United States

Student loans and their effect on retirement

INSIGHT ARTICLE  | 

Americans face a $3.83 trillion shortfall in their savings for retirement.1 In addition to the pandemic, job losses and the increasing cost of living, the higher cost of education and student loans are preventing employees from saving for retirement.

According to T. Rowe Price’s 2020 Insights on Retirement: Is Student Loan Debt a Barrier to Savings for Retirement2, there is an estimated $1.5 trillion in student loan debt3, of which 24% is either in forbearance or default.4 According to a 2018 study by Willis Towers Watson, a global advisory company, employers contributing to student loan repayment are projected to grow from 4% in 2018 to 32% by 2021.5 Student loan borrowers often face the dilemma of deciding whether to save for retirement or to repay years of substantial student loan debts. The decision to repay student loans most likely wins out; thus, not only are employees missing out on contributing to their retirement, but they are also missing out on potential employer matching contributions.

Student loan debt goes beyond affecting young employee’s retirement savings; it also affects retirement savings for parents and grandparents who have assisted with student loans for their children and grandchildren, and who are saying their retirement plan contributions will increase when their student loan obligations are paid off. As quoted by Roger W. Ferguson, Jr., president and CEO of TIAA: “To be sure, getting a college degree remains one of the smartest investments a person can make in their financial future—but saving for retirement is equally important.”

According to the December 2019 T. Rowe Price’s survey on student loans, overall, 28% of those surveyed had student loan debt and participated in their employer’s retirement plan. In contrast, 35% of nonparticipants said they had student loan debt. One interesting finding of the survey is that the amount of student loan debt does not necessarily lead to lower retirement plan participation rates. According to T. Rowe Price: “For those with $10,000 or less in student loan debt, 21.1% were nonparticipants in a 401(k) plan, and 20.5% were participants. This is consistent with Boston College Center for Retirement Research’s  How Does Student Debt Affect Early-Career Retirement Saving?6

What is exactly contributing to the higher amount of student loan debt?

The increased cost of college tuition and related expenses has decided how we order our financial lives. We decide to pay off student loans before saving for retirement. The perspective on an investment in a college degree affects how borrowers perceive student loan debt. Many borrowers view additional student loans like a 30-year mortgage, which is viewed as good debt since borrowers think the debt is for a good investment.

Many student loan borrowers are not clear about their own student loan situations and the responsibilities with their partners’ loans, so they avoid discussing them. Poor communication and understanding of student loans are affecting when borrowers get married, have children and buy homes, thus prioritizing those life events ahead of contributing to retirement.

Finally, student loans affect generations differently. Millennials are almost two times as likely to have taken on student loan debt compared with Generation X. However, millennials’ net worth as a percentage of their retirement assets is higher than Generation X: 35.2% versus 23.9%.7 This is most likely because of residual loans and other obligations that Generation X has during midlife, thereby affecting their retirement plan saving.

Possible solutions

Student loan assistant programs

A company may decide to offer a student loan assistance plan as an employee benefit program. These programs are relatively new and usually are offered at major companies.

One way a company can set up this type of program is to make direct payments to the employee’s student loan lender every month for either an unlimited or a fixed period. This may help to free up a portion of an employee’s compensation to be used for retirement plan savings. Of course, there is always the possibility the monies will not be used that way.

Another method for employers to assist with student loan payments is to set up a student loan benefit within a retirement plan. This method is more complex and would require a private letter ruling (PLR) from the IRS approving this type of plan. Private letter rulings are specific to the company and cannot be relied on by other employers.

For example, PLR 201833012 was issued on May 22, 2018, to the Abbott Laboratories 401(k) Plan. Under the retirement plan, eligible employees could enroll in a voluntary student loan benefit program. If the employee enrolls in the program and makes a student loan repayment equal to 2% of his eligible compensation for a pay period, Abbott Laboratories will make a nonelective contribution to the plan equal to 5% of the employee’s compensation for that period. The PLR states that no benefit can be contingent on whether or not an employee makes deferrals to a 401(k) except the employer match. The IRS concluded that the Abbott Laboratories plan did not violate this contingent benefit rule.

