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If you’re among the 46 million Americans with federal student loans, here’s some good news for a change: Paying down your student debts could add free money to your retirement accounts.
Under Section 110 of the SECURE 2.0 Act of 2022, which was signed into law by President Joe Biden in 2022 and took effect in January 2024, student loan borrowers can take advantage of an incentive that treats student loan payments as elective deferrals for matching retirement contributions. This provision is “intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt, and thus are missing out on available matching contributions for retirement plans.”
Through this provision, when an employee makes a student loan payment, their employer can match part or all of that contribution into a workplace retirement plan, such as a 401(k), 403(b), SIMPLE IRA, or 457(b) plan. This gives workers who are repaying their student loans an opportunity to start saving for their retirement — without making any retirement contributions on their own.
How do matching retirement contributions work?
Matching contributions are a typical benefit of workplace retirement plans. An employee adds a portion of their salary to a retirement plan, and their employer matches that contribution — usually as a set percentage of the employee’s salary — as an additional, free money contribution.
The SECURE 2.0 Act builds upon a previous retirement-focused act, Setting Every Community Up for Retirement Enhancement (SECURE), which was passed in 2019. It was designed to make it easier for employees to participate in workplace retirement plans and extend benefits to part-time employees.
The inspiration behind SECURE 2.0 was Abbott, a global medical device and pharmaceutical company that received special permission from the IRS to provide retirement contributions to employees who were also student loan borrowers. Through Abbott’s 2018 Freedom 2 Save program, if an employee designated 2% of their salary towards student loan repayments, Abbott would offer a 5% annual contribution to their 401(k) plan. According to an Abbott spokesperson, the program grew popular, even inspiring a few employees to go on and obtain their PhDs — all the while knowing that they were saving towards their future.
Why should I ask for matching retirement contributions to my student loan payments?
Everyone knows how important it is to start saving for retirement as early as possible, due to the magic of compounded interest, which is the interest you earn on your original savings and the interest you’ve already accumulated. This is how your retirement savings achieves the exponential growth needed to cover your living expenses for years — if not decades — after you stop working.
But recent graduates entering the workforce have faced particularly steep headwinds, as pandemic-related inflation made the cost of living skyrocket, especially for basic necessities like groceries and rent, and rising interest rates made life goals, like owning a home, virtually impossible.
According to a survey by U.S. News and World Report, 74% of students with outstanding federal loan debt said they were planning on taking advantage of President Biden’s 2022 plan to cancel up to $20,000 in individual federal loans, but in June 2023, the Supreme Court rejected Biden’s proposal. In addition, 85% of those surveyed said they would face financial hardship as a result of student loan repayments resuming in September 2023 — so it’s understandable that saving for retirement fell to the bottom of every recent graduate’s to-do list.
But SECURE 2.0 could make a significant impact on your retirement savings over the long run — and since that’s something everyone will need down the line, eventually, let’s take a moment to illustrate just how much you could benefit, and why you should talk to your human resources department as soon as possible to see if your employer will be participating in this innovative new plan.
An example of a student loan payment as a 401(k) contribution
Say you recently graduated with a bachelor’s degree and started a new job with a yearly salary of $50,000, which approximates Bankrate’s average starting salary for college graduates.
You also have $20,000 in student loan debt, which falls within the Federal Reserve’s range of median student loan debt.
Your student loan payments work out to be $217 per month (which is the estimated payment on a $20,000 student loan with a 5.5% interest rate and standard 10-year repayment term).
Now say your employer participates in SECURE 2.0, and they will match up to 4% of your salary to a 401(k): That means if you contributed $2,000 a year, they would match your contribution, dollar for dollar, up to $2,000.
Without SECURE 2.0 benefits, if you don’t contribute to your retirement plan, you wouldn’t receive any employer match.
But under the SECURE 2.0 plan, at the end of the year, instead of saving $0 for your retirement because you were busy repaying your student loans, you could have $2,000 in retirement savings.
And at the end of 10 years, even without adding another penny to your retirement savings (notwithstanding any raises or promotions that might cause your salary to rise), you would have $20,000 in your retirement account — plus, you would also have paid off your student loans.
Now say you kept that $20,000 in your 401(k) for the next 30 years. Due to the miracle of compounded interest, if that money grew at an average annualized rate of return of 6%, you would have $114,869.82.
So why on earth wouldn’t you take advantage?
Which companies offer the student loan payment as a 401(k) contribution plan?
According to Nasdaq, a few big-name companies have already added Secure 2.0 Act benefits: Verizon offers a 6% retirement contribution to employees paying their student loans, while Chipotle will match up to 4%. Other companies, like Kimley-Horn and News Corp, offer similar benefits, and more are expected to follow. After all, if an employer wants to attract — and retain — top Generation Z talent, these are the kinds of benefits they will need to offer.
Keep in mind that every workplace is different, so you should check with your HR department to see if your company is participating in SECURE 2.0, and which specific benefits it will be offering to employees who are making student loan payments.
It’s also important to note that many employers have their own set of rules and regulations surrounding their retirement plans — one of which is a vesting schedule, which means that if you decided to leave the company before a certain indicated period, say 5 years, you would only be entitled to take a percentage of your retirement benefits with you.
How to participate in your employer’s student loan payment as a 401(k) contribution: A step-by-step plan
- As a recent graduate, you already know that education is your best tool for success. So, you should first make sure that you read up on your company’s retirement plan, its contribution matches and limits, as well as any fine print.
- Ask your HR department if your employer is participating in SECURE 2.0 in 2024, and if so, what its contribution amount will be.
- If it isn’t, you might not need to quit on the spot. Band together with other like-minded coworkers so you can show your company how the student loan crisis affects workers at all levels of business — and every age group, too.
- Take advantage of other student loan assistance measures your employer may offer, like the CARES Act. Under this plan, employers can offer up to $5,250 in tax-free student loan payments through 2025.
