With repayment of student loans starting again after a three-and-a-half year pause, college debt is top-of-mind for many borrowers who won’t be eligible for new relief plans from the Biden administration. That could come at the expense of saving for retirement, as paying down these loans can cause Americans, especially prime-working-year Americans, to forgo saving for through tax-advantaged workplace plans like 401(k)s. But there’s good news: After Jan. 1, more workers may be able to both pay off debt and build towards a more secure retirement.
A provision in the Secure 2.0 retirement-savings overhaul, which takes effect in January, allows employers to match employees’ student loan payments with tax-advantaged contributions into their retirement accounts. This means that — starting as early as January — student loan borrowers from a host of employers could get matching funds without depositing money in their retirement account.
“Many people have to choose between paying down their student loans and contributing to a 401(k) because they don’t have enough disposable income to do both,” said John Newcome, senior consultant at Kelly Benefits Strategies. “Not only are they not saving for their future, they’re leaving employer money on the table because they aren’t taking advantage of the match.”
Here’s what employees, and their employers, need to know about the new opportunity:
Prime-working-year borrowers dominate $1.6 trillion in debt
There are about 43 million student-loan borrowers owing a collective $1.6 trillion, and borrowers in their prime working years have the highest portion of student-loan dollars outstanding. Not surprisingly, student loan debt can have a debilitating effect on people’s overall finances.
Forty-six percent of student loan borrowers said their loans have impacted how much they contribute to their retirement plans, according to a recent Morning Consult survey of about 500 student-loan borrowers between the ages of 18 and 39. And a whopping 94% of young student-loan borrowers expressed interest in an employer-provided 401(k) contribution as they pay off school loans, according to the survey commissioned by Abbott, whose groundbreaking 401(k) matching program for student debt borrowers, introduced in 2018, paved the way for broader adoption.
Borrowers in the age group of 35 to 49 have the highest percentage of student-loan dollars outstanding, followed by those ages 25 to 34, according to federal student loan portfolio data. This data underscores the widespread benefit a matching program can have. Research has shown that employees who have “a strong financial footing in the short-term and the long-term tend to have longer tenure with an employer,” said Tom Armstrong, vice president of customer analytics and insight at Voya Financial.
How a company student loan match will work
How much a company matches will depend on its 401(k)-plan design, said Melissa Elbert, partner of wealth solutions at Aon, a retirement benefits consultant for employers. In Abbott’s case, for instance, employees who are eligible for the company’s 401(k) and who apply at least 2% of their eligible salary toward paying down an eligible student loan will receive a 5% company contribution into their Abbott 401(k) annually. Employees don’t have to put any money into their retirement plan to get this company contribution.
Why more employers should adopt the savings idea
Benefits consultants said the program stands to help companies attract and retain talent. Those that offer it will have a competitive advantage.
Abbott said its program has produced meaningful results. For starters, employees who participate in its Freedom 2 Save program are 19% more likely to stay at the company. What’s more, some employees have managed to pay down all their student debt — as much as $60,000 over a few years — while amassing retirement savings, the company said. More than 2,600 total employees have enrolled since the program’s inception, according to company data.
To help other companies considering this program, Abbott created a publicly available blueprint, with suggestions on how to get started. This includes notifying their record keeper and deciding whether to allow employees to self-certify their student loan payments.
“If more employers had a similar program, the impact on student loan debt would be significant,” said Mary Moreland, the company’s executive vice president of human resources.
Formal announcements are lacking, but many companies are in the process of evaluating the program with the intent to adopt it as soon as possible, said Joel Shapiro, president of the retirement division at NFP, a benefits consulting firm. “Virtually all of our clients are considering it. They realize that it’s that important to their personnel,” Shapiro said.
Why an employer would decide not to offer this benefit
Employers have limited dollars to use for benefits, so they have to determine where best to use them, said Kim Cochrane, retirement plan advisor and consultant at HUB International. She recommends employers survey their employees about their strongest needs. “Even if you offer a student-loan benefit and it only solves a need for 20% of your employees, that doesn’t mean it’s a bad thing,” Cochrane said.
Companies are likely to incur additional costs since they will presumably be contributing matching funds for employees who didn’t previously participate in the company’s 401(k), Shapiro said. How much extra this could cost would depend on several factors, including how many people participate, which is why modeling is important, he said.
Other options to help workers with student loan debt
Some employers have programs to help employees pay down their student loans, without tying it to retirement.
Through the Cares Act and an extension, employers can pay up to $5,250 to repay employee student loans through December 31, 2025, tax-free to employees and tax-deductible for the employer. Newcome predicted that the tax-advantage is likely to be extended, but even if it isn’t, some companies will continue to help with student debt payments because it’s an important benefit for employees “staring down the barrel of debt.”
Indeed, recent research from Voya found that 81% of working Americans with a student loan would be interested in participating in an employer-offered student loan repayment program and 83% agree or strongly agree that they would be more likely to work for an employer if the company offered student-loan debt repayment assistance. What’s more, a notable 83% of working Americans with a student loan said they would save more money for retirement if their employer helped pay off their student loan debt, according to the research.
The data reinforces why many employers are looking for ways to help employees tackle student loan debt. Companies can choose to institute a matching program as well engage in more traditional repayment assistance, benefits providers said.
What employees should do
Employees should ask their companies if they plan to offer a 401(k)-matching benefit. If employers know that an employee needs a particular benefit, they may be more inclined to offer it, Cochrane said.
And, as soon as they are able, employees should commit or recommit to saving for retirement, Elbert said. “If you delay saving for retirement for 10 years, it could reduce your retirement savings by around 30%, so you’re going to have to work for longer to make up for that. If the employer provides this benefit that will help a little bit, but it’s not going to cover the full amount.”
