Student Loan Paydown Plans vs. 529 College Savings Plans

College expenses continue to rise, and many new graduates will enter the workforce with thousands of dollars in student loan debt. Older employees might have children and grandchildren who will be attending college in the future and will want some way to save money for those expenses.

For these employees, benefits such as an employer-sponsored student loan paydown plan or a college savings plan such as the state-sponsored 529 plan can go a long way in ensuring the financial health and well-being of your employees.

But which do you offer your employees? How do you choose which would benefit your employees the most?

College savings primer: 529 vs. student loan paydown plans

The 529 college savings plan tends to be one of the most familiar benefit offerings that employers provide. States or state agencies sponsor these plans and thus provide some essential tax benefits. As long as the funds are used for qualifying education expenses, the withdrawals will be considered tax-free disbursements. Any funds used for non-qualifying educational expenses will be considered taxable. Until that time, all contributions are completely tax-deferred.

According to the U.S. Securities and Exchange Commission, there are two types of 529 plans. The prepaid tuition 529 plan locks in a tuition rate at eligible colleges and universities, only covers mandatory tuition and fees, and are backed by the state and guaranteed investments. In contrast, 529 college savings plans do not lock in tuition costs, cover a wider range of qualified education expenses, have no limits on with enrollment open all year. These plans are not guaranteed by the state, so the 529 college savings plan come with a higher market risk.

An employer-sponsored student loan paydown or debt relief plan will be designed by the employer to help employees cover the cost of repaying their student loans. This can take many forms.

For example, an employee might contribute 5 percent of their net earnings to the plan while the employer contributes a matching sum that is considered taxable income on the employee’s paycheck. Or the company might reimburse an employee for a portion of what they’ve paid in student loans for the entire year. More companies are offering this benefit, and employees are loving it!

Student loan paydown plans will vary according to the size of the company, how much it would be able to contribute and the specifics that make the most sense for both the company and its employees. The company could offer to pay a portion of student loan interest as long as the employee makes regular payments on their student loans. Or the plan could offer to pay one full student loan payment a year. Employers set the limits on what they can contribute, but even regular small amounts can help ease the burden of student loans your employees may be weighed under.

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