As student loan repayments resume after a three-and-a-half-year pause, college debt is at the top of the list for many borrowers who will not be eligible for new relief plans from the Biden administration. This may come at the expense of saving for retirement, as paying off these loans forces Americans, especially prime-working-year Americans, to avoid saving through tax-advantaged workplace plans like 401(k)s. Could. But there is good news: After January 1, more workers may be able to pay off loans and move toward 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 to their retirement accounts. This means that – starting in January – student loan borrowers from many employers can receive matching funds without having to deposit money into their retirement account.
“Many people have to choose between paying off their student loans and contributing to a 401(k) because they don’t have enough disposable income to do both,” said John Newcome, senior advisor at Kelley Benefits Strategies. ” “Not only are they not saving for their future, they’re leaving employer money on the table because they’re not taking advantage of the match.”
Here’s what employees and their employers need to know about the new opportunity:
The debt of prime-working-year borrowers stands at $1.6 trillion
Nearly 43 million student-loan borrowers collectively owe $1.6 trillion, and borrowers in their prime working years owe the largest share of student-loan dollars. It’s no surprise, student loan debt can have a debilitating effect on people’s overall finances.
Forty-six percent of student loan borrowers said their loans affected their contributions to their retirement plans. Recent Morning Consult survey According to the survey, nearly 500 student-loan borrowers between the ages of 18 and 39. And 94% of young student-loan borrowers expressed interest in employer-provided 401(k) contributions while paying off school loans. By abbottIts groundbreaking 401(k) matching program for student loan borrowers, launched in 2018, paved the way for widespread adoption.
Borrowers aged 35 to 49 have the highest percentage of student-loan dollars outstanding, followed by borrowers aged 25 to 34. federal student loan portfolio data, This data underscores the widespread benefits of a matching program. Research has shown that employees who “have stronger financial positions in the short and long term have longer tenures with an employer,” said Tom Armstrong, vice president of customer analytics and insights at Voya Financial.
How will the company’s student loan match 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. For example, in the case of Abbott, employees who are eligible for the company’s 401(k) and who apply at least 2% of their eligible salary to pay off eligible student loans can contribute to their Abbott 401(k). ) will receive 5% company contribution. annual. Employees do not need to put any money into their retirement plan to receive this company contribution.
Why should more employers adopt the savings idea?
Benefits consultants said the program is meant to help companies attract and retain talent. Those who introduce it will have a competitive advantage.
Abbott said his program has yielded meaningful results. For starters, employees who participate in its Freedom 2 Save program are 19% more likely to stay at the company. Additionally, some employees have managed to pay off all of their student loans — as much as $60,000 in some years — while accumulating retirement savings, the company said. According to company data, a total of more than 2,600 employees have enrolled in the program since its inception.
To help other companies considering this program, Abbott created a publicly available program outline, with tips 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 intention of adopting it as soon as possible, said Joel Shapiro, president of the retirement division at benefits consulting firm NFP. “Virtually all of our customers are considering this. They realize this is very important for their personnel,” Shapiro said.
Why would an employer decide not to offer this benefit?
Employers have limited dollars to use for benefits, so they must determine where best to use them, said Kim Cochran, a retirement planning advisor and consultant at HUB International. She advises employers to survey their employees about their strongest needs. “Even if you offer student-loan benefits and it only meets the needs of 20% of your employees, that doesn’t mean it’s a bad thing,” Cochrane said.
Companies are likely to bear the additional cost because they will likely contribute matching funds for employees who did not previously participate in the company’s 401(k), Shapiro said. How much additional cost this might entail will depend on a number of factors, including how many people participate, which is why modeling is important, he said.
Other Options to Help Workers Struggling with Student Loan Debt
Some employers have programs to help employees pay off their student loans without tying them to retirement.
Through the CARES Act and an extension, employers can contribute up to $5,250 to repay employee student loans through December 31, 2025, which is tax-free for employees and tax-deductible for employers. Newcome speculated that the tax benefit is likely to be extended, but even if that is not the case, some companies will continue to help with student loan repayment because it is an important benefit for “debt-burdened” employees.
In fact, recent research from Voya found that 81% of working Americans with student loans would be interested in participating in a student loan repayment program offered by an employer and 83% would agree or strongly agree that working for their employer would be beneficial. Would be more likely if the company offered student-loan debt repayment assistance. Additionally, according to research, 83% of working Americans with student loans said they would save more money for retirement if their employer helped pay off their student loan debt.
The data reinforces why many employers are looking for ways to help employees deal with student loan debt. Benefits providers said companies may choose to launch a matching program as well as engage in more traditional repayment assistance.
what should employees do
Employees should ask their companies if they plan to offer 401(k)-matching benefits. If employers know an employee needs a particular benefit, they may be more willing to give it, Cochrane said.
And, as soon as they’re able, workers should commit or recommit to saving for retirement, Elbert said. “If you delay saving for retirement by 10 years, it could reduce your retirement savings by about 30%, so you’ll have to work longer to make up for it. If an employer offers this benefit, it A little bit will help, a little bit, but it won’t cover the entire amount.”
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