New Legislation Helps Student Loan Borrowers Save for Retirement

February 21, 2024

Young workers trying to get a handle on their finances can often feel pulled in two different directions. On the one hand, starting saving for retirement as early as possible is the best way to get ahead, and failing to take full advantage of your employer’s 401(k) contribution matching means you are leaving money on the table. At the same time, however, many young workers with student loans feel too stretched by the loan payments to contribute toward their retirement.

Luckily, new legislation that went into effect this year allows workers with student loans to receive employer contributions in workplace retirement plans, even if the employee is unable to contribute themselves.

In a typical workplace retirement plan, such as a 401(k) or 403(b), employers may choose to provide a matching contribution on the amount workers save. Typically, employers match employee contributions dollar for dollar up to a specific cap, such as 4% of the employee’s salary. Workers unable to contribute up to this level, or not at all, like student borrowers may delay saving for retirement and miss out on years of free money while they focus on paying down their debt.

As part of the SECURE 2.0 Act, employers can make matching contributions to workers’ retirement accounts so long as the worker can demonstrate that he or she is making student loan payments. At the healthcare technology company Abbot, workers who contribute at least 2% of their salary to their 401(k) receive a 5% matching contribution from the company. Under the new legislation, if workers can show that they are using at least 2% of their salary to pay down their student loans, they can receive the 5% match, even if they are not contributing anything to their 401(k).

Retirement plan administrators are still looking into how the benefit will work in practice and whether it makes sense for their clients’ employees. The head of strategic retirement at Vanguard told the New York Times that 401(k) providers may start rolling out more student loan match provisions, but it would likely be later in the year, once plan administrators work out the potential complexities.

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