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Paying Down Student Loan Debt OR Saving for Retirement? Why Not Both?

Student loan debt has gained considerable visibility in the past few years. Since the COVID-19 pandemic began, first President Trump and then President Biden signed executive orders to place a hold on federal student loan debt repayments. This repayment freeze has been extended several times, most recently in November 2022 as a response to courts blocking Biden’s debt relief plan. The loan repayment pause is now extended until after June 2023 or when the administration can move forward with its plan. The Coronavirus Aid, Relief and Economic Security Act (CARES) Act added qualified student loan payments as acceptable tax-free contributions to education-related employee benefits. The Consolidated Appropriations Act (CAA) of 2021 extended this provision through 2025. The maximum annual contribution is $5,250.

The student loan debt dilemma is not new but has come to the forefront with the debt repayment freeze and favorable tax provisions in the CARES Act. The Federal Reserve estimates that 30 percent of all adults—representing just over 4 in 10 people who went to college—said they incurred at least some debt for their education, resulting in approximately $1.7 trillion in debt. Among those who are still paying down debt for their own education, 18 percent were behind on their payments. Student loan debt can have an enormous impact on a person’s secure financial future, including the ability to also save for retirement.

Student loan debt assistance can take several forms:

  1. It is very common for employers to offer basic resources and financial education assistance to their employees as part of financial wellness concierge type services to help employees manage, consolidate and pay down their debt. Sometimes these resources are part of other financial wellness benefits that an employer already offers, or they can be purchased for a relatively small cost—a few thousand dollars per year. The offering is a fairly low cost to employers for this type of resource but provides an abundance of goodwill and value. In addition, because of the flexibility afforded with these plans, employers can even structure them so that parents of students that have loans of their own can also take advantage of this type of benefit.
  2. Student loan repayment assistance is where the employer (most often via a vendor) makes a direct contribution toward an employee’s student loan debt. The most common amount is $50 – $100 per month. Again, the tax-free benefit of this type of program has been made possible from the CARES Act (and then the CAA extension until the end of 2025).
  3. Tuition assistance is also a benefit that has been around for some time. Employers can contribute up to $5,250 annually tax-free for employee’s education, including courses and materials.
  4. Student loan repayment matching is a relatively novel concept that is gathering a lot of attention. In this type of program, the employer makes a matching contribution based on their 401(k) match into the employee’s 401(k) based on the employee’s student loan repayments. The employee is paying their student loan debt on their own, but the employer matches their payment with contributions into their 401(k). Employees early in their careers with student debt do not have to make a choice between saving for retirement and paying down their student loans. This approach will be codified a lesser-known provisions of the recently passed $1.7 trillion omnibus spending bill nicknamed SECURE 2.0. The provision will go into effect at the end of 2023.

While student loan debt assistance can be a major benefit to some employees, others may feel resentment if they do not have any student debt or already paid it down. These programs may also not find favor with employees that do not have higher education degrees at all. Some employees may prefer their employers help out with a staggering medical debt or a mortgage instead of student loans. There are other legal issues to consider such as safe harbor rules and the interaction with other 401(k)/403(b) plan provisions such as plan eligibility, vesting, and distribution rules, and annual coverage and nondiscrimination testing to ensure that the retirement savings plan does not favor highly compensated employees. It is also unclear what will happen to these programs after the CAA extension expires at the end of 2025.

There is no doubt that customizable benefits for all stages of a career are a trend that is here to stay. It could be that student loan debt assistance and resources is one arrow in an employer’s quiver to attract and retain valuable employees in the post-pandemic workplace. Cowden Associates is well positioned to assist employers with evaluating all aspects of a total compensation package to ensure benefits and compensation align with your rewards strategy and business goals.