Student debt is one of the most prevalent issues in the U.S. right now, impacting approximately a third of the nation’s workforce. However, thanks to the CARES Act of 2020, you as a small business owner have the opportunity to make a difference by offering programs that help your employees pay back these massive loans. In this episode, Gene Marks and Mick MacLaverty, a student loan expert, CEO, and co-founder of Highway Benefits, discuss the advantages of offering student loan repayment as a benefit at your company.
Podcast Key Highlights
What Is The Current State of Student Debt in the United States?
- In March of 2020, during the CARES Act, the government did two things with regards to student debt: they put a pause on all student loan payments as well as all the interests accruing on them and they also made student loan repayment a tax-free benefit for businesses.
- Last October 1, student loans resumed for the first time in three years.
- Although the president has managed to get some student loans forgiven, specifically for those who should have qualified for what’s called public service loan forgiveness, it only applies to a very small fraction of the overall student loans in this country.
Who Actually Shoulders Most of the Student Loan Debt?
- There’s a common misconception that student debt only affects those between 22 and 30.
- In actuality, a surprising number of people that hold student debt are older people on behalf of their kids. Almost 40% of federal student loan holders are between the ages of 35 and 50.
Why Do Business Owners Need a Third Party Like Highway Benefits to Help Pay Employee Student Loans?
- Any money you pay your employees has to go through payroll, where it’s subject to payroll taxes, Social Security taxes, and income taxes. Paying your employees’ loans directly prevents them from receiving the full amount.
- In contrast, every single dollar that you as a business owner contribute toward your employees’ student loans through a service like Highway is tax free, which means that they receive every single dollar. Furthermore, it gets processed as a deduction for your small business.
- Partnering with a company like Highway Benefits shows potential employees that you care about your staff’s financial wellbeing.
What Exactly Does Highway Benefits Do When They Work With a Small Business?
- Highway Benefits performs the verification and compliance piece that ensures your employee actually has a qualified education loan and that they are who they say they are.
- Then, they move the money directly from your company into the servicer to prevent the employee from using those dollars elsewhere.
What Will Highway Benefits Do After the CARES Act Expires?
- Because of how prevalent student debt is in this country, Highway Benefits predicts that the government will extend this program.
- However, should this act be repealed, Highway Benefits is diversified enough to be able to survive by relying on its other services, such as its tuition reimbursement program.
How Does the SECURE 2.0 Program Impact Highway Benefits?
- This new provision which starts on Jan 1 will allow companies to match employee student loan payments with a contribution to their 401k.
- By offering this benefit, companies are enabling their employees to save for their retirement.
Links
Transcript
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Gene: Hey everybody, it’s Gene Marks, and welcome back to another episode of The Hartford Small Biz Ahead podcast. Thank you very much for joining us today. I am speaking with Mick MacLaverty. He is a student loan expert and CEO and co-founder of Highway Benefits. This conversation is about student loans and benefits that you can be providing to your employees. So first of all, Mick, thank you very, very much for joining us.
Mick: Thanks for having me. Excited to chat all things student debt.
Gene: Yeah, let’s talk about student debt. First of all, tell us about Highway Benefits. What do you guys do?
Mick: Yeah, sure. So again, I’m the CEO, co-founder of Highway Benefits. What we do is we provide student loan-related benefits to companies to help their employees manage their student debt. Our bread and butter product specifically is student loan repayment as a tax-free benefit. So companies can actually contribute up to $5,250 tax-free per employee per year directly to their employees’ loans. And what we do at Highway is we manage the verification and compliance of that process as well as the movement of money directly into the employee’s loan account so that they can’t pocket the cash and use it elsewhere.
Gene: That is great. We’re going to dig into that in some of the details in just a minute. Give me some of the demographics here. Tell us about what’s going on with student loans. It is hard for me as a consumer, frankly, to catch up on President Biden has forgiven these loans, except these loans aren’t forgiven, and my daughter has student loans and of course her’s aren’t forgiven. So she’s got to start repaying them, and she’s all confused. Maybe the general environment as we’re speaking right now in the student loan world.
Mick: Yeah, so the high level statistics that you probably hear or read about in different articles we’re approaching $1.8 trillion of student debt. About 1.6 of that is federal student loans. There are about 44 to 46 million Americans who are currently affected on average holding about $40,000 of debt. The average student loan payment is around $500 a month, so it affects basically a third of all working employees in the United States. So it’s a pretty broad sweeping issue. A little bit of background on where things stand. So student loans have actually been on pause for the last three years. So in March of 2020 during the CARES Act, the government kind of stepped in and did two things specifically with regard to student debt. The first thing they did was they said, “Okay, all federal student loans we’re putting a pause on all the payments. We’re putting a pause on all the interests accruing on those loans.”
