Employer Paying for Your Student Loans vs. Contributing to 401(k): Pros & Cons
More employers have begun to offer student loan repayment their employees as part of their company benefits package, a big perk for recent college grads racked with debt.
Surveys have shown that approximately 90% of young hires from their early 20s to 30s would sign on for an employer-backed student loan assistance if it means coming closer to being debt-free.
For companies, that’s enough to offer this type of benefit a no-brainer, not just for the welfare of recent hires, but also to offset employees’ costs and attract and keep new talent.
Repayment assistance can be a solid perk to have at your disposal. Do your job, get paid, and a portion of your student loans are taken care of on behalf of your boss? It almost sounds too good to be true.
Yet for employees starting off on their careers, it’s not quite so cut and dry. Do you take the student loan compensation package? Or, do you simply opt for making company 401(k) contributions plus a matching component? Some employers offer both benefits, while some offer either. If you had to choose between the two, which one is the smarter option?
Benefits of Student Loan Assistance and 401(k) Participation
|Student loan assistance||401(k) participation|
|Immediate, lump sum debt reduction||Allows to you to save toward retirement|
|Guarantees savings on loan interest paid||Potential for investment return to exceed interest rates on student loans|
|Psychological relief from a major debt||Possible tax advantages|
|Possible contribution match by employer|
What is Student Loan Assistance?
Student loan assistance isn’t the same thing as tuition reimbursement -- like if your job paid for tuition costs if you returned to school to further your skills, or enrolled in classes for your job function. With student loan assistance, your employer agrees to pay part of your student loan balance, either as you’re billed, or as a monthly or annual reimbursement.
How much they’re willing to pay is totally up to your job, however. Find a job at one of these companies in the finance, business and tech sectors, and you might find your student loan debt burden lessened significantly.
These are some examples:
- Tech company Nvidia offers both full- and part-time employees up to $6,000 per year, or a total of $30,000, for their student loan debt, for both federal and private loans
- Fidelity and Aetna both reimburse employees up to $2,000 per year in money owed toward your student loan debt
- After one year of employment with Penguin Random House, the publisher reimburses employees up to $1,200 per year, or $9,000 total
What are 401(k)s?
A tried-and-true investment vehicle, a 401(k) is an employer-sponsored retirement plan with a few financial advantages built in, including tax benefits.
The 401(k) is named after the tax code they’re based on, an account that allows you to contribute a portion of your pre-taxable income specifically to save for retirement. Some employers will “match” your contributions up to a certain amount. Employers with full, 100% matching means the chance to double your 401(k) account retirement savings.
For example, an employer may match up to 6% of your salary. So, if you contribute 6% of your paycheck, your company will also contribute the same amount to your 401(k).
The best part? You own your retirement contributions, so if you leave your current job, you can take the money with you and keep investing it in a variety of possible ways.
Impact on Your Taxes
Taxes on student loan assistance programs almost seem like a moot point, since it’s essentially a gift from your employer. And free reimbursement is better than no reimbursement. There’s a reason they’ve been dubbed a modern-day 401(k), and for good reason.
Depending on how you’ve arranged your tax withholdings, and the particulars of your loan assistance with your job, the benefits you receive from your employer will have already been taxed, so there’s no tax burden on your end -- that is, unless you find yourself positioned in the 25% tax bracket, in which case one-quarter of what you receive is taxable. (For instance, out of a $200 monthly student assistance payment, $150 would actually count toward your student loan balance.)
401(k)s, on the other hand, are all about the tax deferments; that’s what makes them so popular for working Americans with an eye on saving for retirement. Contributions to your 401(k) are not taxed, so if you set aside $200 per paycheck to automatically deposit into your 401(k), it’s $200 of pre-tax, gross pay, not post-tax, net pay.
401(k)s continue to earn interest tax-free, as well, and your only tax obligation is upon withdrawal.
