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Many workers with student loans wonder if they should prioritize paying down their debt or saving for retirement. Starting in 2024, many won’t have to choose anymore.
In the new year, some employers will begin making matching 401(k) contributions into a retirement account for their employee’s student loan payments, a change that could be “transformational” for borrowers who may have trouble saving for retirement while paying down their debt.
That’s thanks to a provision in Secure Act 2.0, a retirement bill that became law in late 2022. Even if workers aren’t contributing to their own retirement, employers who adopt the policy will make the matching contributions into a tax-advantaged account. So, if a worker is paying $300 per month on their loans, the employer would treat that the same as contributing $300 to their 401(k).
Aside from the student loan matching provision, the legislation also upped the age for required minimum distributions and allows unused money in 529 accounts to roll over to a retirement account penalty-free.
Different provisions in the legislation have different implementation dates. 401(k) matches for student loan payments will begin after Jan. 1. That comes just a few months after federal student loan payments resumed after a three-and-a-half year hiatus.
“It’s a transformational provision,” Laurel Taylor, CEO and founder of Candidly, a student debt and savings optimization platform, previously told Fortune. “It’s massive in terms of transforming financial outcomes for those completely sidelined.”
Employers who opt into the match need to offer “consistent” treatment to all employees. That means if the company offers a 6% 401(k) match for contributions, a person paying down their student loan debt would also get 6%. But exactly how the match is structured is dependent on each company. Employees will certify that they have made qualified student loan payments annually.
The provision also applies to 403(b) accounts, SIMPLE IRAs, and governmental 457(b) plans.
A game-changer for retirement savings
It’s not difficult to imagine why this new law could be a game changer for many workers. Around 43 million Americans have student loan debt totaling around $1.6 trillion, and the majority of the debt is held by Americans aged 25 to 49—those in their prime working years.
Financial experts said many borrowers, already working with a strained budget thanks to inflation and other factors, would struggle to save for retirement once the monthly bill was added back into the mix. In fact, 75% of borrowers say the resumption of student loan payments will impact their ability to save for retirement, according to a recent survey. And college graduates with student loan debt at the age of 30 have half of the retirement savings of those without student debt, on average.
But the new provision could help, if employers institute it. As of now, workers who cannot contribute to their retirement account because of their debt are effectively taking a pay cut if their employer offers a retirement match. That changes in the new year.
Though all workers with debt can benefit, it will be especially helpful for younger workers, who can begin growing their retirement nest egg and see the benefits of decades of compounding returns. Putting saving for retirement off even for a few years can greatly reduce a worker’s overall net worth.
