Concerned young married couple worrying over financial statements
Student loan borrowers often have to choose whether to save for their futures or make payments on their student loans. A new law, passed at the end of 2022, includes a provision making it easier for borrowers to save for retirement while paying off their student loans.
The SECURE Act 2.0 was included in the year-end spending bill that will fund the government until the fall of 2023 and consists of a raft of measures designed to make it easier for Americans to save for retirement. One of those provisions will allow companies to provide employees with a match on their retirement plans for making student loan payments.
To receive a company match on 401k contributions, you must put your own money into the retirement account. For example, if you contribute three percent of your income to your 401k, your company will match that with another three percent from company funds. The changes brought in by the SECURE 2.0 Act will count payments made on student loans the same as retirement contributions allowing companies to provide matching funds into retirement accounts when their employee makes loan payments.
For student loan borrowers struggling to pay back their loans and save for retirement, the new law could provide a lifeline for those choosing between saving for retirement and paying their loans.
Total student loan debt stands at over $1.7 Billion, with the average borrower owing over $37,000, making it easy to see how student loan debt can impede saving for retirement.
In an attempt to relieve the burden of student loan borrowers, the Biden administration announced in late August 2022 that it would forgive up to $20,000 in student loans for borrowers who received Pell Grants (Pell grants are federal financial aid generally awarded to low-income students). Other eligible borrowers will see $10,000 in forgiveness. Borrowers who earn less than $125,000 ($250,000 for couples) will be eligible for the plan. These actions are in addition to steps the administration has taken that make it easier to qualify for public service loan forgiveness, improve income drive repayment plans, and forgive loans of students who were defrauded by for-profit colleges.
Biden’s loan forgiveness plan is now tied up in the courts, with multiple lawsuits filed. The Supreme Court has decided to hear two of the cases in February 2023, and until then, the plan remains on hold. While those cases work through the courts, the administration has decided to extend the student loan payment pause. Payments will resume 60 days after a Supreme Court verdict or June 30, 2023, whichever comes sooner.
Providing workers who want to save for retirement but are struggling with student loan debt is a less controversial approach to supporting student loan borrowers than forgiving debt outright. However, this approach has the downside of only assisting workers with access to an employer-based retirement plan.
Only 68 percent of workers in the private sector had access to an employer-provided retirement plan in 2021, leaving a large portion of the workforce cut off from this additional help. In general, the people with access to employer-provided retirement accounts are more likely to be college graduates, work in white-collar jobs, and be white, not typically the groups who face the biggest challenges repaying their loans. Other provisions in Secure 2.0 are designed to encourage employers to adopt 401k plans, so there could be an increase in the number of workers who can access retirement plans due to the law.
The new retirement savings rules will go into effect at the start of 2024, and key details still have to be worked out. The legislation directs the IRS to write the rules that will determine contribution limits and other details.
Millennials, who have been hit hard by needing to borrow large amounts to pay for college, are ahead of their parent’s generation when it comes to retirement savings, with larger balances in retirement accounts. However, when looking at overall wealth, millennials lag a long way behind, with substantially less wealth than older generations possessed at the same age.
This new provision will help some student loan borrowers save for retirement. But, it seems most likely to help the people who are already reasonably well off, not the student loan borrowers who are truly struggling.
