Trouble continues to brew for U.S. student loan borrowers in 2023. But as bad as the picture looks, financially struggling collegiate borrowers may get help in the form of an unlikely source: student loan 401(k) matches.
Loan borrowers can use all the help they can get, given the sad state of U.S. student loan debt. Consider these statistics from the Education Data Initiative.
- Student loan debt in the U.S. currently stands at $1.774 trillion. Meanwhile, the outstanding federal student loan balance is $1.644 trillion, comprising 92.6% of all student loan debt.
- 43.6 million borrowers have federal student loan debt.
- The average federal student loan debt balance is $37,717 while the total average balance (including private loan debt) may be as high as $40,505.
Help Is On the Way
Uncle Sam is looking to help borrowers curb that debt with a special provision inside the SECURE 2.0 Act, which was signed into law by President Joe Biden on Dec. 29, 2022.
The legislation allows eligible employees to receive a 401(k) match from their employer, but only if they’re making qualified student loan payments.
U.S. companies can’t launch any 401(k) student loan match program until Jan. 1, 2025, when the legislation takes effect.
“Basically, the SECURE 2.0 allows employers to make matching contributions to a 401(k) or other employer-sponsored retirement plan on behalf of employees who make student loan payments,” says Eliza Arnold, CEO of Arnie, a full-service 401(k) services provider in San Francisco. “Essentially, even if an employee chooses to pay down their student loans instead of contributing to their 401(k), they can still receive the employer match as if they made the contribution to the retirement plan.”
What Is a Student Loan 401(k) Match?
A student loan 401(k) match allows companies to pair student loan repayment with contributions to a traditional 401(k) plan.
Here’s how it works: An employee must be making qualified student loan payments due to higher education expenses. The employer must offer a qualifying retirement account and a student loan matching contribution program. Student loan matching contributions can be made to a 401(k), 403(b), SIMPLE IRA or 457(b) plan. The exact 401(k) matching plan structure would be up to the employer’s discretion and the specifics of their 401(k) or retirement plan.
The employee “may choose to match dollar-for-dollar, or perhaps a percentage of the student loan payment,” Arnold says. “There are limits on overall contributions to 401(k) plans each year, both from employees and employer matches, so the combined total contributions would need to stay under that limit.”
Who Benefits From a 401(k) Student Loan Matching Program?
A 401(k) student loan matching program potentially benefits employees who are actively paying off student loan debt and employers who wish to recruit and retain college-educated workers.
“For many employees, especially those beginning their career, putting away money for retirement while paying off student loans is a daunting proposition,” says Bennett Hadley, a senior actuarial associate at Segal, a human resources and employee benefits services company. “If a company matches loan payments in the retirement plan, employees are automatically saving for retirement while paying down debt, freeing up a chunk of each paycheck to meet expenses or save for a down payment on a home.”
Companies that sync up with employees seeking student loan help are making a good – and forward-looking – business move. “When a company offers a retirement plan match on student loan payments, not only are they offering a benefit that will improve employees’ lives, they are setting up the organization for success as well,” Hadley notes.
Specifically, setting up a 410(k) student loan program can benefit companies in the short and long run in three ways, Hadley says.
- Providing a benefit that people care about will make people more likely to join and stay at a company.
- Curbing financial stress in the workforce makes people happier and more productive at work.
- Making sure employees are saving for retirement as early as possible will help employers manage their workforce years down the line.
There’s one more way companies can take advantage of 401k student loan matches – with big tax benefits.
“The CARES Act allows employers to provide tax-exempt student loan repayment assistance, up to $5,250 per year, per employee,” says John Newcome, vice president and senior consultant at Maryland-based Kelly Benefits Strategies. “However, it will end in 2026, absent action from Congress.”
The benefit can result in tax savings for both the employer and the employee, “making it a cost-effective option for enhancing the benefits package,” Newcome notes.
Getting Immediate Help
Since the Secure 2.0 legislation states that the program can’t start until January 2025, companies may want to get an early start in helping out student loan-borrowing staffers right away.
“There are a couple of ways companies can help student loan borrowers beyond the provisions of SECURE 2.0,” Hadley says. “Companies can help their employees directly pay down their loans in a tax-advantaged reimbursement program. Companies can also offer student loan navigational support, still a meaningful benefit that doesn’t break the bank.”
Companies don’t have to stop there. Arnold offers several ideas for company management looking to get ahead of the student loan debt issue for their employees.
Student loan repayment assistance. Some companies offer direct student loan repayment assistance as a benefit. “While this isn’t a retirement match, it helps reduce the student loan principal faster,” Arnold says.
Financial wellness programs. Companies can provide resources, workshops or access to financial advisors to help employees manage their finances and student loans.
Advocate for early adoption. Even if the formal program starts in 2025, “companies can show goodwill by starting a similar matching program in advance, even if it doesn’t directly go into the 401(k),” Arnold notes.
f Your Company Doesn’t Have a 401(k) Student Loan Match Program
If student loan borrowers work for a company that hasn’t shown interest in offering a 401(k) student loan matching program, they shouldn’t give up.
“Open a dialogue with HR. Start by talking to your HR department or benefits coordinator to see if they are aware of the provision and if they’re considering implementing it,” Arnold advises. “Show demand, too. Meet with colleagues and gauge interest. If many employees express interest, the company may be more inclined to offer student loan matching help.”
