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Paying off a student loan? Your company could match this money into your 401(k).
Student loan borrowers stressed about the choice between reducing student loan debt and saving for retirement just got some relief.
If you work for an employer that offers a 401(k), 403(b), or similar workplace plan, there’s a new option launching this year that could help you save for retirement and pay off student loans in one fell swoop. turn.
Employers can now consider student loan payments as qualified contributions to retirement plan matching programs, thanks to the Secure 2.0 Act, which included a package of retirement-related provisions aimed at increasing savings.
“The student debt retirement provision is particularly interesting as it directly addresses retirement savings – which is one of the key areas we see so many borrowers being forced to reduce due to their student debt,” Jesse Moore, head of student debt at Fidelity. Investments, he told Yahoo Finance.
It means that workers no longer need to choose – they can do both at the same time.
“Young professionals often put off saving for retirement to deal with more pressing and tangible financial concerns, like debt and short-term expenses,” Edward Gottfried, senior director of product management at Betterment at Work, told Yahoo Finance.
“Missing the first few years of 401(k) contributions and the resulting compound interest can significantly hurt your 401(k) balances in the future.”
See more information: Tips and tricks for paying off student loans quickly
A new 401(k) benefit is a potential game changer, especially for graduates just starting their careers. (Getty Creative) (lakshmiprasad S via Getty Images)
Something is better than nothing
Here’s how it works: If your employer provides a match to your retirement plan contributions and you’re paying off your student loan, you can count your monthly student loan payments as your “contribution” to your employer-provided retirement account.
Retirement law provisions allow employers to obtain tax incentives on this type of matching. The matching formula needs to be matched, however, and whether the employer offers the option depends on the employer.
The details are still being worked out with companies, but in general, you can make contributions to your retirement account and then add your student loan amount up to your employer’s full amount – which usually ranges between 4% and 6% of your salary, Craig Copeland of EBRI, a nonpartisan, nonprofit research institute in Washington, D.C., told Yahoo Finance.
“Even if someone feels like they can’t spare enough money to put anything into their retirement account from their paychecks, their employer can add the student loan equivalent, so they’re still saving something for their retirement,” he said.
It’s a potential game-changer, especially for recent graduates just starting their careers. According to the most recent data available from the Federal Reserve, the average federal student loan debt balance is $37,088, and the average student loan payment is between $200 and $299.
The story continues
Meanwhile, 64% of employees report that student loan debt has had a negative impact on their ability to save for retirement, according to a recent study. Work Improvement Research. And nearly a quarter of workers would be enticed to change jobs if a potential employer offered a student loan/401(k) match program.
See more information: How much can you contribute to your 401(k) in 2024?
There’s a new option launching this year that can help you save for retirement and pay off student loans all at once. (Getty Creative) (Witthaya Prasongsin via Getty Images)
Match is attractive to workers of all ages
“Employers who offer a 401(k) match to workers paying back student loans will be very attractive to the younger generation, or Gen Z,” Olivia S. Mitchell, professor at the Wharton School of the University of Pennsylvania, and co-author of a new Working Document about the provision, he told Yahoo Finance. More than 6 in 10 workers with a retirement account ages 20 to 29 have a student loan, and more than half of those ages 30 to 39 do, according to the data.
Older workers can also benefit from free money.
“We found that a third of workers ages 40 to 49 still have student loans and access to retirement accounts, and a quarter of those ages 50 to 59 do as well, so these are potentially great employees to try to retain with matching contributions in exchange for student loan repayment,” Mitchell said.
Employers are not required to offer this benefit to their employees, so it is difficult to estimate the number of companies that will offer it. However, several large companies working with Fidelidade to provide access to student debt benefits include Masco Corporation, News Corp, Dow Inc., Unilever, Sephora and LVMH.
Since the passage of Secure 2.0, Fidelity has seen an increase “in demand for student debt retirement benefits from all types of employers – from large employers with a national presence to smaller companies,” Moore said.
“Employers offering a 401(k) match to workers paying back student loans will be very attractive to the younger generation, or Gen Z,” said Olivia S. Mitchell, a professor at the Wharton School of the University of Pennsylvania. (Photo courtesy of Olivia S. Mitchell) (Olivia S. Mitchell)
The other side
There are possible downsides.
For employers, it could be an expensive proposition to match student debt payments. Additionally, “plan servicers must also build new systems to make this practically viable, as they require new ‘pipelines’ to keep accounts in order and confirm loan payments,” Mitchell said.
For employees: The struggle to pay off loans with the comfort of knowing something is being set aside for retirement thanks to an employer match can make saving for retirement less of a priority.
“Employees can pay off more loan debt but reduce their own retirement plan contributions,” Mitchell said. And that is a concern.
Kerry Hannon is a senior columnist at Yahoo Finance. She is a career and retirement strategist and author of 14 books, including “In control over 50: how to succeed in the new world of work” and “Never too old to get rich.” Follow her on X @kerryhannon.
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