Mick: So that was in March of 2020, and that policy was extended about eight times over the last three years until this year, which September 1st of this year, interest on loans resumed and October 1st, loans actually resumed for the first time. The second thing the government did in March of 2020 during the CARES Act was make what we do student loan repayment as a benefit, actually tax-free. So this allows every dollar contributed by the company to actually be tax-free income for employees. So those were kind of the two main things that the government did. But yeah, so fast-forward three years to October 1st, just a month and a half ago here, loans are resumed for the first time. So you have three years worth of people not having to deal with this. It’s been out of sight, out of mind, and now people are presented with the reality that these loans will have to be paid against.
Gene: And even when I read in the news that the president has managed to get some student loans forgiven, to me that seems to be a very small fraction of the overall student loans that are out there, right?
Mick: Yeah. I mean, pre-COVID I don’t think the word trillion was used very much. The only thing, it was really used for was for student debt. And so the kind of broad sweeping forgiveness plan was the goal, and that would’ve really only removed only about $300 billion. It sounds crazy to say only $300 billion.
Gene: I know. I know.
Mick: It’s such a large number, but with regard to student debt, it actually is, you’re right, only kind of a small amount, that 300 billion also would kind of come back into play within three to four years just at the growing rate of employees taking or students taking on student debt. So that plan didn’t actually go through, the Supreme Court ruled that unconstitutional earlier this summer. But what the Biden administration has done is tried to take this more targeted approach to forgive debt for those who had special circumstances. These would be folks who technically should have qualified for what’s called public service loan forgiveness. Maybe they’ve made payments for 10 years, and if you do that working in a specific industry, your loans are forgiven. So these are folks who probably would’ve already had their debt forgiven anyway. And so the kind of more tactical approach and the administration is taking now kind of makes a bit more sense, I guess, from my eyes.
Gene: Yep. Makes sense. That does make sense. One of the sort of misconceptions I think people have about student debt is who actually holds the student debt. I was speaking to somebody that’s in the world of student loans, and he said to me, “I wanted you to comment on it,” that a surprising number of people that hold student debt are actually older people on behalf of their kids. And I wonder if you could speak to that. Is that true?
Mick: Yeah. So about almost 40% of federal student loan holders are between… I think it’s between the age of 35 and 50.
Gene: Yeah. Right. Right.
Mick: That’s something a lot of people don’t really realize is that this is not a problem that just affects the 22 to 30 for us employee base. It affects people and it will continue to affect people as people grow older. So this problem of student debt is growing at an exponential rate. So you have individual… Go ahead.
Gene: Yeah, no, no, no. The reason why, to piggyback on what you’re saying is that a lot of employers and business owners think like, “Oh, well, if I’m going to offer any help or assistance or with student debt, it really only impacts those younger employees that are just out of college,” when really that’s not true. I mean, it could be up to 40% of your employees if they’re similar to these numbers of all ages, could take some benefit by having an employer help them out, pay down student loans. Is that fair?
Mick: Oh, that’s beyond fair. I mean, employees, again, on average, about a third of an employee base at any given company will have student debt, and that number changes based on the industry. So if you have, we call them healthcare tangential businesses. So these are any hospital systems, healthcare system, vet clinics, physical therapy groups, the percentage of employees who have debt is well above…
Mick: 50%. So this isn’t a benefit that just affects a few people here and there. The problem is so severe that it really does affect, yes, recent college grads, who, by the way, haven’t had to ever make a student loan payment, so have no idea what it’s like, but it also affects people into their forties, fifties, sixties. So that’s kind of the scarier piece is that the problem is so severe and it will continue to grow, so it’ll reach people in their seventies eventually. And so what we really want to do is, in essence, help people manage this problem and allow companies to really play a part in this. They can, and it can be advantageous for companies to play a role in preventing this problem.
Gene: So why Highway Benefits? I have 10 employees, say I offer benefits saying, “Yeah, we will help pay down your student loan a few grand a year or whatever,” why can’t I just give a check to my employee to reimburse them for their student loan? Why would I use Highway Benefits?
