What the stimulus deal means for student loan borrowers

Laurel Taylor, CEO and Founder of FutureFuel.io, joins Yahoo Finance’s Julie Hyman to discuss the latest news on the student loan front: from payments, to what kind of relief people can expect going into 2021.

Video Transcript

JULIE HYMAN: Well, thanks to the aid and stimulus package that passed Congress and is now law, people who have student debt will now be able to do tax-free contributions through their employers to try to pay down some of that student debt, which we know is a crisis in the United States. Joining us now to talk more about it is Laurel Taylor. She's CEO and founder of FutureFuel.io, which is a student debt repayment platform. So this new provision, Laurel, and thanks for joining us, is called the Employer Participation and Repayment Act. Talk to me about what exactly it does. And as I was saying to you during the break, it's surprising to me that something like this did not exist already.

LAUREL TAYLOR: Yes. Well, Julie, I'm so thrilled to join you today. And I love that sentiment that you were shocked that it didn't already exist because it's incredibly intuitive. The Employer Participation and Repayment Act is a transformative provision that is enabling employers to leverage their tuition assistance and tuition reimbursement program and budget and simply expand that budget not only for future educational pursuits but to also pay down the student debt that employees have already incurred, I would argue, to get the job.

And so it enables employers to offer $5,250 annually tax-free to both the employer as well as the employee. And shockingly, this will liberate about somewhere between $143 billion and $206 billion to pay down student debt. And I can share a little bit more and get more granular on where those numbers come from, but this is a transformative provision that will have a massive impact in the workplace and for employees who are struggling in confronting and paying down student debt.

JULIE HYMAN: So just to make sure I understand this correctly, presumably, there would be two ways in which this would be deployed, where an employer would offer this, perhaps, as a benefit to employees and say maybe to attract them, to retain them, we're going to pay down some of your student debt, and they would get the ability to do that in a tax-free way. Or they could allow the employees to do it through their job in a tax-free way. Am I understanding it correctly?

LAUREL TAYLOR: OK. So, perfect. So Julie, this provision enables employers to effectively add extra payments and to pay down-- and we as FutureFuel, we, of course, facilitate this entire benefit offering. But it's an additional $5,250 in tax-free contributions to pay down the student debt of the employees.

Now, employees will still continue to pay their student loans, and that will be in a post-tax world. But certainly, this additional $5,250 that the employer has already set aside-- actually, 71% of employers offer tuition assistance and tuition reimbursement program. And so this enables all of those employers-- and that that tuition assistance and tuition reimbursement offering covers about $115 million employees. But that budget goes 92% unutilized every year. So now, employers can take that 92% of budget that goes unallocated, and they can leverage it to pay down the student debt of their employees. And it's finally tax-advantaged, just like any other benefit that's being offered in the workplace.

JULIE HYMAN: Gotcha. OK. And in addition to that, going into 2021, the SECURE Act is on the table. SECURE Act 2.0, I should say, which offers further incentives to get this debt paid down to employers because it talks about offering matching a contribution to retirement savings to employees who pay down their debt. So the only thing I wonder about with this particular provision is for the employees who aren't paying down their debt at the same rate, is that going to be enough of a carrot, if you will? you know, I wonder if the people who are not paying it down at the same rate, is it because they-- how many people don't pay down their debt because they can't? And how many people don't because they are deploying the cash elsewhere?

LAUREL TAYLOR: Hm, good. OK, so we have two issues here. The repayment of student debt, the average horizon is 17 to 20 years. That is the pay down journey, which is staggering. And then we have 401k participation. So if we think about the student debt, paying down student debt, so we have about 20% of student loan holders are on income-driven repayment programs, which decreases the total amount that that employee has to pay commensurate with income.

Now, if we think about the-- and 53%, by the way, 53% of borrowers are not prepared to enter into repayment in FY '21. So we would really encourage those users to get on and switch their plans to income-driven repayment plans if they're not prepared to enter repayment. You've lost your job. Can bring it down to $0 for 12 months as an example.

Now, if we look at the SECURE Act 2.0-- and this is a, Julie, this is a transformative year in the workplace from an employee benefit and benefits that address student debt in the workplace. The SECURE Act 2.0, for the first time, will enable employers to offer a matching contribution to employees who are paying down their student debt.

So I have $150,000 of student debt. I did not put anything into my 401k in the first 10 years of my career because I was paying down student debt. My mother took out a Parent PLUS Loan as a social worker with a 9% interest rate. The interest rates on Parent PLUS loans are outrageous. She didn't put anything into her retirement in the last year she could save for retirement.

84%, according to MIT AgeLab, 84% of those who have student loans do not contribute to their 401k or retirement savings, or they contribute at a suppressed level. So the SECURE Act 2.0, what it enables Americans as they're paying down student debt-- for the first time ever, for the majority of the population paying down student debt, this will be the first time they have anything going into their retirement savings. So this is truly a transformative opportunity for those who are paying down student debt to build wealth in partnership with their employer.

And, of course, the provision that was already passed enables employers to direct dollars directly to help pay down the student debt of their employees. That will save the average employee $30,000. The impact of $30,000 on their student loans, and will shave off six to seven years off that horizon. So these have a huge impact at a micro level.

And 2/3 of debt is held by women and persons of color. So as we think about employers, progressive employers who are financially inclusive who want to address the full spectrum of financial health and wellness within the workplace, women and persons of color owes 2/3 of debt. And we know that also women have left the workforce kind of in mass since COVID hit at about 22%. So this has a double impact within the workplace.

JULIE HYMAN: Right. Thank you so much for explaining all of this, Laurel. It's been really helpful and really interesting and also really helpful, I think, on the topic of student debt, over which you do not hear a lot of hope. So Laurel Taylor, CEO and founder of FutureFuel.io. Thank you so much for your time, and happy new year.

LAUREL TAYLOR: Happy new year. Thank you, Julie.

JULIE HYMAN: Thank you. Take care, Laurel.