How paying student debt could boost your 401(k) balance

Student debt often makes it harder for people to save for retirement. But that may soon change.

A provision in the Secure 2.0 Act of 2022, which had a delayed effective date of Jan. 1, 2024, allows employers to match workers’ student loan payments with contributions to their retirement plans.

“Many employees paying off their student loans are having trouble saving for the future,” said Mary Moreland, executive vice president of human resources at Abbott, a medical device and health care company whose 401(k) matching program for student borrowers led the way to the new policy. “Now employers can help.”

Outstanding student loan debt in the U.S. exceeds $1.6 trillion, and burdens Americans more than credit card or auto loan debt. The average loan balance at graduation has tripled since the 1990s to $30,000 from $10,000. Additionally, about 7% of student loan borrowers are now more than $100,000 in debt.

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Nearly half of student loan borrowers said their debt affected how much they were able to salt away in their retirement plans, according to a recent Morning Consult survey of about 500 borrowers between the ages of 18 and 39.

Here’s what borrowers should know about the new benefit.

When in 2016 Abbott began to develop its 401(k) match to student loan payments, which it dubbed “Freedom 2 Save,” “there was no other program like it,” Moreland said. The company requested and received a private ruling from the IRS to allow it to launch the benefit in 2018.

“Other companies expressed interest in developing similar programs, but they weren’t able to because only Abbott had the private letter ruling,” she added. “Secure 2.0 now makes it possible for other employers to implement this type of program with no special dispensation required.”

Still, since the broader law just went into effect, it may take some time before the matching program takes off across employers, said higher education expert Mark Kantrowitz.

Workers interested in the nascent benefit should ask their company’s human resources department about it, he said: “If several people ask for it, they will start thinking about it.”

Moreland recommends employees who hope to see the benefit adopted at their company also share Abbott’s “Freedom 2 Save” blueprint, available on its website, when they make the case.

“In the blueprint you’ll find details on how our program works and a guide for how to develop and implement a program of your own,” Moreland said.

At Abbott, eligible employees who put at least 2% of their pay toward their student loan debt will get a 5% company contribution into their 401(k) each year.

But companies can decide on their own numbers, Kantrowitz said.

In most cases, employers will likely decide whether to match either your student loan payments or your retirement contributions, but not both, Kantrowitz said. If your employer currently has a 401(k) match in effect, it is unlikely to raise that rate, even if it establishes the benefit.

“Employees do not actually need to prove that they are making payments on their student loan,” Kantrowitz added. “They simply need to sign a document attesting that they are making the payments.”

One thing to keep in mind is your contributions to your 401(k) are pre-tax and reduce your taxable income, and so pausing these payments to focus on paying down your debt may leave you with a slightly larger tax obligation.