Student Loans Don’t Have to Stop You From Saving for Retirement

If you’re one of the tens of millions of people who must start making federal student loan payments again this fall, it could be a struggle to make room for them in your budget, let alone set aside any savings.

Between inflation, other debts (now with higher interest rates) and the ripple effects of an uncertain economy, will you be so stretched after the three-year break that you’ll forgo contributing to your retirement to free up the cash? 

By next year, you may not have to choose. A new law will make it easy for employers to step in and “match” your student loan payments with retirement plan contributions. In other words, you pay down your debt and your employer — if they offer this benefit — will add to your 401(k) or similar plan. 

Americans saddled with student loan debt have typically saved less for retirement, but now may be a particularly critical time for the law: Not only is the government's unprecedented three-year reprieve on monthly loan payments ending in October, but the Supreme Court just blocked a cancellation program that would have erased up to $20,000 from balances. Almost 6 million federal student loan borrowers — or 1 in 5 — could struggle to make payments when bills start coming again, according to the Consumer Financial Protection Bureau. 

“People are stressed. They have loans that they gotta pay down and these other avenues are sort of shutting off,” said David Kennedy, a certified financial planner and a senior analyst with Cerulli Associates, which surveys 401(k) participants every year. “It makes this kind of provision all that much more relevant.”

But will employers want to offer this benefit, if and when the companies on the backend of retirement plans make it possible on a broad scale? One fintech in the field, Candidly, boldly predicts that most companies that offer a 401(k) match will fall in step with the student loan version too.

“The student loan retirement match will be the new normal,” said Laurel Taylor, CEO and founder of Candidly. “Two to three years from now, employers who offer a match that don’t offer the student loan retirement match will be the outlier.”

A student loan match would work almost exactly like a traditional retirement match, but with a big twist: The employer will “match” qualifying student loan payments rather than their employee’s own pre-tax contributions to retirement savings. So even if you can’t afford to put anything toward your retirement, your savings would still grow while you’re paying off your debt. 

The benefits are stark for someone who would otherwise not be saving. If an employee gets a dollar-for-dollar employer match on a $350 per month student loan payment for 10 years, they could build as much as $450,000 in extra savings by retirement, assuming an 8% annual return, according to Candidly estimates. 

For perspective, the median for total household retirement accounts among Boomers (those over the age of 59) was just $289,000 in a 2022 survey by the Transamerica Center for Retirement Studies.

The new law may even help borrowers who are still able to save for retirement, depending on how much they’ve been contributing, how much their monthly loan payment is, and whether their employer will apply its match (which must be consistent) to both their loan payments and their own pre-tax contributions. If they have to choose which gets the match, they should weigh which option would net them more, factoring in how much they’d save in interest if they accelerated their payments.

In fact, according to Cerulli's first-quarter survey, more than a third of 401(k) participants with student debt said they would reduce their retirement contribution to pay down their student loans more quickly if their employer offered a student loan match.

Take, for instance, a new grad with just over $45,000 in student debt charging a 5.8% interest rate. They could double their $500 monthly payments, paying off their student loans in just over four years instead of 10, saving over $8,500 in interest, and potentially getting more than $24,000 (if the employer matched 100%) added to their retirement fund over those four years. 

The government first allowed borrowers to skip monthly student loan payments without penalty at the start of the pandemic in 2020, and CFPB researchers estimate that 5.9 million of the 32 million people expected to get bills again this fall may not be able to manage. 

Not only are there more borrowers behind on other payments (things like credit cards and car loans) than the last time they were billed, but the monthly burden from those other debts is greater because balances have tended to increase and interest rates are higher. One online Pollfish survey taken in July found 58% of borrowers aren’t prepared for payments to resume.

With so many Americans shouldering this renewed financial burden, employers may feel more pressure to address it — especially if their workforce tends to include younger student loan borrowers who are more apt to save less for retirement.

College graduates with student loan debt had about 50% less in retirement savings by the time they reached 30 than grads without student debt, according to a 2018 study by the Center for Retirement Research at Boston College. And the difference in savings rates is the most pronounced for Gen Z and millennial workers with student loan debt, according to a separate 2022 T. Rowe Price survey of 401(k) participants.

The new urgency is one reason third-party fintechs like Candidly, Savi, and SoFi at Work are eyeing the student loan match as a growth area for their business with employers.

"We're still in — in many industries — a fairly tight labor market where employees do have options," said Aaron Smith, co-founder of Savi, a fintech that sells student loan tools to companies. There’s a real retention risk if some companies are responsive and some aren’t, he said.

“It has become much more top of mind,” said Barrett Scruggs, vice president of workplace financial well-being at SoFi at Work, which just launched a loan payment verification service for companies who want to offer a match. Over the past three years “employees weren’t worried about it, which meant employers weren’t focused on it.”

Abbott, a medical device, testing and drug company, blazed the trail for a student loan match five years ago, getting a special private letter ruling from the IRS in order to offer its Freedom 2 Save program.

More than 1,300 of its employees, or about 3.7% of its U.S. workforce, are enrolled today, getting a company contribution equal to 5% of their eligible pre-tax pay added to their retirement account as long as they use at least 2% of their paycheck toward their student loans. (The company’s regular 401(k) match offers the same 5% for 2%, though employees can’t get the match on both.) 

“This program, for us, was really a way to extend the reach of our retirement plan,” said Diego Martinez, the company’s divisional vice president of benefits and wellness. Many employees managed to accelerate their payments and “move on to the next chapter in their life.”

When the new law — part of a package of retirement savings changes called the SECURE 2.0 Act of 2022 — takes effect next year, it will give blanket permission for any employer to offer a student loan match, making it easier and potentially less expensive not to run afoul of the IRS. 

“I think a lot of companies probably were just like, 'Alright, I'm gonna wait for the legislation,'” said Will Hansen, executive director of Plan Sponsors Council of America, a trade group for employers who offer retirement plans.

So far only 8% of U.S. employers offer any kind of student loan benefit (including paying some of their employees’ student loans themselves,) according to a 2023 survey by the Society for Human Resource Management. 

If more employers do follow in Abbott’s footsteps, it won’t happen overnight — even with the new law smoothing the way. Although a small ecosystem of companies has already emerged to offer their services, much of the industry isn’t equipped to administer this particular benefit and may first tackle mandatory changes imposed by SECURE 2.0, according to Hansen. 

“It's going to take a number of years for this to become a more popular provision,” he said.

It may even depend on what people say on Twitter (now rebranded X,) said Cerulli’s Kennedy.

“There will be a couple of early adopters that will push it out, and it will depend on their success — the word of mouth,” he said.

The Details

While the IRS has yet to give specific guidance on the law, here’s what we know so far: 

This story has been corrected to reflect corrected figures from Abbott on participation in the company’s student loan match. Today there are more than 1,300 employees, or about 3.7% of Abbott’s U.S. workforce, enrolled in the program, not 2,500, as the company previously stated.