Pay Off Student Loans or Save for Retirement? Help Employees Do Both
Part of a series | SECURE 2.0 Act Insights
SECURE 2.0 is empowering employers to prioritize employee financial wellness. ADP's new plan feature can help your employees reduce their student loan debt while saving for retirement.
Financial wellness is a hot topic for today's workers. Student loan debt in the U.S. totals an astonishing $1.7 trillion, impacting 45 million American workers. And your hard-working employees may be struggling.
After a three-and-a-half-year pause, federal student loan payments resumed in October 2023. Employees with student loans pay an average of $503 per month—roughly 10% of the median starting salary for a new graduate—placing a huge strain on their financial health and forcing workers to choose between paying down student loans or saving for retirement.
In fact, 82% of U.S. employees say student debt is their top financial concern, holding them back from meeting their savings goals. But the SECURE 2.0 Act gives today's employees an opportunity to do both — with the help of their employer.
Simplified student loan repayment, maximized savings
In a recent webinar on Simplifying Student Debt, business owners learned about a new solution to help reduce student loan debt while also building retirement savings. The student loan retirement matching program lets employers provide a valuable savings option that can help employees pay off their student loans while earning a matching contribution from the employer that is deposited into their 401(k) plan. Simply stated, when an employee who is otherwise eligible to receive matching contributions makes qualified student loan repayments, they may also be eligible to receive matching contributions based on the loan repayments.
To better assist your employees in balancing student loan repayments with saving for retirement, we've compiled answers to some of the most frequently asked questions from our recent Student Debt webinar. These insights aim to provide clarity and guidance on making informed financial decisions.
Q: How does Summer verify the employee's student loan?
A: The primary method Summer uses to verify student loans is by connecting directly to the loan servicer when the employee syncs their loans. Summer can then confirm the loan is held by the same individual currently enrolling in the student loan match program and can confirm the date of the loan and payments to the loan. There is also an optional document review process where the employer can provide statements from the loan servicer to Summer for verification purposes.
Q: How does the student loan match work?
A: The student loan match amount will be based on the plan's matching formula and the employer match will be deposited directly into the employee's retirement plan account. The contribution will not be sent to the student loan servicer.
Below is one example of how the student loan match might work:
Charlie just started working at the Company at a salary of $60,000. He is paying off student loans of $500 per month and does not contribute to his 401(k). Charlie's employer matches employee contributions 100% up to 4% of pay and has a student matching loan program. Charlie's student loan payments are 10% of his pay ($6,000/$60,000). He can receive a matching contribution into his 401(k) plan of $2,400 (100% X 4% X $60,000)
Q: Does the student loan have to be a government-sponsored loan to qualify for the match program?
A: No, the loan does not have to be a federal student loan to be eligible for student loan matching contributions. It may also be from a private institution, such as a bank or credit union.
Q: Does the student loan matching contribution follow the retirement plan's vesting schedule?
A: Yes, any student loan matching contributions the employee receives would be subject to the plan's vesting schedule. If the employee leaves the company prior to the end of the vesting period, any unvested matching contributions will be forfeited.
Q: Are parents who have taken on student loan debt for their child eligible to receive student loan matching contributions?
A: Yes. To qualify for student loan matching contributions, an employee's repayment of a qualified education loan must be for the higher education expenses of the employee, the employee's spouse or the employee's dependent when the debt began.
Lead the way to employee financial wellness
Saving for retirement is challenging for employees with student debt. By offering innovative options to help reduce their financial stress, your company can stand out from the competition when it comes to hiring while significantly improving the financial well-being of your people.
To help make saving for retirement easier and more accessible for everyone, learn more about ADP's student loan solutions or register and watch the webinar for more information.
Registered representative of ADP Broker Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07068 and Associated person of ADP Strategic Plan Services, LLC (SPS) an SEC Registered Investment Adviser. Registration does not imply a certain level of skill or services.
ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.
M-540955-2024-05-03 and M-565396-2024-06-26
