The scale of student debt in the U.S. today is jaw-dropping. Americans collectively owe $1.814 trillion in student loans, with an average balance of $42,673. [1]
Most people would love to be rid of their student loans, but one man in New Jersey called into The Ramsey Show for help with the opposite problem.
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John’s wife doesn’t want to pay off her relatively small student debt of $6,500 — even though she and John have a combined income of $300,000 a year and could easily do so. When Dave Ramsey found out why, he was flabbergasted.
"This is stupid," Ramsey said. "She needs to get her head wrapped around the mathematics of how dumb her not budging is."
Failing to see the big picture
For the most part, John and his wife have been aggressively shedding debt. They’ve paid off $100,000 already, leaving just two debts: a 401(k) loan worth $40,000 and the $6,500 student loan.
So why not pay off the student loan? John’s wife wants to continue carrying it because her employer gives her a $50 monthly stipend to assist with student loan repayment. She considers that ‘free money,’ so she won’t budge.
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Ramsey explained that if she continues paying off the student loan just one month at a time, it will take 10 years to be rid of it. Co-host Jade Warshaw added that interest will accrue on that debt, wiping out the ‘free money’ aspect.
"We’re not keeping this thing around like it’s a pet," said Ramsey.
Companies offering student-debt support
John’s wife is not the only one receiving student-loan repayment support from her employer.
The International Foundation of Employee Benefit Plans reports that such benefits are on the rise — with 14% of employers offering such a student-debt repayment program in 2024, more than triple the number that offered one in 2019. [2]
Upsolve reports that some major employers across a range of industries, from retail to tech to finance, offer a fairly generous student loan repayment stipend. Here are some examples: [3]
- Aetna – $2,000 per year, lifetime max of $10,000
- Ally Financial – $1,200 per year, lifetime max of $10,000
- LiveNation – $1,200 per year, lifetime max of $6,000
- New York Life – $2,040 per year, lifetime max of $10,200
- PWC – $1,200 per year, lifetime max of $10,000
- Staples – $1,200 per year, lifetime max of $3,600
- SoFi – $5,250 per year, lifetime max of $25,000
By law, the most a company can contribute toward employee student loans is $5,250 per year, according to the IRS.
It is a valuable benefit. Such assistance can not only help workers make their monthly loan payments on time and in full but may even help them pay off their student debt sooner.
On the flipside, it might tempt some — like John’s wife — to fall into the trap of carrying student loans longer than necessary to continue getting that benefit.
If you have student debt and your employer offers a student-loan repayment program, do the math to see if it makes sense to get that benefit or whether you’ll save more money in interest paying off your student debt sooner.
For example, an extra month of repaying your loans might cost you $60 in interest but come with $100 toward your balance. A financial advisor can help you run the numbers if you’re not sure how to yourself.
Setting debt payoff priorities
If you have a few different debts, you may not be sure which to tackle first. Ramsey recommends the Snowball method, where you pay off debts in order of smallest balance to largest.
But in some cases, it can make sense to prioritize debt payoff based on other factors, including:
- Interest rate
- Risk
- Amount of stress
For a 401(k) loan, the interest rate is typically the prime rate or higher. [4] The current prime rate is 7.5%.
Federal student loan interest rates currently range from 6.39% to 8.94%, depending on the loan type.
Private lenders can set their own rates, but the Education Data Initiative puts the typical range for private student loans at 3.19% to 17.95%. If you’re paying a higher interest on a student loan than a 401(k) loan, that’s a good reason to tackle it first. [5]
That said, 401(k) loans can be more risky in that if you leave your job (voluntarily or otherwise), your repayment window might shrink to just a few months. In some cases, you may have to repay that loan immediately. [6]
If you don’t, it can be treated as a 401(k) withdrawal. And if you’re not yet 59½, that means a 10% early-withdrawal penalty. So that actually makes the argument to repay a 401(k) loan first.
Finally, think about which type of debt is messing the most with your mental health. In a 2023 Employee Benefit Research Institute Workplace Wellness survey, 13% of workers said student-loan repayment was the financial issue causing them the most stress.
So if you have two types of debt with similar interest rates and one is causing you to lose more sleep, that may be the one worth prioritizing.
Article sources
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[1]. Education Data Initiative “Student loan debt statistics”
[2]. [The International Foundation of Employee Benefit Plans](https://blog.ifebp.org/student-loan-repayment-benefits-on-the-rise/] “Student Loan Repayment Benefits on the Rise”
[3]. Upsolve “25 companies that will help you pay your student loans [4]. John Hancock “What you need to know about 401(k) loans”
[5]. Education Data Initiative “Average Student Loan Interest Rate”
[6]. Empower “401(k) loans: What they are & how they work”
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