Last month, the Biden administration announced a plan to provide financial relief to people living on low-to-moderate incomes (LMIs) with student loans. As student loan forgiveness and income-contingent repayment changes take effect, employers and service providers have the opportunity to make saving easier, an important step in improving financial security and reducing the wealth gap between races and genders. Employees whose debt repayments are reduced or eliminated can redirect at least some of those funds to emergency savings and be better prepared for unexpected expenses – a proven method to advance financial security.
The Student Loan Relief Plan has created a moment for employers and service providers to influence employees who earn LMI through products and benefits that meet their needs, wants and aspirations.
The Student Debt Relief Plan forgives $10,000 of student debt for those earning less than $125,000 and $20,000 for eligible borrowers who received a Pell grant for undergraduate study. It will also cut monthly payments in half for 65% of borrowers, reducing repayment requirements for income-oriented undergraduate loans from 10% to 5% of the borrower’s monthly income. The plan comes at a good time: Federal student loan repayments have been on hold since March 2020 in an effort to provide relief to student borrowers, but that pause will end on December 31, 2022.
The Commonwealth and the Retirement Research Center (RRC) of the Defined Contribution Institutional Investment Association (DCIIA) conducted joint research on the role emergency savings play in retirement savings and the institutionalization of savings emergency in the workplace.
Our research subsequently discovered a unique opportunity, enhanced by the Student Loan Relief Plan, for plan sponsors and service providers to support and improve the financial well-being of employees eligible for loan relief student by designing products or offering benefits that meet their specific needs. Additionally, through increased communication and revised messaging, employers can highlight the benefits of redirecting reduced debt payments to emergency savings and/or retirement benefit offerings.
Our joint work indicates that student debt among people who earn IMT is a barrier to emergency savings, and as a person’s level of student debt increases, they are more likely to have a lower financial health score. Lack of emergency savings is a fence participation in retirement. Like a game of dominoes, student debt has ramifications for short- and long-term financial security. In fact, a US Student Aid Survey finds that 62% of employees who have student loans say they have deferred saving for retirement.
Female, black, and Latinx borrowers are disproportionately affected by student debt. Specifically, women hold about two thirds of all student debt in the United States and black and Latino college graduates owe an average of $25,000 more in student loan debt than white college graduates. Latinx borrowers are more likely to report delay a financial decision like buying a house or saving for an emergency due to student debt. Student debt reinforces the wealth gap between races and genders, as they disproportionately go into debt for higher education does not necessarily translate to higher wages for black workers or women.
Whether student debt is written off entirely or monthly repayments are reduced, raising awareness and providing a high-quality emergency savings solution could help employees take advantage of their increased discretionary income. For people with low incomes and reduced payments, the Biden administration estimates that the average annual student loan payment will be reduced by more than $1,000 per year for current and future borrowers.
Directing it to a cash emergency savings account may be the most effective use of these new “saveable” funds. The DCIIA RRC and the Commonwealth to research finds that those with emergency savings are 70% more likely to contribute to their retirement. In fact, our previous research found that at the height of the pandemic, those with emergency savings were less likely to dip into their retirement savings cover an unforeseen expense.
Plan sponsors and registrars are in a unique position to provide support, information and solutions to employees who are eligible for student loan debt forgiveness and other benefits such as student loan repayments – which 45% of employees say this type of support would motivate them to stay with their employer. Providing a high-quality emergency savings solution to employees with new discretionary income can protect individuals from cycles of debt while encouraging retirement participation in the process. This support has a particularly strong impact on people who earn IMT, women, and Black and Latinx populations. By leveraging debt forgiveness, employers and service providers can impact their own workforce and support broader progress in closing the racial and gender wealth gap .
Natalie Blain is senior director of innovation at the national nonprofit Commonwealth.
Warren Cormier is the director of Defined Contribution Institutional Investment Association Retirement Research Center.