Student loans back on radar after ruling

As millions of Americans begin repaying student loans this fall, plan sponsors should think about ways to help employees pay down their education debt while still saving for retirement, industry players said.

The U.S. Supreme Court ruled June 30 to block President Joe Biden’s student loan forgiveness program in a 6-3 decision. If enacted, the Biden administration’s program would have forgiven up to $10,000 in federal student loan debt for individuals making under $125,000 a year or households making under $250,000, and up to $20,000 in student loan debt for Pell Grant recipients.

Because of the COVID-19 pandemic, student loan payments have been frozen for the past three years, so resuming payments is “obviously going to be a real challenge for millions of people,” said Amanda Hahnel, Boston-based vice president and head of student debt retirement at Fidelity Investments. While student loan payments will resume in October, interest on such loans will resume beginning Sept. 1.

This means “folks will have to readjust their finances,” Ms. Hahnel added, which could impact retirement savings.
“The biggest thing that (plan sponsors) can do is think about the burden that their employees are facing and (think) if they can offer any benefits within this space,” she said.

One avenue is through the SECURE 2.0 legislation.

In December, Congress passed SECURE 2.0, a retirement security package made up of more than 90 provisions aimed at bolstering retirement security. One of those provisions allows employers to make matching contributions to an employee’s 401(k) plan, 403(b) plan or SIMPLE IRA based on qualified student loan payments, starting on Jan. 1, 2024.

The provision is a way of “really helping (borrowers) continue to save for retirement while they’re dealing with the financial pressures of paying off student debt today,” Ms. Hahnel said.

Matching student loan payments with retirement plan contributions isn’t the only way to support employees, sources said.
While some retirement plan sponsors have taken a more direct approach to relieve student loan debt, others are simply offering their employees more guidance and education on how to deal with student loans, which industry experts say is helpful as well.

“We’re seeing plan sponsors partner with vendors for guidance, for education (and) for tools,” said Sara Vipond, senior associate on the U.S. defined contribution research team at Mercer’s Minneapolis office.
Whether it’s starting a new benefit program or just offering more guidance to employees, taking any kind of initiative related to student debt is a good way to get employee feedback, Ms. Hahnel said.

Before student loan payments resume, some plan sponsors have a head start with programs already in place to help borrowers.

Prior to Congress passing SECURE 2.0, Abbott Laboratories became the first company to launch a student loan matching program in 2018, upon receiving a private-letter ruling from the IRS. Under its Freedom 2 Save program, employees who dedicate 2% of their annual salary toward student loan repayment will receive a 401(k) contribution worth 5% of their salary, or the equivalent of the company match.

“I think for us it was very clear that employees that were dealing with student loan debt were facing some challenges in terms of saving for retirement,” which prompted a response on how to manage that issue and address it, said Diego Martinez, Chicago-based divisional vice president for benefits and wellness at Abbott Laboratories.

The key point of the program is that employees don’t have to contribute to their 401(k) accounts in order to save for retirement, he noted.

“We — as an employer — we can play a critical role in helping employees tackle their student loans,” Mr. Martinez said. While more than 1,300 employees are currently enrolled in Freedom 2 Save, Mr. Martinez expects Abbott employees’ interest in the program to increase given the recent Supreme Court ruling.

Employees from other companies will likely be interested in such programs as well, he added.

“SECURE 2.0 makes it a lot simpler than what we had to do, and I think that that’s great.”

In a different approach, Unum Group launched a program in 2020 that allows employees to trade in unused paid time off for student loan relief.

Starting at a minimum of eight hours and a maximum of 40, employees can take their unused PTO at the end of each calendar year and convert it to student loan repayment for themselves, a spouse, or a child, as long as they are the signatory or co-signer of the loan.

Carl D. Gagnon, associate vice president of global financial wellbeing and retirement programs at Unum, said the company knew that student loan payments were an issue but decided not to tie its program to the 401(k) match because it felt doing so could have a long-term impact on retirement savings.

“We have a very competitive PTO program in the industry with Unum,” said Mr. Gagnon, who’s based in Portland, Maine. “So taking that 40 hours and maybe repurposing it, at its hourly value, to help pay off additional student debt was a good way to go.”

“But we applaud what Abbott does,” he added. “We applaud the SECURE 2.0 features.”

With the passage of SECURE 2.0, employers now have explicit permission to match student loan payments with retirement contributions. And according to Fidelity’s Ms. Hahnel, employers are ready to jump in once the provision takes effect in 2024.

“We’re seeing a lot of employers really leaning in and making sure that their employees can take advantage of it Day One,” she said.

Allowing employers to make matching contributions for employees’ student loan payments “could help employees who are paying off their student loans to start saving for retirement sooner or increasing their contributions,” Matt Brancato, Devon, Pennsylvania-based chief client officer in Vanguard Group Inc.’s institutional division, said in an email.

Some 72% of employers currently offer or plan to offer student loan debt assistance or tuition reimbursement, according to EBRI’s 2022 Financial Wellbeing Employer Survey, conducted in 2022.

And the return of student loan payments is sure to bump up program participation on the employee side, sources agreed.
“I think there’s going to be a big kick up coming up in terms of employees taking advantage of any student loan program or rebate, or reimbursement, or payment system that employers have in 2024, or as they go forward,” Mr. Gagnon said.

However, he noted there may be other SECURE 2.0 provisions that require plan sponsors’ more immediate attention and could take away from their work toward student debt relief. Specifically, he said the provision that subjects all catch-up contributions to Roth tax treatment may be a challenge for some employers, third-party administrators and payroll systems to implement by 2024.

Without any final guidance on how the student matching provision will be administered, “it’s a little bit more of a wait and see,” said Mercer’s Ms. Vipond, as she doesn’t expect many plan sponsors to have programs ready by Jan. 1, 2024.

For workers below age 45, employer match contributions paying down student debt would be the most attractive feature in a defined contribution plan, according to Mercer’s 2022 Inside Employees Minds’ Study.

“I think that this is going to be something that people are going to be excited (about) and people are going to be requesting, as they have to kind of reconsider how they allocate their monthly budget,” Abbott’s Mr. Martinez said.

“We know that a program like this helps recruitment, helps retention and … I think it gives employees a great message (that) we care about you, you made a huge effort to get your education and this is a way that the company can support you to kind of pay that back,” he added.