However, don’t sell student loan assistance short on the tax end of things. H.R. 4363, The Student Tax Affordability and Relief Act, was introduced to the House of Representatives and proposes giving employers offering student loan repayment assistance a gross income tax break for contributions up to $10,000 per employee.
Which is the Better Benefit?
That depends on your priorities at the current moment -- but also for the long term.
Paying your student loans -- especially with the help of your employer on your side -- means coming closer to being debt-free more quickly, and taking a bite out of your loan interest, which begins accruing as soon as you borrowed your student loans. (Interest continues to build even when you’re in school.)
But by passing on a 401(k), you run the risk of not having enough saved for retirement because student loans, even with loan repayment assistance, took precedence for a few years. However, aggressively saving for your golden years with student loan repayment help can also mean having (somewhat) the best of both financial worlds.
So, how do you decide which one is the better benefit? Think over some of these ideas:
- Find an employer that offers both benefits. Research companies in your chosen field of study who may extend student loan repayment assistance to its employees. How much do they offer maximum, both annually and total over the life of your student loans? Do they also offer a 401(k)? If so, aim to contribute to your retirement account as much as you normally would if you were paying your student loans in full, only this time, contribute the extra student loan savings you’ll get with employer assistance.
- Examine your risk. Even with assistance, you’ll still owe money on your student loans from your own pocket. And this may task you with choosing between paying down your loans first and saving for retirement last, or vice versa. Take a look at the potential risks involved. Student loan interest builds at an accelerated rate (after all, that’s how lenders make their money). Generally, the guaranteed return from the money you’d save by paying down student loan interest first -- even with assistance in place -- is more attractive and a less-risky route to take than a 401(k). Even though a 401(k) offers an endless amount of investment possibilities, volatile markets and stock fluctuations mean there’s more risk in losing money on your investments than there is in steadfastly paying off your student loans. Unless you know an investment can yield a higher return than a student loan, get rid of your debt first and worry about investing money later.
- Consider your exceptions. Before overlooking a 401(k), consider this: if your employer’s 401(k) match is higher than the APR(s) on your student loan(s), it may be wise to put more money to you retirement than to paying off your student loans. Striking a balance between a high 401(k) employer contribution, student loan repayment assistance, and your own contributions to both debt and retirement offsets risk, saves you money, and gets you on the path to being rid of student debt forever.
- Crunch the numbers. Your rate of return on a 401(k) depends on a lot of factors (such as the investment accounts you have, fee structures and the stock market). Historically, financial planners have referred to an 8-to-10% stock market return, but other experts maintain that estimated a 5% annual gain is an ideal estimate to make. With that percentage in mind, calculate how much interest you’re likely to save on your student loans by taking your employer up on assistance, and also paying down as much of the debt as per your own obligation. Do you stand to save more interest on the loan -- or pay more?
- Remember to forecast the length of your loan terms. Are you on a standard 10-year repayment plan, or 20 years? Make use of a student loan interest calculator to see how much interest will accrue over that time, with and without employer assistance. Is there a chance to pay off your loans early with the financial help? It could leave more room for depositing into your 401(k) and taking advantage of possible interest rate increases -- a win-win, since you’d pay off your student debt, and save for retirement, early at the same time.
Can your loans be discharged? Generally, no, or the student loan crisis wouldn’t be a crisis -- more people would be absolved of their debts. Student loans can be discharged in certain unique instances, such as if your alma mater shut down; an injury or disability leaves you unable to work and earn money; if your college violated certain laws; or if your loan was issued to you fraudulently. Student loans usually can’t be discharged in bankruptcy proceedings. Bear in mind that if you’re successful in getting your loans forgiven, you still may owe taxes on the unpaid balance.
The right choice is ultimately determined by your unique situation with student loan debt.
The safer option for guaranteed savings is to opt for the student loan assistance -- it removes a major financial burden in a short period of time. Even if you don't get access to a 401(k) remember that you can use an IRA to save for retirement.
If your company offers a 401(k) match and you're comfortable with a little more risk for higher reward, the 401(k) offers the potential for greater financial gain.