The Big Threat To Your 401(k): Student Loan Debt
What does student loan debt have to do with retirement? A lot. Student loan debt is eating into Americans’ 401(k)s, threatening retirement security. “For young people, it’s a growing problem,” says Craig Copeland, senior research associate at the Employee Benefit Research Institute.
401(k) workplace retirement plan balances are lower for those with student loan debt than for those without it, Copeland found in new research he unveiled at an EBRI policy forum last week. Families ages 45 to 54 without student loans have a median 401(k) balance of $80,000 versus just $46,000 for those with student loans. Families with heads younger than 35 without student loans have a median $11,000 401(k) balance versus $8,000 balance for those with student loans.
“It’s impacting their ability to save for retirement,” says Fidelity Investments’ head of financial wellness Cindy Silva. Fidelity initiated a program in January 2016 to help customer service associates pay off up to $2,000 of student loan debt a year (with a $10,000 lifetime max), and 8,400 employees have taken advantage of it so far. They’re mostly younger employees but some older ones too (10 in the 55-plus group). Silva says the program has helped with attrition, and she hopes it will help boost 401(k) balances too. The reps with student loan debt defer 6% of salary into their 401(k), while those without student loan debt defer 7% of salary. “As soon as we can get them out of debt, that will help with retirement savings,” she says.
Kate Winget, chief sales officer at Gradfi, a fintech company that piloted student loan repayment programs to 100 employers in 2016, is now working with 350 companies across the U.S., including PricewaterhouseCoopers and Peloton. “The workforce is asking for it,” she says. Employers can customize the programs to focus on retention or key hires, and they can be limited to just the worker’s loans or opened up to pay down debt for anyone in your household--to cover spouse’s loans and parent PLUS loans.
One limitation to student loan repayment programs is that the employer payments count as taxable income to the employees. Rep. Rodney Davis (R-Ill.) has introduced a bill in Congress that would let employers make up to a $5,250-per-employee tax-free contribution toward their workers’ student loans.
What about measures to reduce the reliance on student loans from the start? Silva says Fidelity is working on an advisory platform that will help employees with students nearing college age to choose the right college from a financial and employment perspective. “Boston College isn’t going to give you ROI if you’re going to be a kindergarten teacher,” she says. And Gradfi’s Winget says employer funding of 529 college savings plans will be the future.
For now, if you’ve got student loan debt, consider its impact on your 401(k). Make it a priority to save enough in your 401(k) to grab any employer-match money. “It becomes a choice, whether you’re going to contribute to your retirement account,” Copeland says.