A New Perk for Some Student Loan Borrowers: A 401(k) Match

Student loan borrowers who are lucky enough to have access to a 401(k)-type plan, but are too stretched to save in it, may soon be helped by a new workplace benefit: Paying off their student loans can generate retirement savings contributions from their employer.

Starting this year, workers with student loans can receive employer matching contributions in workplace plans, even if they’re not able to save anything on their own. The loan payments count instead.

The new feature was made possible by legislation known as Secure 2.0, which included a package of retirement-related provisions intended to boost savings. It’s hard to know exactly how many companies are planning to offer the benefit — they aren’t required to — but several large companies, including Dow Inc., News Corp., Masco Corp., Unilever and others, recently introduced it to employees, according to Fidelity Investments, one of the nation’s largest plan administrators for retirement and student loan benefits.

“Employers can distinguish themselves in attracting and retaining workers by offering such benefits,” said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, a nonprofit, particularly those “who are struggling with their finances and have student loan debt.”

The student loan benefit takes effect just months after 28 million people restarted federal student loan payments after a nearly 42-month pandemic-related pause. There is already evidence that many people are struggling to add those payments to their household budgets, which have already been squeezed by inflation.

“Since the student loan repayment moratorium ended in September, we’ve seen a real spike in customers looking to add support for student loan repayment to their benefits package,” said Edward Gottfried, senior director of product management at Betterment at Work. “Many of those customers have been eager to find a way to marry their student loan benefits more naturally with their 401(k) plan.”

Student loan matches are the latest addition to employers’ collection of education-related benefits, which have included tuition assistance and tuition reimbursement programs, debt counseling and even direct help to pay off student loans. The latest twist, providing free money in 401(k) plans, is widely seen as a potentially effective recruitment and retention tool, particularly in industries that are trying to attract workers in health care, professional services and other fields in which young employees carry higher debt loads.

In a typical workplace plan — be it a 401(k), 403(b) or a government plan — employers can choose to provide a matching contribution on the amount workers save; they might match every dollar each worker contributes, for example, up to 4 percent of their salary. But some student borrowers may delay saving for retirement while they focus on whittling down their debt, which means losing years of free money from their employer.

After hearing about these challenges from its own work force, Abbott, the health technology company, pioneered a program to address it: It has offered a student loan employer contribution, Freedom 2 Save, since 2018. Roughly 1,600 workers participated in the program at some point last year.

“Because Freedom 2 Save was the first program of its kind, there was no road map to follow,” said Mary Moreland, executive vice president, human resources, at Abbott, which received special permission from the Internal Revenue Service to move forward.

The idea seemed to catch on. Later, members of Congress introduced legislation that would codify the feature, and it eventually was written into law as part of Secure 2.0.

At Abbott, employees must contribute at least 2 percent of their salary to their 401(k)s to receive a 5 percent matching contribution. But under its Freedom 2 Save program, if employees can show they are using at least 2 percent of their salary to pay down their student loans, they are eligible for the 5 percent match, without any 401(k) contributions of their own.

For example, if an employee with a starting salary of $70,000 participated in the program, they would accumulate about $3,500 in their first year, or $48,000 over 10 years, the standard term of a student loan. That assumes the worker makes annual student loan payments of at least $1,400; has annual merit raises of 2 percent; and earns a 5 percent market return on average, according to Abbott.

Of course, lower-income workers — and those with less generous matching programs — won’t accumulate as much.

Several retirement plan administrators said their clients are still figuring out how the new benefit might work in practice, and whether it makes sense for their employees. And not all employers will rush in: Some companies have wondered, for example, if the feature might seem unfair if people who chose more costly schools are benefiting. There are also administrative complexities to consider.

“2024 is going to be a year that student loan match provisions could come to some 401(k) plans near you, but it may be closer to the end of the year,” said David Stinnett, head of strategic retirement consulting at Vanguard, which oversees workplace plans for five million participants.

The plight of student debt borrowers has increasingly become a national focus, as tuition costs accelerated faster than income growth and total loan balances eclipsed credit card and other consumer debts. The issue was catapulted into the spotlight again when President Biden made student debt relief a centerpiece of his agenda. After his plan to forgive up to $20,000 in debt for millions of borrowers was shut down by the Supreme Court, the administration turned its focus to more targeted relief, along with the introduction of more generous income-driven repayment plan called SAVE.

In fact, SAVE enrollees who qualify for zero-dollar monthly payments — or those earning less than $32,800 as single borrowers, or those in a family of four with incomes less than $67,500 — wouldn’t qualify for the 401(k) match because they’re not making payments.

Younger workers have been enrolling into workplace plans at higher rates than they have historically, plan administrators say, in large part because they are often automatically enrolled.

“It is just getting people started,” said Rob Austin, head of research at Alight Solutions, which oversees plans for large employers and recently worked with Eli Lilly, the pharmaceutical company, to add the feature. “And then hopefully they will begin contributing on their own behalf.”