The voices of Urban Institute's researchers and staff
April 13, 2016

Should employers repay student loans or pay higher wages?

April 13, 2016

Widespread attention to student debt has put the issue at the top of the agendas of some political campaigns and, apparently, firms trying to attract talented young employees.

According to the New York Times, companies large and small are offering help with student debt repayment as a benefit. In the current environment, where the media, political candidates, and free college advocates depict student debt as a life-destroying burden, it might not be surprising that this policy could be an effective recruitment tool. But does it make sense?

Fidelity Investments, which helps people manage their finances through rational investment policies, announced in March that it will contribute up to $2,000 a year to retiring the principal of employees’ student debt. But to my knowledge, no one has conducted the simple experiment of giving employees a choice between a $2,000 salary increase and a $2,000 contribution to student loan repayment. (Because the loan repayment is a taxable benefit, these two options are financially equivalent.)

The moves to provide the benefit suggest that if employers are correct, most young people would opt for the loan repayment. But even if we assume that the benefit is directed at employees who hold bachelor’s degrees, only about 70 percent are graduating with debt. Surely the other 30 percent would prefer the cash. And if the benefit applies to all employees, the percentage who would be denied any benefit at all from the new policy would be even higher.

What does this supposed preference say about the decisionmaking processes of young people who have borrowed? Do they not understand that they could devote the $2,000 salary bump to retiring their principal of debt? Or are they asking for help in disciplining themselves? Maybe they are worried that they would use the extra cash for evenings out and are looking for a commitment strategy. Maybe they are under the false impression that it would be better to pay off their student loans than to take advantage of employer matching for retirement savings.

The interest in employer repayment is not confined to employers hiring young people. Bills currently in Congress propose to subsidize this benefit, which would lead more employers to offer repayment instead of raising wages. This would not be good public policy. It’s hard to justify providing higher compensation to employees who borrowed for college and have not yet repaid their debts than to those with the same qualifications and positions who may have worked more while in college to avoid borrowing, who had parents who footed the bill, or who have already made sacrifices to repay their debts. Accepting the idea that valuable young employees are not capable of making good decisions about how to allocate their incomes is not the best way to ensure their futures.

A central reason that student debt is causing more problems for more young people today than in the past is that when they find jobs in the slowly recovering economy, those jobs don’t pay enough. Firms should think more creatively about compensation, and Congress should focus on providing incentives for strengthening the labor market for all workers.

A student, right, works in the counseling office at Frederick Community College on a work-study program to avoid student debt, on October 6, 2015 in Frederick, Maryland. Photo by Melanie Stetson Freeman/The Christian Science Monitor via Getty Images

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