Mick: Yeah. So I think a couple of reasons. One is there’s kind of the tactical objective reason, which is these are tax-free dollars. So if you give your employee a check for the money, you as the company aren’t utilizing all the dollars effectively, the employee isn’t receiving all of the dollars that you’re giving because money has to go through payroll. So you have payroll taxes, Social Security taxes, income taxes. So technically every single dollar, you as the business owner contribute to your employee through a service like Highway, they receive every single dollar. So it is the most effective form of compensation if the employee has a loan better than a bonus, which gets taxed better than a salary dollar, etc.
Mick: So that’s like the… legitimately, this is the best compensation dollar you can give someone if they have loans. On the other end, there are kind of outsized rewards for companies that do offer this benefit. It kind of says, “We actually do care about your specific financial wellbeing as an employee, and we want to see you succeed.” So it allows companies an opportunity to really like to say, to show, not tell that they actually care about their employee’s financial wellbeing. It really is just… it’s kind of a win-win for all parties involved.
Gene: Does Highway Benefits get in the middle then between payments? So if we’re using a student loan processor, are you involved in that payment from the company going directly to the student loan processor?
Mick: Yeah, so we integrate with all the loan servicers, so we’re able to ensure that the employee does have a qualified education loan. We understand the balance and principle. The company actually sets up rules. So they’re the one who determines how much money goes into the employee’s loan account. So company says a hundred bucks a month, we’re going to contribute to employee’s loans or $300 a month. Again, the maximum tax-free limit is 5,250 per year. And then also if the company wants to put in kind of tenure rules, that’s say if you’ve been at the company for a year, maybe you get a hundred bucks a month. If you’ve been here for three years, maybe you get the max. So what we do is kind of two-fold. On one hand, we do the verification and compliance piece that ensures the employee actually has a qualified education loan. They are who they say they are. We can have Jean paying off your nephew’s loan or something, right? And then we actually do move the money directly from the company into the servicer to prevent the employee from using the dollars elsewhere.
Gene: I got it. Which is another great benefit that you provide is that you reimburse an employee or you give the employee money you don’t know. There’s no validation that they’re going to use it for the student loan in the end. And that’s certainly our concern. So the amount is it’s $5,250 per employee per year. That’s not only tax-free to the employee, but it’s a deduction for the employer. This came through the CARES Act. I think this expires at the end of 2025. So does that mean you’re out of business then? You’re going to answer no to that, of course. But tell me about what happens after 2025.
Mick: Yeah, A brief kind of history lesson on that. So we, or this benefit falls under Section 127. Previously, a lot of companies are probably familiar with this. This is tuition reimbursement or continued education benefits. That’s why the limit is 5,250. And so the CARES Act, in essence, what they did was they lumped our benefit into that bucket of Section 127. We actually also offer a tuition reimbursement product, so we’re not a one trick pony, but the number 5,250 came up 20 something years ago, that was based on the cost of education at the time. So as you can see, the problem is way different now given that an average semester of college costs like $20,000 or something. So times have changed very quickly.
Mick: And so this benefit was a provisional period for five years. And if you look historically at Section one 127 and how that was rolled out for educational assistance benefits, it was actually chunked out in five-year increments to ensure that companies weren’t kind of abusing the rules put in place. And then in 2012, the government stepped in and made educational assistance benefits permanent. And so a couple of things. One, we view that this is basically just kind of the following the path. You don’t want to institute a rule and make it permanent, and then, oh no, there was some loophole that exists that we didn’t catch.
Mick: So it’s kind of a smart way to roll out a benefit to ensure that things are being not taken advantage of or rolling out smoothly. Then yeah, so it is set to cease Jan 1, 2026, and we believe, and we’re kind of in the loop with how things are moving along, that the benefit will be extended much further along. We also believe that the limit could increase from 5,250 to 10,000. Maybe it could include things like parent PLUS loans, which would allow parents who’ve taken out loans on behalf of their kids to be able to take advantage of this. So not only do we foresee it being pushed out, but kind of extra emphasis on the rules to make it a more attractive benefit for everyone.
Gene: Yeah, I actually think it’s a pretty good bet that you’re making. I mean, obviously student debt, it is definitely a very discussed topic. It would be politically unwise to ignore the issue, and obviously both parties are arguing how to deal with it, but this type of tax benefit that’s provided makes a lot of sense. I know has pretty strong bipartisan support. I know it got added to the CARES Act with very little debate. So I do think… Go ahead.
