Student loan borrowers who are lucky enough to have access to a 401(k) plan but are too stretched to save in it could soon be helped by a new corporate benefit: Repaying their student loans can generate retirement savings contributions their employer.
Starting this year, employees with student loans will be able to receive employer contributions to company retirement plans, even if they cannot save anything themselves. Instead, the loan payments count.
The new feature was made possible by legislation called Secure 2.0, which included a package of retirement provisions designed to boost savings. It’s hard to say exactly how many companies plan to offer the benefit — they’re not required to do so — but several major companies, including Dow Inc., News Corp., Masco Corp., Unilever and others, have recently added it introduced to employees. According to Fidelity Investments, one of the nation’s largest retirement and student loan benefit plan administrators.
“Employers can excel in attracting and retaining workers by offering benefits like these,” said Craig Copeland, director of asset benefits research at the Employee Benefit Research Institute, a nonprofit organization, especially for those “who are struggling with their finances and Have student loan debt.”
The student loan relief comes into effect just months after 28 million people began making federal student loan payments again following a nearly 42-month pause caused by the pandemic. There is already evidence that many people are finding it difficult to fit these payments into their household budgets, which are already under pressure from inflation.
“Since the student loan repayment moratorium ended in September, we have seen a surge in the number of customers looking to add student loan repayment assistance to their benefits package,” said Edward Gottfried, senior director of product management at Betterment at Work . “Many of these customers were eager to find a way to more naturally integrate the benefits of their student loans with their 401(k) plan.”
Student loan grants are the newest addition to employers’ offerings of education-related benefits, which include tuition assistance and tuition reimbursement programs, debt counseling, and even direct student loan repayment assistance. The latest innovation, providing free money in 401(k) plans, is widely viewed as a potentially effective recruiting and retention tool, particularly in industries trying to attract workers in health care, professional services and other fields where young Employees have better career opportunities and debt burdens.
In a typical workplace plan—be it a 401(k), 403(b), or government plan—employers may elect to make a matching contribution to the amount employees save; You could match every dollar each worker contributes, for example up to 4 percent of their salary. However, some student loan borrowers may delay saving for retirement while they focus on paying down their debt, meaning they lose out on years of free money from their employer.
After learning about these challenges from its own workforce, healthcare technology company Abbott developed a program to address these issues: Since 2018, the company has offered an employer student loan contribution, Freedom 2 Save. About 1,600 workers participated in the program at one point last year.
“Because Freedom 2 Save was the first program of its kind, there was no roadmap to follow,” said Mary Moreland, executive vice president of human resources at Abbott, which received special approval from the Internal Revenue Service to implement it.
The idea seemed to be popular. Members of Congress later introduced legislation that would codify the feature, and it was eventually enshrined into law as part of Secure 2.0.
At Abbott, employees are required to contribute at least 2 percent of their salary to their 401(k)s to receive a 5 percent matching contribution. However, under the Freedom 2 Save program, if employees can demonstrate that they are using at least 2 percent of their salary to pay off their student loans, they will be eligible for the 5 percent share without making their own 401(k) contributions must.
For example, if an employee with a starting salary of $70,000 participated in the program, they would accumulate about $3,500 in the first year or $48,000 over 10 years, the standard term of a student loan. This assumes that the employee makes annual student loan payments of at least $1,400; has annual benefit increases of 2 percent; and, according to Abbott, achieves an average market return of 5 percent.
Of course, lower-income workers—and those with less generous matching programs—won’t amass as much.
Several retirement plan administrators said their clients are still considering how the new benefit might work in practice and whether it makes sense for their employees. And not all employers will rush: some companies, for example, have questioned whether the feature might seem unfair if it benefits people who chose more expensive schools. There are also administrative complexities to consider.
“2024 will be a year where student loan adjustment provisions could be introduced in some 401(k) plans in your area, but it could be closer to the end of the year,” said David Stinnett, head of strategic retirement advisory at Vanguard . which oversees the workplace schedules for five million participants.
The plight of borrowers taking out student loans has become a growing focus in the country as tuition costs have risen faster than income growth and total loan balances have dwarfed credit card and other consumer debt. The issue came back into the spotlight when President Biden made student debt relief a central plank of his agenda. After its plan to forgive up to $20,000 in debt for millions of borrowers was rejected by the Supreme Court, the government focused on more targeted relief and introduced a more generous income-driven repayment plan called SAVE.
In fact, SAVE participants who qualify for zero monthly payments – or those who earn less than $32,800 as individual borrowers, or those in a family of four earning less than $67,500 – would qualify. Dollars – don’t qualify for the 401(k) match because they don’t make any payments.
According to plan administrators, younger workers are enrolling in company plans at higher rates than in the past, in large part because they are often auto-enrolled.
“It’s just getting people up and running,” said Rob Austin, research director at Alight Solutions, which oversees plans for large employers and recently worked with Eli Lilly, the pharmaceutical company, to add the feature. “And then hopefully they start to contribute on their own behalf.”