies to offer that benefit. Most companies can’t just give away money like that to their employers. In addition, wouldn’t senior members who do not have to pay student loans (or 20somethings that did not take on debt) be a little peeved?
My proposal could be utilized by a wide variety of companies, especially companies that can’t afford to match the monetary payments made by their employers. Let borrowers take control of their debt and give freedom to companies that want to market themselves better. Lastly, and most importantly, let the federal government gain a centralized way to really understand the student debt situation and provide it statistical resources to find creative ways to tackle it. This is how we can address the bigger problem.