According to a TIAA-Massachusetts Age Lab survey, 84% of borrowers say student loans negatively impact their ability to save for retirement. The longstanding challenge is whether Americans with academic debt should pay off their loans or begin retirement savings.
That dilemma temporarily eased during the payment forbearance due to the pandemic and without interest accruals. During that pause, Fidelity’s Retirement Analysis found that 72% of student loan borrowers could save at least 5% of their salary in their 401(k) retirement account, a jump from 63% before suspending the payments.
A more significant solution became effective in 2024 as part of Secure 2.0, allowing employers to help employees saddled with student loan payments who want to save for retirement.
Employer Match Student Loan Payments As 401(k) Contribution
The new feature, effective January 1, 2024, permits companies to treat employee-qualified student federal or private loan payments as matching contributions into a 401(k) plan, 403(b) plan, 457(b), or SIMPLE IRA. This provision is not mandatory for companies, but there is increased demand for relief for students concerned about the renewed responsibility to pay their loans.
Student Payments Resumed, But Not All Are Ready
During the payment pause, some borrowers, particularly those with graduate degrees and higher incomes, continued paying their loans to take advantage of the unprecedented temporary 0% student loan interest rate. According to the New York Fed, about 10 million borrowers with private loans or Family Federal Education Loan (FFEL) loans owned by commercial banks didn’t get any relief. They continued to make payments during the pandemic.
Despite the Biden Administration’s efforts to forgive some of the federal student debt, repayments resumed in September 2023. According to the U.S. Department of Education, just 60% of the 22 million borrowers owed payments due in October 2023, for the first time in three years, made payments by mid-November. Anticipating the challenge of returning student loan payments to their budgets, borrowers will have until September 2024 before the harsh consequences kick in for missed payments, including delinquency, default, and collections.
Student Debt Defaults Could Rise
In 2023, the total U.S. student loan debt surpassed $1.7 trillion, represented by nearly 44 million borrowers, predominantly of federal student loans comprising over 92% of the total debt. Approximately seven million students are in default, amounting to over 10% of Americans, even with inadequate payment plans and refinancing alternatives. Defaults occur after missing payments for more than 270 days and could rise in 2025 once consequences are back in place. Defaults have severe penalties compared to delinquency fees if you miss a month or two, including the government garnishing wages and impacting credit scores.
Making Student Payments Cause Lower Retirement Savings
Making at least the minimum payments on student loans to avoid late fees or worse causes lower contributions to their 401 (k) retirement accounts. A new Employee Benefits Research Institute (EBRI) study found that employees who earned $55,000 or more and have been at the company for more than five years to 12 years have an average 401(k) balance of $86,109 compared to $107,687 for those who did not.
Student Loan Benefits Provide Advantages For Employers
According to a Morning Consult Survey on behalf of Abbott Laboratories, 94% of participants are interested in a workplace benefit in which they can receive a 401(k) contribution for paying their student loans. 54% said this workplace benefit would significantly impact their choice of alternative job offers.
Employers can also benefit from increased employee loyalty and reduced employee stress. Abbott Laboratories was the first to seek IRS approval for a novel way to help employees. Approved in 2018, Abbott says employees participating in Freedom2Save are 19% likely to stay at the company. The Freedom2Save program makes a matching contribution that equals 5% of the employee’s contribution if the employee made at least a 401(k) contribution of 2% or a student loan payment of 2% of their compensation, even if they don’t contribute to a retirement account. Since its launch, 2,500 employees enrolled in the program.
Abbott is not alone; large companies like Fidelity, Nvidia, Google, New York Life, and Estee Lauder offer similar student loan benefits to employees seeking to grow their retirement accounts.
The new rules mean employers can match employees’ student loan repayments as 401(k) contributions, a game changer for those who want to pay off student loans but want to begin saving for retirement as early as possible. With some relief, students can achieve their financial targets. It will depend on whether the employer’s plan adopts this option, though several employers moved early to help employees with student borrowings. According to the Society of Human Resources Management (SHRM), just 8% of companies offered student loan repayment benefits in 2019. According to H.R. Executive, 42% of employers now offer a 401(k) student loan match, with another 23% expected to do so within the next year or two.
Companies can reap some tax benefits from repayment assistance. The updated Consolidated Appropriations Act states that, through December 31, 2025, employers can give each employee $5,250 annually in tax-free student loan assistance under a Qualified Educational Assistance Program. This amount is not part of the employee’s regular wages but will be subject to payroll taxes if the company exceeds that level.
A Game-Changer For Students Tackling Loans
For those student borrowers who have challenges contributing to retirement accounts as they pay off their loans, this option will help them build up assets for retirement earlier than they could have before as they addressed their loan payments. Some have raised the concern that this feature may lower their contributions as they are more likely to earn the employer’s match contribution. While that is possible, the more significant benefit is that more people will have the opportunity to improve their financial health and allow them to achieve their financial goals.