Employers to Offer Forgivable Loans to Help Employees Buy a Home or Pay Student Loans
Posted By Donna Fuscaldo on May 2, 2016 at 9:00 am
Paying a portion of an employee’s student loan debt is slowly becoming a benefit similar to the employee-sponsored 401(K). But one startup is taking it a step further. Benevate’s model provides a platform for companies to give employees a forgivable loan the can be used to pay down student loan debt or go toward a down payment for the purchase of a home.
“If you think about benefit offerings, very few of them are designed with recent college graduates in mind,” says Jason Rusnak, co-founder of Benevate out of Atlanta, Georgia, and a former strategy and business development executive for payroll and human resources services company ADP. “401(K) plans are great but it’s hard to contribute if you have very large student debt. If you don’t have a child, dependent care is not relevant. There’s a big gap in the early employee life cycle in terms of benefits.”
Student loan debt has reached crisis level with the nation collectively owing $1.3 trillion. Many millennials are staring at an average debt balance of $31,000 when they leave school, which makes it harder for them to get on their feet when they enter the workforce. Studies have shown that people are putting off starting a family, purchasing a home and saving for retirement all because of this student loan debt. According to the U.S. Census Bureau in the fourth quarter of 2009, those under the age of 35 represented 40 percent of homeowners and in the fourth quarter of 2015 that declined to 34.7 percent.
Employers being forced to rethink benefits
It’s also coming at a time when unemployment is at an eight-year low and employers of all stripes are having a tough time recruiting and retaining young workers, once they get them onboard. It doesn’t help that millennials are less loyal than their older counterparts. They grew up during the great recession and saw that loyalty still got you a pink slip and a trip to the unemployment office. As a result, they are less likely to stay at one or even two jobs for their entire career, which can get costly for employers who invest money in training and retraining them only to see them walk out the door. That, in turn, has driven a growing number of companies to offer to pay down a portion of their employees’ student loan debt, typically in the $100 to $200 a month range.
Benevate is one of a few companies taking a different approach. The company launched three months ago and is currently in the final stage of testing its platform with three companies. This platform will make it possible for employers to offer an upfront, forgivable loan that can be used as a down payment or to make a big payment to their student loan debt. Co-founder Rusnak argues providing employees with a large housing allowance or a way to pay down their debt is more valuable than dolling small amounts out each month. “The value of this is that they get the money upfront, which can reduce the principal and lower the interest rate or be used for a down payment on a house,” says Rusnak.
Housing could become a new benefit
While the student loan debt portion of it is starting to take off as a company benefit, Rusnak says offering new employees a lump sum to use as a down payment for a home isn’t too common in corporate America. Although, hospitals, universities and city governments have historically used it to get people to live close to where they work. It’s also used in economically depressed neighborhoods and communities to get people to work in areas that are, otherwise, less attractive for talent. Rusnak says that doing that has a positive impact on the individual, community and company that’s offering the benefit. He pointed to the University of Chicago, which has long used a housing benefit to lure professors and staff to build up the surrounding communities.
Benevate’s service isn’t without strings. While the employees get the money upfront, which Rusnak says is typically $3,000 to $10,000, they won’t see the loan forgiven until they have worked for the company for a predetermined set of years. If they leave before the term of their loan expires, what they haven’t worked off will be deducted from their last paycheck. Employers can choose to charge interest on the loan and, once it is forgiven, it is treated as taxable income.
The strategy differs from the other employer student loan assistance programs currently available. Most employers agree to pay a monthly stipend for student loans for a set amount of time. The employee isn’t on tap to pay anything back if he or she leaves for greener pastures. “It’s carrots and sticks,” says Rusnak of Benevate’s model. “Some programs earn you $100 increments and you can leave when you want, but with this, you are getting a lot of money upfront. A forgivable loan is the fastest way to accelerate student loan payoff and minimize total interest payments.”