Turning Student Loan Debt into Retirement Savings

Part of a series  |  SECURE 2.0 Act Insights

Husband and wife with advisor discussing student loan debt

By Ronald Ulrich, Vice President, Product Consulting and Compliance at ADP

Hefty student loan debt could have your employees struggling to contribute to your retirement plan. Proposed legislation may allow them to do both in the future.

Student loan debt has reached an astounding $1.745 trillion in the United States, with the average borrower owing $40,000+.

Surprisingly, Americans age 40 and older account for more than 30% of student debt holders — whether for their own education or their children's. For many employees, that means having to pause saving for retirement until their loans are repaid, which could be one reason that participation rates in your company retirement plan aren't as high as you'd like.

Despite the proposed student loan forgiveness plan currently stuck in legal limbo, there may be a new form of financial relief on the horizon.

A section of the Secure Act 2.0 puts forth a plan for providing employees who may not otherwise be able to contribute to a retirement plan a way to still get a contribution by treating qualified student loan payments as 401(k) employee contributions for the purposes of getting an employer match. [NOTE: A new related article is now available: SECURE 2.0 Act of 2022.]

What exactly does that mean for you and your employees?

For every qualified student loan payment they make, you (as the employer) can apply your retirement plan's matching contribution formula you have in place. Your employee gets a jump start on retirement savings, and you get a tax benefit for the contribution!

Here's how employees will benefit from this proposed legislation:

  • Their retirement savings will increase even when they're not able to contribute themselves.
  • They don't miss out on the benefits of compound interest as their 401(k) account grows.
  • They can continue to reduce their student loan debt while not totally sacrificing saving for retirement.

For employers, the matching contribution benefit can help increase plan participation among employees who are eligible but not enrolled, which in turn can improve the overall health of your retirement plan. It is also certain to be popular with current employees and job candidates in a competitive hiring market.

When nearly three in five workers say that preparing for retirement makes them feel stressed, offering a retirement savings vehicle as part of your benefits package can go a long way toward building employee loyalty and retention rates.

Not currently offering an employee retirement savings plan? Let ADP help you fix that, so you can focus on driving your business forward.

ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor. ADPRS-20221114-3841