Student loan borrowers stressed over choosing between paring down student loan debt and saving for retirement just got some relief.
If you work for an employer that offers a 401(k), 403(b) or similar workplace plan, there’s a new option rolling out this year that can help you save for retirement and pay off student loans in one fell swoop.
Employers can now consider student loan payments as qualifying contributions toward retirement plan matching programs thanks to the Secure 2.0 Act, which included a package of retirement-related provisions aimed at ratcheting up savings.
“The student debt retirement provision is particularly exciting as it directly addresses retirement savings — which is one of the top areas we see so many borrowers are forced to cut back on due to their student debt,” Jesse Moore, head of student debt at Fidelity Investments, told Yahoo Finance.
It means that workers no longer need to choose — they can do both things at once.
“Young professionals often put off saving for retirement in order to deal with more urgent and tangible financial concerns like debt and short-term expenses,” Edward Gottfried, senior director of product manager at Betterment at Work, told Yahoo Finance.
“Missing out on the earliest years of 401(k) contributions and the resulting compounding interest can significantly hinder their 401(k) balances down the line.”
Something is better than nothing
Here’s how it works: If your employer provides a match to your retirement plan contributions and you’re paying down your student loan, you can count your monthly student loan payments as your “contribution” to your employer-provided retirement account.
Provisions in the retirement law make it possible for employers to earn a tax break on that type of match. The precise matching formula, however, and whether the employer offers the option at all depends on the employer.
The details are still being worked out at companies, but in general, you can make contributions to your retirement account, then add in the student loan amount up to your employer’s full match — which generally ranges between 4 % and 6 % of your salary, Craig Copeland, with EBRI, a nonpartisan, nonprofit research institute in Washington, D.C, told Yahoo Finance.
“Even if someone feels they can’t spare the money to put anything at all into their retirement account from their paychecks, their employer can add that student loan match, so they’re still saving something for their retirement,” he said.
It’s a potential game changer, especially for new graduates starting off on their careers. The average federal student loan debt balance is $37,088. And the average student loan payment is between $200 and $299, according to the most recent available data from the Federal Reserve.
Meanwhile, a whopping 64% of employees report that student loan debt has had a negative impact on their ability to save for retirement, according to a recent Betterment at Work survey. And nearly a quarter of workers would be enticed to switch jobs if a prospective employer offered a student loan/401(k) matching program.
Match is attractive for workers of all ages
“Employers offering a 401(k) match for workers paying off student loans will be quite attractive to the younger generation, or Gen Z ” Olivia S. Mitchell, a professor at The Wharton School of The University of Pennsylvania, and co-author of a new working paper on the provision, told Yahoo Finance. More than 6 in 10 workers with a retirement account who are between the ages of 20 and 29 have a student loan and more than half of those between 30 and 39 do, according to the data.
Older workers may also benefit from the free money.
“We found that one-third of workers age 40 to 49 still have student loans and access to retirement accounts, and a quarter of those age 50 to 59 do as well, so these are potentially excellent employees to seek to retain with matching contributions in exchange for student loan repayment,” Mitchell said.
Employers aren’t required to offer their employees this perk, so it’s hard to get a bead on how many companies will offer the benefit. But several big firms working with Fidelity to provide access to student debt benefits include Masco Corporation, News Corp, Dow Inc., Unilever, Sephora, and LVMH.
Since the passing of Secure 2.0, Fidelity has seen a surge “in demand for the student debt retirement benefit from all types of employers — from large employers with a national presence to smaller companies,” Moore said.
The flip side
There are possible drawbacks.
For employers, it could be an expensive proposition to match student debt payments. Plus, “plan service providers must also build new systems to make this feasible in practice, insofar as they need new ‘plumbing’ to keep the accounts straight and confirm the loan repayments,” Mitchell said.
For employees: The push to pay off loans with the comfort of knowing that something is being socked away for retirement thanks to their employer’s match can make retirement savings less of a priority.
“Employees may repay more loan debt but reduce their own retirement plan contributions,” Mitchell said. And that’s a worry.
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist, and the author of 14 books, including “In Control at 50+: How to Succeed in The New World of Work” and “Never Too Old To Get Rich.” Follow her on X @kerryhannon.
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