Students loan borrowers face unprecedented levels of debt. In addition to high inflation and job uncertainty, borrowers must figure out how they can save for retirement. Monthly loan payments take a large chunk of their paychecks. A new federal law could make it easier to save for retirement and pay student loan debt.
The Secure 2.0 Act of 2022 was signed by President Joe Biden on December 29, 2022. This legislative act forms part of a larger spending bill. It outlines federal funding through fall 2023, and allocates funds for other initiatives such as increasing student loan borrowers who are saving for retirement.
Employers can now treat “qualified student loans payments” as contributions towards a retirement savings program starting in January 2024. This means that an employer can match all or part of the student loan payment, and then deposit that money into a company-sponsored retirement plan like a 401(k).
According to a summary by the U.S. Senate Finance Committee, qualified student loan payments can be used for debts that are eligible for higher education expenses incurred.
At this time, it is unclear whether there are restrictions on which student loans — federal and private — can be used.
How Secure 2.0 Act can benefit student loan borrowers
The new law is being enacted amid a $1.76 trillion student loan crisis. Nearly 44 million students are affected by federal student debt. The average borrower is estimated to owe around $35,000 based on data from 2021 by the College Board. This non-profit association includes over 6,000 educational institutions.
Employees can be hampered by student loan debt.
A 2018 Fidelity survey found that 79% of respondents felt student loans had an impact on how they save for retirement. 69% of respondents also stated that student loans had a negative impact on how they save for retirement.
Greg Ward is a North Carolina certified financial planner and think tank director at Financial Finesse. A workplace financial wellness company that offers financial planning services, Ward sees the tension faced by many when trying to pay bills and save enough to have a retirement account where they can take advantage of matching employer contributions.
Ward states, “You might get a few thousand dollars in your retirement plan but now you want to borrow that money.” “We want employees to have enough money to save for the match. We also want them to be able to save enough for the match to still have cash flow.
According to E*TRADE’s 2022 survey, nearly half of millennial and Generation X borrowers have used their retirement savings to pay for expenses. According to the same survey, paying down student loans and covering education costs were the most common reasons that millennial workers (aged 25-34) didn’t save enough for retirement.
What the Secure 2.0 Act could mean for an employee who is on a federal student loan repayment program
Let’s suppose that an employer matches 100% of an employee’s 401(k), contribution up to 4% of their salary. To fully take advantage of the employer match, a recent graduate with a starting salary of $58,862 should contribute $196 each month to their 401 (k).
A recent graduate could make $371 in qualified student loan payments. This is based on an estimated $35,000 student loan payment with a 4.99% Federal interest rate and standard 10-year repayment terms. The employer could, by January 2024, count this monthly student loan payment towards the employee’s 401k contribution.
The new law would require employees to contribute $196 per month to their 401k to be eligible for the $196 per month employer 401k contribution. The new law would allow the employee to pay the $371 monthly student loan payment and also receive $196 per month from their employer 401(k).
The Secure 2.0 Act does not replace
The new law will not be in force until January 2024. There are many questions about the benefits that employers will offer, the availability of participation from both the private and public sectors, and how the rollout will work.
It won’t work for everyone. It may be impossible for struggling borrowers to pay their student loan bills each monthly, even if they are in default or forbearance. This could result in them losing any employer retirement savings matches.
Borrowers with a low degree and who don’t have the income to pay back the debt won’t be able to benefit. Crystal Cox, a certified financial planner, said that borrowers who didn’t get the expected value of their degrees, or who struggle to make a living from their studies, won’t see much.
What other provisions are included in the Secure 2.0 Act’s?
Students loan payments for elective deferrals can be made as
401 (k) auto-enroll. Employers are required to automatically enroll employees in the company-sponsored retirement plan after they become eligible.
Rollover 529 into Roth IRA. If the 529 account has been open for less than 15 years, a beneficiary can rollover up to $35,000 to a Roth IRA.
Penalty free early withdrawals from tax-preferred retirement funds. For qualified emergency expenses, up to $1,000 can be withheld, penalty-free.
The federal government will match up to 50% of eligible individuals for up $2,000 directly into retirement savings accounts. This replaces the tax credit that was previously available for IRA and retirement plan contribution contributions.
Non-highly compensated employees can be offered pension-linked employer savings accounts. These accounts include employee and employer contributions. There would be no fees or penalties for four withdrawals.