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Student loan borrowers could soon have an easier time building up 401(k) balances for retirement

December 21, 2022, 6:57 PM UTC
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A student loan provision included in the omnibus appropriations bill Congress is poised to pass could be "transformational" for some borrowers.
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A student loan provision included in the omnibus appropriations bill Congress is poised to pass in the next few days could be “transformational” for some borrowers.

Included in the $1.7 trillion package are hundreds of provisions from the so-called Secure Act 2.0, a collection of retirement-related legislation that aims to help Americans save more.

One of the provisions allows employers to make matching contributions into a retirement account for employees who are making student loan payments, even if they aren’t contributing to their 401(k)s.

Companies have been working toward the legislation for years, says Laurel Taylor, CEO and founder of Candidly, a student debt and savings optimization platform. It’s critical because workers with student loan debt often forego making retirement contributions, even when their employer offers a match, while they pay down their debt. They simply can’t afford both payments each month.

In fact, 30 million Americans have access to a 401(k) match but don’t contribute at all, according to data from Candidly. College graduates with student loan debt at the age of 30 have half of the retirement savings of those without student debt, on average.

“It’s a transformational provision,” says Taylor. “It’s massive in terms of transforming financial outcomes for those completely sidelined.”

The new provision levels the playing field, says Taylor. Now, those with student loan debt can also start to build their retirement savings—potentially a decade or more earlier than they would have otherwise. They no longer have to choose between their past and their future for the 10 to 30 years it takes the typical borrower to pay down their debt, she says.

“This enables people to make simultaneous progress on debt, and wellness and wealth,” says Taylor. “It’s the first time that most of this population will have received any retirement contribution from their employer.”

This is especially crucial for new graduates and those early in their careers—the earlier they are able to start investing for retirement, the more their money can grow and compound.

The change also makes intuitive sense: Why should those with student loan debt essentially take a pay cut—by forgoing their employer match—because they cannot afford to contribute to their retirement accounts? They’re currently being assessed a financial penalty with no foul.

If the provision becomes law, employers will need to opt into offering the student loan match. They would need to offer “consistent” treatment to all employees: So if someone contributing to their 401(k) receives a 5% employer match, a person paying down their student loan debt would also get 5%.

While that might seem small, Candidly estimates that a borrower who receives a matching 401(k) contribution on a $350-per-month student loan bill for 10 years could see their 401(k) balance balloon to $450,000 by the time they retire, assuming an 8% return.

Taylor says the change could help reduce the racial wealth gap in the U.S. As it stands, white families hold almost three times the retirement assets of Black and Latino families on average. Some of this discrepancy can be traced to unequal student loan debt burdens.

With employers empowered to offer matching retirement contributions for student loan payments, workers will be able to save more.

“This is a game changer,” says Taylor.

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