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How Paying Off Your Student Loans Could Increase Your Retirement Benefits


The House recently passed H.R. 2954 Securing a Strong Retirement Act, being referred to as the Secure 2.0 Act, which has overwhelming bi-partisan support, with a vote of 414 in favor and only 5 opposing. The Act includes a great benefit for those individuals who are working on paying off their student loan debt but have limited resources to invest towards retirement.

The average amount of student loan debt per borrower in 2021 was $38,792, while the total amount of outstanding student loans was estimated to be $1.58 trillion. While many would expect the most recent college graduates to hold the most student loan debt, the Federal Student Aid portfolio reflects that the largest federal student loan balances are held by adults between the ages of 35 to 49, with student loan balances of $622 billion or 40% of the total outstanding student loan debt. The ability for this age group to start and increase retirement savings is imperative for a successful retirement. The concern of Congress that adults were focused on paying off student loans rather than investing in retirement savings, is highlighted in the House proposal, Section 111. This might be the best option Congress is willing to provide as an alternative to student debt forgiveness.

The House proposal looks to expand the definition of an employer matching retirement contribution to include employer contributions made on behalf of an employee making payments towards qualified student loans. Therefore, even if an employee can only make their student loan payments, the employee would be allowed to receive an employer matching contribution to the employer’s 401(k) plan, 403(b) plan, or SIMPLE IRA.

For example, let’s assume Adam is an eligible participant in his employer’s 401(k) plan. Adam makes $1,500 per week, or an annual salary of $78,000 a year. The employer will match contributions up to 4% of Adam’s salary. Therefore, prior to the proposal, Adam would have to contribute $60 (1,500 x 4%) per week to maximize his employer contribution of $60 per week. If Adam was able to participate, Adam could create $6,240 of savings in a year ($120 x 52 weeks), or $62,400 over a 10-year period before any interest.

Unfortunately, Adam passed on making 401(k) contributions. Instead, Adam made payments of $60 a week toward student loans. Under the House proposal, the employer is allowed to treat the $60 a week payment as an employee contribution to Adam’s 401(k) plan, resulting in an employer match. The employer match of $60 a week, would result in additional retirement savings for Adam of $3,120 per year, or $31,200 over a 10-year period before any interest. This change to the definition of what can be considered when calculating the employer contributions could have a positive impact for many adults burdened with student loan payments.

Do I have a Qualified Student Loan?

The definition of a qualified student loan is linked to the existing requirements used to determine the deductibility of student loan interest. A loan will be considered a qualified education loan if it was incurred by the taxpayer solely to pay qualified higher education expenses, and the education expense is:

1. Made on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer at the time the debt was incurred,

2. Paid within a reasonable period of time before or after the debt was incurred, and

3. Attributable to a student who is enrolled in a degree or certificate program and who carries at least one-half of the normal full-time workload for the course of student that the student is pursuing.

Qualified education expenses include the cost of attendance. A student’s cost of attendance generally includes tuition and fees (net of certain amounts including scholarships) and an allowance for room and board, books, supplies, transportation, and miscellaneous expenses of the student.

How will my employer know if I am making qualified student loan payments?

Based on the House proposal, the employer can rely on an employee certification to ensure payments were made in relation to a qualified student loan.

Will employers have different benefits for cash contributions versus qualified student loan payments?

An employer contribution made on behalf of an employee making a qualified student loan payment will only be treated as eligible for an employer match if:

1. The plan provides that matching contributions related to qualified student loan payments are treated in the same manner as salary reduction contributions;

2. All employees that are eligible to receive matching contributions under the initial employer plan are also eligible to receive a matching contribution relating to the payment of qualified student loans; and

3. The vesting is the same for employees who have salary reduction contributions or make qualified student loan payments.

Large bi-partisan support for this bill is also expected in the Senate. While the inclusion of Section 111 is exciting, it’s important to highlight that this is a voluntary benefit which employers have the option to provide but are not required to do so. Careful attention to the status of the Bill should be monitored and if passed, a conversation with your employer may be helpful. If the ability for employer matching on qualified student loan payments is enacted, it would be effective for contributions made for tax years beginning after December 31, 2022.



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