While there are some obvious pros to offering these programs, including helping to attract and retain talent and allowing employees to pay down student loan debt and still save for retirement, there are some cautions. These programs still need additional clarity provided by the regulators. There is little data on the impact these plans actually have on retirement savings. And, if an employer is going to offer such a plan, they need to think about who it will be offered to and the impact the plan may have on compliance and nondiscrimination testing. For example, if a student loan is offered to both highly compensated employees and non-highly compensated employees, the program has to meet the “benefits, rights and features” provisions of the IRC 410(b) coverage requirements, and the IRC 401(a)(4) nondiscrimination classification provisions.

Recordkeeping service providers

Many retirement plan recordkeepers offer financial wellness education as well as information on student loan topics. For example, T. Rowe Price offers participant education and interactive calculators.  They also offer employer contribution programs through SoFi, a personal online finance company that includes  student loan refinancing.

Education and communication

Helping educate and train employees about finances and money management is an important factor for employers in raising awareness about the impact student loans can have on finances and available financial options. Also, employers need to understand the new methods for retirement plan design that can help their employees pay down student loan debt while at the same time saving for retirement.

In summary, student loans and the cost to future retirement plan savings have become an important topic for borrowers, employees looking for jobs and for employers. The pandemic has brought additional focus to these issues as more and more student loans continue to move to default status. The positive news is legislators are recognizing the importance of this topic by introducing bills to address concerns and allow for new breeds of retirement plans to help shift the focus toward retirement planning.

Two big trends in voluntary benefits
Source: Willis Towers Watson: 2018 Emerging Trends: Voluntary Benefits and Service Survey


What is next?

Since the PLR was issued to Abbott Laboratories, there has been a lot of legislative activity regarding student loans. Many large employers have created their own student loan programs outside of a retirement plan.

Employers have requested more guidance on the PLR. On May 13, 2020, U.S. Senator Ron Wyden (D-Ore.) reintroduced the Retirement Parity for Student Loans Act, which would allow an employer’s student loan payment to qualify for the employer match and not affect a plan’s safe harbor status, if applicable.

U.S. Senator Rob Portman (R-Ohio) and U.S. Senator Ben Cardin (D-Md.) included a similar provision in the Retirement Security and Savings Act of 2019.

Senators John Thune (R-S.D.) and Mark Warner (D-Va.) proposed the Employer Participation Repayment Act, which would allow employers to provide up to $5,250 in tax-free compensation to help cover the cost of student loan repayments.

Representative Richard Neal (D-Mass.) and Representative Kevin Brady (R-Texas) proposed the Securing a Strong Retirement Act of 2020 on Oct. 27, 2020. The bill included a provision that would let businesses pay a 401(k) match to workers paying off student loans, even if those borrowers are not saving in the company retirement plan.

In addition to the above, there have been numerous bills introduced in 2020 during the pandemic that provide relief and temporary relief for student loans and defaulted loans.

1VanDerhei, Jack, PH.D., “Retirement Savings Shortfalls:  Evidence from EBRI’s 2019 Retirement Security Projection Model” ebri.org Issue Brief, March 7, 2019, No. 475, p. 11.
2Dietch, Joshua, T. Rowe Price Insights:  Is Student Loan Debt a Barrier to Savings for  Retirement?, September 2020,
3T.Rowe Price:  Financial Wellness Student Debt Management by Matthew Cann, CPC, QPA, QKA.
4T. Rowe Price: Financial Wellness Student Debt Management by Matthew Cann, CPC, QPA, QKA.-Analysis of Federal Student Loan Portfolio (inclusive of Direct, Federal Family Education Loans, and Perkins Loans.
5Willis Towers Watson, 2018 Emerging Trends: Voluntary Benefits and Services Survey.

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