Mick: No, I think you’re spot on. I mean, it’s kind of one of those things and the way we look at… My co-founder and I, we started this business actually stemmed out of our master’s thesis at graduate school. So we did a ton of interviews. We interviewed over 150 heads of HR, heads of total rewards, all these different groups, and we were trying to find… we knew that student debt problem was so massive and we wanted to find a way that we thought was an effective business that should and could exist in the near future. And this is before student loan repayment as a benefit was tax-free.
Mick: But the way we view it is in order to really tackle the societal issue of student debt, not only does Highway have to be successful, our competitors have to be successful, the refinancing businesses have to be successful, collective bargaining for student loan companies, they have to be successful. And that’s just to make a dent in the problem. I think… I can’t stress enough how massive of an issue this is. I mean, it affects a third of all workers. So we view ourselves as part of the kind of broader group of solutions that are addressing student debt.
Gene: And you had mentioned about your competitors, and for those of you guys that are watching or listening to this, I mean, just be aware. I mean, Highway Benefits does have its competition. I’m not going to name them, but that’s a good thing because this is a thing. I mean, the fact that you do have competition means that there is a market of many employers that are out there that are offering these benefits to their employees. Hence, there are some companies like Highway Benefits and others that are providing similar services because there is demand for this. And again, as a business owner, you’re looking for a way to attract to retain workers. This is a very, very important benefit.
Gene: Mick, pivoting a little bit though, but it’s the same kind of concept. So SECURE 2.0 passed about a year ago from this conversation that we’re having now. One of the key parts of it, which I thought was great, is that now when you’re contributing to an employee’s 401k, you can now match an employee’s student loan payments and make a contribution to their 401k, the theory being that people are not saving enough for retirement. They’re paying out their student debt. Is there anything we can do about that? Yeah, let’s give an employer as an incentive to put money away for their employee’s retirement by matching these payments, which is great. How does that work or dovetail into the services that you guys provide?
Gene: Like say an employee has $5,000 in student debt or student debt repayments, and an employer reimburses them for that, which is great. Does that mean that the employer cannot make that match to the employee’s 401k? How does that work because I do have clients that ask those questions?
Mick: Yeah, so it’s new. So this is one of the optional provisions of SECURE 2.0. So I think a lot of organizations, specifically a lot of the 401k companies are still trying to figure out specifically what’s going to happen here. They’re kind of waiting on a bit more government involvement or government direction as to how to roll this out.
Gene: Sure. And by the way, this seems like a great opportunity for you guys, but carry on.
Mick: Yeah, it is great. And we speak with a bunch of the different 401k providers. There are a lot of them out there. And so what we do as a business, I mean part of our technology stack is that we allow companies to verify that an employee has a qualified loan and has made a payment. So inherently from us, we do that already. The way the benefit works now, student loan repayment is a tax-free benefit. The company cannot say, “You can use money for student loan repayment, or you can use money for cash, or you can use money for commuter benefits.” It kind of has to be for student loan repayment or tuition reimbursement because those fall into the same tax code.
Mick: This new provision that starts your right Jan 1, will allow money to, in essence, what it’s saying is if an employee makes a student loan payment, that counts as the trigger for a company to be able to match that employee’s retirement account. So the idea or the objective is to make people who may be spending their extra cash on their student debt allow them to get into the retirement savings space, which is a great thing. The thing that comes into play that companies have to make a decision is do we want to utilize that new rule or do we want to just do student loan repayment because we want to get them out of debt fast?
Mick: And we’ve had companies reach out who are contemplating that exact thought. I think it’s more of a business decision as to how companies want to roll out the benefit. Debt compounds just like retirement savings compounds. So if an employee isn’t taking… if they’re just making their minimum payments and aren’t chipping away at the principal, I mean it never goes away. So it’s just something to think about. And it also depends on the type of business it is, the type of employees, if it’s younger employees versus older employees. So that’s kind of how it’s going to work, and we’re excited to see how it rolls out.
Gene: So my takeaways for this conversation is that obviously student loans affects one out of every three workers that are out there, and there’s no real limitation to age because a lot of parents and older people have student loan payment responsibilities. So this is an employee benefit that affects many of your workers, not necessarily just your younger workers. Companies like Highway Benefits, if you want to offer that benefit of paying down… helping your employees pay down their loans, you can do that. And you guys are like the middle man that can facilitate all that and validate the information going back and forth and make sure everything is in compliance and reported. As an employer, I can pay down each employee’s student loan up to $5,250. They don’t get taxed on it, and I get a deduction for it. And although that might expire… supposed to expire the end of 2025, I think both you and I, Mick, feel that there’s a good chance that’s going to be extended beyond that.
