Paying off student loans can aid in saving for retirement, starting next January.

• The resumption of student loan payments may cause many Americans, holding a collective $1.6 trillion in student debt, to delay saving for retirement.
• The Secure 2.0 retirement law, effective January 1, 2024, enables employers to match employees' student loan payments with tax-advantaged contributions into their retirement accounts.
• One benefits consultant stated that "almost all of our clients are thinking about it."

As student loan repayments resume after a three-and-a-half-year hiatus, many borrowers are concerned about their college debt, which may prevent them from taking advantage of new relief plans from the Biden administration. This could lead to Americans, particularly those in their prime working years, forgoing retirement savings. However, there is good news: Starting January 1, more workers may be able to both pay off their debt and save for a more secure retirement.

Starting January, employees from various employers can receive matching funds for their student loan payments through a provision in the Secure 2.0 retirement-savings overhaul, without having to deposit money in their retirement account.

According to John Newcome, senior consultant at Kelly Benefits Strategies, many individuals face the dilemma of deciding between paying off their student loans and contributing to a 401(k) due to limited disposable income. This choice results in not saving for their future and forfeiting employer matching funds.

The new opportunity requires employees and their employers to be aware of certain information.

Prime-working-year borrowers dominate $1.6 trillion in debt

Over 43 million individuals owe a collective $1.6 trillion in student loans, with borrowers in their prime working years having the highest outstanding loan amounts. Consequently, student loan debt can have a detrimental impact on people's financial well-being.

A recent Morning Consult survey of about 500 student-loan borrowers between the ages of 18 and 39 found that 46% of them said their loans have affected how much they contribute to their retirement plans. Additionally, 94% of young student-loan borrowers expressed interest in an employer-provided 401(k) contribution as they pay off school loans, according to the survey commissioned by a company that introduced a groundbreaking 401(k) matching program for student debt borrowers in 2018.

According to federal student loan portfolio data, borrowers aged 35 to 49 have the highest percentage of student-loan dollars outstanding, followed by those aged 25 to 34. This data highlights the potential benefits of a matching program. Studies have shown that employees who have a strong financial footing in both the short and long term tend to have longer tenure with their employers, as stated by Tom Armstrong, vice president of customer analytics and insight at Voya Financial.

How a company student loan match will work

The amount a company matches in a 401(k) plan depends on the plan design, according to Melissa Elbert, a partner at Aon, a retirement benefits consultant for employers. For example, in Abbott's case, employees who are eligible for the company's 401(k) and apply at least 2% of their eligible salary toward paying down an eligible student loan will receive a 5% company contribution into their Abbott 401(k) annually. Employees do not have to contribute any money to their retirement plan to receive this company contribution.

Why more employers should adopt the savings idea

Companies that implement the program will gain a competitive edge in attracting and retaining talent, according to benefits consultants.

Abbott's Freedom 2 Save program has resulted in a 19% increase in employee retention, with some employees even paying off their student debt and saving for retirement. Since its inception, over 2,600 employees have enrolled in the program.

To aid other companies in implementing a similar program, Abbott made a publicly accessible blueprint with recommendations on how to begin. This includes informing their record keeper and determining whether employees should self-certify their student loan payments.

The impact on student loan debt would be significant if more employers had a similar program, as stated by Mary Moreland, the company's executive vice president of human resources.

NFP's retirement division president, Joel Shapiro, stated that while formal announcements are scarce, many companies are evaluating the program with the intention of adopting it as soon as possible. He added that virtually all of their clients are considering it, recognizing its importance to their personnel.

Why an employer would decide not to offer this benefit

According to Kim Cochrane, a retirement plan advisor and consultant at HUB International, employers have limited funds for benefits and must decide where to allocate them. Cochrane recommends that employers survey their employees to determine their greatest needs. Even if a student-loan benefit only addresses the needs of 20% of employees, it can still be beneficial, she said.

The cost of contributing matching funds for employees who didn't previously participate in the company's 401(k) could increase, according to Shapiro. The amount of extra cost would depend on the number of participants, which is why modeling is crucial.

Other options to help workers with student loan debt

Some companies offer loan repayment programs for employees without linking it to retirement savings.

Employers can repay employee student loans tax-free up to $5,250 through December 31, 2025, thanks to the Cares Act and an extension. Newcome predicts that the tax-advantage may be extended, but even if it isn't, some companies will continue to help with student debt payments as it's an important benefit for employees "staring down the barrel of debt."

Recent research from Voya revealed that 81% of working Americans with a student loan would be interested in participating in an employer-offered student loan repayment program, and 83% agree or strongly agree that they would be more likely to work for an employer if the company offered student-loan debt repayment assistance. Additionally, 83% of working Americans with a student loan said they would save more money for retirement if their employer helped pay off their student loan debt, according to the research.

Employers are increasingly looking for ways to help employees manage their student loan debt, and companies can offer matching programs or traditional repayment assistance, according to benefits providers.

What employees should do

Employees should inquire about their companies' plans to provide a 401(k)-matching benefit. If employers are aware of an employee's need for a specific benefit, they may be more likely to offer it, according to Cochrane.

Elbert advised employees to commit or recommit to saving for retirement as soon as possible. If they delay saving for 10 years, their retirement savings could be reduced by around 30%, which would require them to work longer to make up for the loss. While employer-provided benefits can help, they won't cover the full amount needed for retirement.

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