This story was originally published on CNBC.com.
The student debt crisis has hit a new milestone — soaring to $1.7 trillion in outstanding loans at the end of last year.
As more than 44 million Americans grapple with this burden, the disparity in the amount of that debt held by Black and white borrowers is also growing.
Studies show that young Black adults start their careers with more student debt than whites and that gap increases over time.
The reason? White borrowers tend to be able to pay down their debt more quickly than their Black peers, said Fenaba Addo, associate professor of public policy at the University of North Carolina-Chapel Hill, who conducted research on the topic.
For many Black young adults, “their inability to find wages and employment to pay down debt at the same rate of whites” exacerbates the debt divide.
Some employers have taken a step that could slowly reduce the debt burden among their workers — by offering student loan repayment assistance as an employee benefit.
“This is such a massive problem that just the individual being responsible and paying off debt isn’t gonna make a dent in the overall crisis, especially now with the impact of coronavirus,” said Vault CEO Romy Parzick, whose company provides the technology platform for student loan repayment programs at MGM Resorts, New York Life, Prudential, Voya and other companies.
It’s really important to take a “three-pronged approach,” she said.
In addition to individuals paying down their loans, employers need to take responsibility because these employees are getting this education to help their employers advance their mission and objectives,” Parzick said. “And then the government has a role through relief efforts.”
Prior to Covid-19, about 8 percent of employers offered student loan repayment assistance as a benefit, according to a 2019 survey by the Society for Human Resource Management. The share of companies that would do so could rise to one-third, the organization found, if the government allowed them to avoid taxes on the payments.
The government did just that last March with the passage of the CARES Act. Although the tax-incentive was set to expire at the end of 2020, another relief package passed extends the provision for another five years through 2025. Some experts say it’s likely to become permanent.
Employers can make tax-free contributions of up to $5,250 a year — or $437.50 a month — to their employee’s student debt through 2025. Employees don’t have to pay taxes on those contributions, either.
Aliah Gibson, a human resource specialist, hopes to wipe out her student loans in a few years. The 31-year-old said she spends about a third of her budget paying off her student debt — and “all the extra money goes to loans,” too. But she’s not tackling her college loans alone.
Her employer, New York Life, contributes $170 a month to her student loan tab and will pay off up to $10,200 of her debt over five years.
A powerful tool for retention and racial equity
As companies compete to attract the best, most diverse workforce, Parzick says offering this financial perk can also be a powerful tool for retention and recruitment.
“Work is more than just a paycheck. Eight in 10 American workers say they want their employers to focus on providing benefits that are central to their financial well-being and, if not, workers will look elsewhere to get what they need,” said Rob Falzon, vice chair of Prudential Financial, referring to the firm’s recently released a survey on the state of American workers.
Plus, Gibson says there is another big bonus for most borrowers who are paying down debt right now.
“You, one, are saving money on not paying interest,” she said. “And you’re paying down the principal, which is the name of the game to paying off your student loans.”
Borrowers got a break from accruing interest — and making monthly payments — on their federal student loans, beginning in March 2020, under the CARES Act. And, after one of President Biden’s first executive orders, that pause will now last until at least Oct. 1.
But Parzick points out that it is temporary relief. “A pause only delays the inevitable, which is that the student loan debt still exists,” she said.
And, that debt burden can have a significant impact on future wealth.
Addo’s research found the average net wealth of older, white millennials with a bachelor’s degree is about $60,300, which is 10 times more than Black people in this age group, who have a net wealth of about $6,400.
Gibson, who is Black, has seen the impact of student debt on her peers. “It’s often a barrier for many people to reach financial wellness,” she said. Gibson believes, however, that having employers help pay down student debt is a strategy that could potentially bridge a steep divide.
“For people like myself and other people of color, this helps to close that gap tremendously,” she said. “You are able to take control over your financial situation.”