Gene: And then the only other curveball that’s out there is because of SECURE 2.0, we also have an option of choosing because we might want to make a contribution to a 401k for the student loan payments that our students… to match what they’re doing during the course of the year, we now have that ability to do that. Is there anything else that I’m missing as an employer if I want to offer? And I think it goes without saying that by offering this kind of benefit, I mean it helps with attracting workers and retaining workers, and I love your idea of the tenure. Maybe we pay a certain amount, but after you’ve been with us for three years, we’re going to pay more. We covered all of this. Is there anything else that we didn’t cover that you thought that you think might be important to discuss?
Mick: Yeah, I think I can give you a couple answers here. So specifically on the product side for us, again, we also offer tuition reimbursement products. So oftentimes it’s kind of an annoying thing that companies have to deal with. If they offer continued ED and they say, we give employees $2,000 a year to take product management classes or whatever kind of associations they… accreditations they need, how do you reimburse an employee for that? We built a product that allows that to be very seamless. So that’s one thing. And then also we’ve built a set of tools for employees. So if you’re offering student loan repayment as a benefit. Again, we want to empower… companies are our customer and we want to help companies attract and retain talent. That is why we exist as a business. At the same time, we’re well aware that employees, yes, this is a helpful benefit.
Mick: You’re putting money into what is their generally biggest liability, personal liability account. But we do want to empower employees to get smart about student debt. And so we do have a set of tools or within the employee dashboard that allows employees to learn more about their loans, connect with someone that they can speak with about their debt, learn of different refinancing options. Do I qualify for income driven repayment? These types of things, employees, they can get paralyzed because it’s so daunting. And so we’re also trying to do our best to make sure that employees are just aware of different things that they can be taking advantage of, providing them with different articles and resources to… I think the phrasing now is get financially fit for us specifically as it pertains to their student loans. So yes, student loan repayment is a benefit, is our bread and butter product, but companies that offer it, there’s also kind of further tools for their employees. So it’s not just kind of let it run on its own.
Gene: I love that. And listen, financial wellness is another growing benefit that employers are providing. We talk about health wellness, but I’m still looking for that magic platform and maybe Highway Benefits can one day be that platform that it integrates with a payroll system, can integrate with major financial firms as well as allow me to input data and then start giving me advice based on my student loans, based on my whatever savings I have, based on what my payroll is, should I buy this car or should I lease it? What do I need to buy a house? How much money should I be putting away from my kids’ education all in one magic app? It sounds like you guys eventually are heading down that road, which is exciting and I think just a growing opportunity for you.
Mick: Yeah, absolutely. And again, right now we’re focused on providing good quality service to our customers, which are HR and people teams or business owners. And we really want to make sure that we’re providing them benefits that attract and retain talent specifically through a financial lens starting with student debt because we feel it’s the biggest problem. And you mentioned financial wellness. We view this as kind of like if you peel the layer of an onion away, what is the biggest contributor to financial wellness in the workplace? It’s generally student debt is kind of the biggest problem. And so we’re hoping to tackle that and basically prevent future issues in the financial… employee, their kind of financial wellness space. So that’s kind of what we’re focused on.
Gene: Mick MacLaverty is a student loan expert and CEO and co-founder of Highway Benefits. Mick, how can we find your firm?
Mick: Yeah, you can visit us at highwaybenefits.com. My email is mick@highwaybenefits if you want to reach out to me directly. We work with companies of all shapes and sizes, so we’d love to speak with folks. Feel free to reach out and demo.
Gene: Thank you for joining. It’s been a pleasure speaking with you.
Mick: Thanks for having me.
Gene: Everyone you have been watching and or listening to The Hartford Small Biz Ahead podcast. My name is Gene Marks. If you need any advice or help or tips running your business, please visit us at smallbizahead.com or sba.thehartford.com. Again, my name is Gene Marks. We will see you again soon. Take care.
Gene: Thanks so much for joining us on this week’s episode of The Hartford Small Biz Ahead podcast. If you like what you hear, please give us a shout-out on your favorite podcast platform. Your ratings, reviews, and your comments really help us formulate our topics and help us grow this podcast. So thank you so much. It’s been great spending time with you. We’ll see you again soon.
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