How the 401(k) Match for Student Loans Works

Choosing between paying off student loans and saving for retirement is a reality for many Americans.

But that’s about to change.

A provision in the Secure Act 2.0 permits employers to consider student loan payments as qualifying contributions toward retirement plans with the goal of enhancing retirement savings while paying off student loan debt.

Keep reading to find out how it works, who is eligible, and if it’s the right option for you.

The Student Loan Debt Crisis

The Federal Reserve estimates student loans are costing more than $1.6 trillion for borrowers as of 2024.¹

Data shows it takes an average of more than 20 years to pay off student loans.²

The struggle to pay these loans is why student loan repayments were paused during the pandemic. 

Fast forward 3 years, in September 2023, student borrowers started receiving bills, and interest started accruing again.

Despite the advanced notice, student borrowers were not prepared.

According to Business Insider, “Nearly 9 million student-loan borrowers missed their first payments in October [40% of borrowers].”³

Given that the average monthly student loan payment is $503 and with the increased cost of living, it is easy to see why so many Americans missed their first repayment check.⁴

We get it. It’s hard to prioritize saving for your future retirement when you are stuck paying off your past.

That’s one reason many young people put off saving for retirement. They often can’t do both.

But, in doing so, they miss out on the compound growth that comes from early retirement contributions. 

That’s about to change thanks to the Secure Act 2.0 provision that allows employers to offer student debt relief through matching contributions.

[Related Read: 5 Major Changes Coming to Your 401(k) in 2024]

How the 401(k) Match for Student Loans Works

The Secure Act 2.0 that passed in December 2022 has over 90 provisions to encourage more people to save for retirement in workplace plans and IRAs and to help grow their retirement savings. 

A big provision for 2024 relates to student loans and retirement. 

Effective January 1, 2024, employers may offer student debt relief through workplace retirement plans, such as 401(k)s, 403(b)s, 457s, and SIMPLE IRAs, by making matching contributions tied to a participant’s student loan repayments.

Instead of depositing a percentage of your paycheck to your 401(k) to max out the employer match, you will get the same employer match benefit when you make a qualifying loan payment.

Sounds great, but there are rules you need to be aware of. 

According to the rules, it’s up to the discretion of your employer whether or not they add this benefit to the plan documents. 

So not every plan will offer this. 

While employers can make matching contributions to your retirement plan account based on your student loan payment amount, the contribution amount cannot exceed the total matching contributions available in the plan.

Employer matching contributions are required to follow the same percentage, eligibility, and vesting rules as traditional 401(k) employer matching contributions.

This is why it is critical to know your vesting schedule. 

If you leave your job before you are fully vested, you could potentially lose some or all of your non-vested retirement savings. 

If the money in your 401(k) is from employer-match contributions, you run the risk of having no retirement savings. 

So, if you do not think you will stick around for at least 3 to 5 years with your current employer, taking advantage of the student loan match probably isn’t right for you. 

Another thing to remember: Employer matching contributions for this new provision still apply to annual contribution limits. 

For 2024, the 401(k) contribution limit is $22,500. Those ages 50 or older can contribute an additional $7,500.

[Related Read: Big Catch-Up Contribution Changes for 2024]

It’s important to recognize that the IRS has not provided much guidance for employers about this new provision.

A big issue that plan sponsors face is verifying the authenticity of employees’ student loan payments.

Any employer offering a 401(k), 403(b) 457, or SIMPLE IRA is eligible to offer a Secure 2.0 student loan match as an employee benefit.

If you want to see this in your plan, it is best to contact HR and ask them to add this benefit. 

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Sources:

1. https://www.businessinsider.com/personal-finance/how-to-secure-2-0-student-loan-match-works?r=MX&IR=T
2. https://www.usatoday.com/money/blueprint/student-loans/average-student-loan-debt-statistics/
3. https://www.businessinsider.com/student-loans-what-happens-if-i-miss-payments-debt-relief-2023-12
4. https://educationdata.org/average-student-loan-debt

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