The U.S. Internal Revenue Service (IRS) issued guidance on Monday detailing how employers can contribute to the retirement accounts of employees who make student debt payments.
Section 110 of the act seeks to resolve this issue by allowing employers to make matching contributions to their employees’ 401(k), 403(b), governmental 457(b), or SIMPLE IRA plans if the worker makes student loan payments.
Employees can now make student debt repayments via their payroll, making it easier for employers to validate the loan.
“By and large, the biggest thing is that the guidance provides for flexibility in designing the plan in a way that is administrable,” said Kelsey Mayo, director of regulatory affairs for the American Retirement Association (ARA).
“They definitely paved the way to minimize the back and forth between employers and participants because you can independently verify the student loan payment, which is considered a certification,” he said. The guidance “paves the way to make the student loan match an integrated part of the plan rather than an overly administrative burden.”
Financial Burden on Americans
An estimated 2.2 million Americans above the age of 55 still carry student debt, which holds “significant implications” for their retirement security, according to an Aug. 14 report by the Schwartz Center for Economic Policy Analysis.The report gave an example of a 55-year-old man with a median income of $54,600. He had to pay a student debt of $50,000 at 4.3 percent interest.
In order to retire at 65, without any student debt, the individual needs to pay $60,386 over the last nine years of his working life—an amount that could have otherwise gone into his retirement account, the report said.
Furthermore, the situation will become worse if someone were to default on the loan. Delinquency on student loans can lead to Social Security benefits being garnished, thus reducing retirement incomes, the group noted.
“Our research shows that half of all debtors over age 55 who are still in the labor force are in the bottom half of income-earners, making them especially vulnerable and precarious,” the report stated.
The issue of student loans is a major election topic, with one in five respondents stating the matter will influence how they vote in the upcoming November presidential elections.
The Saving on a Valuable Education (SAVE) plan was first announced back in August 2022 with the aim of lowering monthly payments for millions of people. SAVE was blocked by District Judge John Ross in Missouri in June this year.
Late last month, the U.S. Court of Appeals for the Eighth Circuit ruled that a temporary injunction will remain in effect which prevents the federal government from forgiving the principal or interest on outstanding student debts.