ESPP = Excellent Student loan Payment Program
Connect the dots between an ESPP and your student loans to pay them down faster without working harder
I hated my first job out of college. So after just under a year, I quit and entered the UC Berkeley Personal Financial Planning program. It meant taking on student debt and borrowing my from my parents - and it was one of the best investments I made in myself.
Student loans are sometimes necessary to take the next step in life, but paying them down can be a real pain. Banks make it easy to take on too much debt, and they make it difficult to pay it down. Student loans have dominated headlines because it is a problem for many Americans - a BIG problem. Americans owe over $1.71 trillion in student loan debt, with an average of $29,900 per borrower. That’s about $739 billion more than the total U.S. credit card debt.
Employers to the Rescue?
Some employers are directly paying down their employees’ student loans, while others will match your loan repayment. Others are getting creative. There are employers that will match your student loan payments with a 401(k) contribution, and others are allowing you to convert your unused PTO for student loan repayment help.
An Employer Stock Purchase Program (ESPP) is not a student loan program, but it is a benefit that can be leveraged to pay down your loan. In fact, it is a program that can be used to pay down any debt, at a potentially greater impact.
ESPP Basics
An ESPP is an employer benefit where you can buy shares of your company stock at a discount - typically anywhere between 5% - 15% every 6 months or so. But the discount is often just the beginning. If your company stock does really well, the original discount of 5% - 15% can turn into a discount of 50% or more!
For more details on ESPPs, check out my post with Plancorp and BrightPlan.
Meet Debbie
Debbie has $30,500 of student loan outstanding and is committed to paying it down ASAP. Once the loan is paid off, her plan is to use those dollars to participate in her employer’s ESPP.
Debbie’s current minimum loan payment is roughly $600/month, but she is going to put in an extra $400/month. The extra $400 is expected to save her almost $1,500 in interest and have her debt paid off 2 years sooner (see footnote 1 for details).
Using ESPP to pay down Debt
Instead of waiting to contribute to her ESPP, what would happen if Debbie used her ESPP to help pay down debt? Let’s say that Debbie works at Salesforce, and used the $400/month towards their ESPP in May of 2019 when shares were trading at roughly $151. By the next purchase date, shares were trading at $163, but Debbie was able to buy them at $128.35 (15% discount off $151), so her $2,400 commitment nets $3,048. A summary of her participation in the ESPP over the next 18 months from May 2019 to November 2020 would have looked something like this:
Estimates based on Salesforce ESPP and stock price.
Debbie saved an extra $7,200 over those 18 months, but rather than using it to directly pay down her student loan, she leveraged her ESPP and was able to use $10,920 to pay down her debt. She will owe tax on the benefit, and how much she owes depends on her tax rate and when she decides to sell (see my post on ESPP Tax Considerations for details).
After assuming that a third of her ESPP benefit is taxed, Debbie will still net almost $2,500 in gains. In other words, by participating in her ESPP, Debbie is able to get an extra 6 months worth of monthly savings. The best part is that Debbie didn’t have to work harder or squeeze her expenses, she just connected the dot between her ESPP and student loans, and saved smarter.
ESPP differs slightly per employer and company stock does not always go up, but understanding how each benefit works can help to connect the dot between your specific areas of personal finance. When seemingly different parts of your finances can help each other, magic happens!
If you are a high earner making $500k+ and would like to learn more about how I can help you put together a personalized plan to accelerate your student loan repayment, schedule a 15-minute call with me below.
1 Assumes subsidized and unsubsidized loans with interest rates ranging from 4.0% - 5.0%
