Many young, college-educated professionals find themselves facing a financial challenge: they want to save for retirement but are also burdened with the need to pay off student loans. Striking a balance between these two goals can be difficult, but recent legislation offers some good news for workers in this situation.

New Legislation Eases the Burden

As of 2024, the SECURE 2.0 Act has introduced a new opportunity for employees struggling with student debt. Under this law, employers can now make contributions to their employees’ retirement plans based on the amount employees pay toward their student loans. This means that even if employees are not contributing to their retirement plans directly, their employers can still match their student loan payments by contributing a percentage to the employee’s retirement account.

This new provision of the SECURE 2.0 Act could be a game-changer, especially for younger workers with significant student debt. Instead of having to choose between saving for retirement and repaying loans, they can now work on both simultaneously.

The Importance of Starting Early

One of the most compelling reasons to prioritize retirement savings early is the power of compound growth. Starting to save for retirement at a young age allows individuals’ investments to grow over time, resulting in a much larger balance when they retire. For example, if someone invests $400 per month starting at age 23, with a 7% annual return, they would have nearly $91,000 by age 35. However, if they waited until age 28 to start, the same monthly contribution would result in just under $44,000 by age 35. This example shows how early and consistent investing can make a big difference in the long run.

How the Matching Contributions Work

The SECURE 2.0 Act allows employers to treat student loan payments as if they were contributions to retirement plans, making matching contributions to the employee’s retirement account based on those payments. What’s especially beneficial is that employees do not need to contribute anything to their retirement plan to receive the match. The employer’s contribution is based solely on the amount the employee is paying toward their student loans.

It’s still early to determine how many employers will offer this benefit, but some large companies like Dow Inc., News Corp., Masco Corp., and Unilever have already implemented it. Employees should check with their employers to confirm whether this benefit is available and to understand the specific terms.

The Growing Burden of Student Loan Debt

The availability of student loan repayment matching is part of a broader trend of employers offering education-related benefits to attract and retain talent. These benefits, such as tuition assistance, debt counseling, and even direct help with student loan repayment, have become more common as the total student loan debt in the U.S. continues to rise. In 2010, the total student loan debt was approximately $800 billion, and by 2023, it had soared to $1.74 trillion.

What’s Needed for Matching Contributions

To qualify for employer matching contributions related to student loan repayments, employees must participate in an employer-sponsored retirement plan, such as a 401(k), SIMPLE IRA, 457(b), or 403(b). They must also make student loan payments and “self-certify” that they are doing so. Employers can only match contributions for loans used to pay for qualified higher education expenses like tuition and fees. Additionally, the contributions to retirement plans cannot exceed the IRS’s annual contribution limits. For 2024, the limit for 401(k), 403(b), and most 457 plans is $23,000, and for SIMPLE IRAs, the limit is $16,000.

Example of How It Works

Let’s look at an example. Suppose Jack, a recent college graduate, starts working at a company that offers a 401(k) matching benefit for student loan payments. Jack has $40,000 in student loan debt and decides to pay $500 per month toward it. His employer matches 50% of qualified student loan payments, up to 3% of his salary, which is $60,000. This means his employer would contribute $1,800 annually into his 401(k), even though Jack is not yet contributing to the retirement account himself.

While Jack’s employer’s contributions are a great start, it’s important to note that relying solely on employer contributions may not be enough to meet retirement goals. Employees should still aim to contribute as much as they can to their retirement accounts to build a solid nest egg for the future.

Final Thoughts

For young professionals grappling with the dual challenge of paying off student loans and saving for retirement, the SECURE 2.0 Act offers an encouraging solution. By allowing employers to match student loan repayments with contributions to retirement accounts, this new provision provides an opportunity to address both financial priorities. By taking advantage of these contributions and starting retirement savings early, young workers can put themselves in a stronger financial position for the future.