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Student Loans Back in the Spotlight   


In the January 2017 edition of 401(k) Advisor, I wrote about the negative impact of rising student loan debt on retirement readiness in the U.S.

A few updated statistics since that article was written:

  • There are now an estimated 46.2M borrowers owing more than $1.52T collectively. [1]
  • On average, a 2017 graduate had $39,400 in student loans, up 6% from the prior year. [2]
  • The average student loan payment is now $351 per month for those between age of 20 and 30.
  • Plan participation is 77% for workers without student debt, and 71% for workers with debt.

Student loan debt is clearly having a negative impact on retirement savings and overall retirement readiness. In last year’s article, I made the argument that Congress, employers, and retirement professionals should design 401(k) plan features to help offset these negative trends. One employer recently decided to do just that.

In May of 2018, an employer submitted an IRS Private Letter Ruling Request to amend their company’s qualified plan to offer a “student loan benefit program”, and in August 2018, in PLR 201833012, the IRS ruled in favor of their request. Under the proposed program, an employee that enrolls in the plan’s student loan benefit program and that makes student loan repayments of at least 2% of compensation for a pay period will receive a year-end, employer non-elective contribution of 5% of compensation for the pay period. Participants that enroll in the student loan program can also make salary deferral contributions to the retirement plan; however, employer contributions will only be made for the student loan benefit program, and the employee would not be eligible for the matching contribution.

Let’s take a brief look at the possible impact a program like this could have on a typical worker with student loan debt. In last year’s article, I mentioned a friend that was not able to participate in her company’s qualified plan because of student loan debt. She is now age 42, a single mother of 3, and has student loan balance of $72,000 with monthly payments of $505. Her current 401(k) balance is $4,000. Assuming she pays off the loan over the next 15 years and enrolls in the student loan benefit program, she would receive a 5% year-end contribution that would equal $3,250. Assuming she receives a 3% annual pay raise and experiences a 6% annual rate of return, she should accumulate a 401(k) balance of close to $100,000 by the time she is 57.

While a $100,000 savings balance at age 57 would not put her fully on track for an age 65 retirement, it would give her a chance to finish the remaining working years strong and put her much closer to attaining a healthy account balance at retirement.

While the above-mentioned PLR applies to one employer’s fact pattern, and many questions remain about whether this type of provision could be adopted more widely, the ruling is encouraging and a step in the right direction. It certainly opens the door for more employers to adopt similar programs and to the possibility that these types of features could be offered more broadly in the future. Doing so would no doubt help improve retirement readiness of U.S. workers.

[1] Federal Student Aid, Q1 2018 and MeasureOne Private Student Loan Report, Q1 2018

[2] Student Loan Hero, May 2018

By John Humphrey, President & CEO – July Business Services