How the end of the student loan pause could affect retirement saving

Saving for retirement isn't going to be a priority for many workers when federal student loan payments resume this fall after a 3½-year hiatus.

But an increasing number of employers are extending new perks to workers that recent legislation made possible, including loan repayment assistance and contributions to 401(k)s for those who are paying down loans but not saving on their own.

One company that provides such services — including through 401(k) record keepers like Vanguard, Empower, PNC, Lincoln Financial Group and UBS — is Candidly, whose CEO and founder reports increasing business by a factor of 10 over the past year. The firm works with about 800 employers and will soon be available to as many as one in five people in the U.S. through its relationships with 401(k) providers.

“We saw massive demand across employers and the workspace more broadly,” CEO Laurel Taylor said. “There were both headwinds and tailwinds — the demand would have been even more explosive had there not been the backdrop of the student loan payment moratorium.”

In March 2020, the Trump administration put a freeze on federal student loans, allowing borrowers to pause their payment schedules without incurring penalties. That freeze was extended several times by the Biden administration, but loan payments are set to resume in October. Although President Joe Biden issued an executive order that would have canceled as much as $20,000 in student loan debt for many borrowers, the Supreme Court ruled against that order in June.

In response, the administration has rolled out a new forgiveness program that affects some long-term borrowers, but is far less comprehensive. It also includes provisions for income-based repayment options.

IN A BIND

Now many borrowers, including graduates who started their careers during the pandemic and may not ever have had to make loan payments, are bracing to get their houses in order.

Two-thirds of recent grads who paused loan payments said they have no idea how they'll be able to start making them, according to data published Monday by Fidelity Investments.

A student debt assistance tool provided by that firm suggests that more workers had directed money toward 401(k)s as a result of the payment hiatus, with the proportion of those saving at least 5% of their income going from 63% to 72% during the pandemic. There was also a decrease in borrowing from 401(k) accounts, at 13.1% versus 18.9%, respectively, according to Fidelity.

About one in three U.S. households expects that their monthly student loan payments will be $1,000 or more, according to survey data published late last month by Empower. There are nearly 44 million people who have federal student loans, nearly a third of whom stopped making payments during the forbearance period, that firm found.

To help cope with the resuming payments, many borrowers are considering getting roommates, trading in their cars, applying for second jobs, moving to more affordable areas or delaying home purchases. Worse, nearly a third said that they plan on amassing credit card debt, although borrowers are also planning to reduce their discretionary spending, Empower found.

While only 14% of respondents said they regretted the decision to go to college, nearly a quarter said they wished that had done more research before agreeing to loan terms, according to the June survey of more than 2,200 people.

SAVINGS HABITS

While the payment pause led some workers to put more money into 401(k)s, that was not the case for many. Savings habits initially ticked up, but that trend quickly reversed, Taylor said, citing the company’s own data.

“What we’ve seen over the last two years is a depletion in savings, an elimination of savings and a significant increase in revolving consumer debt,” she said. “The intention of the moratorium was to give users some relief so they could save, but that is the complete opposite of what we have seen in the data.”

There are multiple factors behind that, with inflation and rising housing costs playing roles, Taylor noted.

For many who will have to start making payments again, “this is a huge financial shock,” she said.

EMPLOYER OPPORTUNITIES

A provision in the Secure 2.0 Act that goes into effect next year will allow employers to consider the student loan payments that employees make as the equivalent of 401(k) contributions, thus making them eligible for company matches.

That concept is several years old and has been used by a small number of retirement plans, including Abbott Labs, which received the IRS’ blessing for that arrangement via a private letter ruling. The new law extends that ability to all employers that offer 401(k) matches.

“Employers have been waiting for this policy lever to be pulled since 2018,” Taylor said. “This is a way of bringing in 47 million net new participants … into retirement savings.”

For workers who would avoid 401(k) contributions altogether while paying down student loan debt, the implications are big. It could mean an extra $450,000 in retirement savings, if those employees only receive the employer’s contribution to their 401(k)s for 50% of the time they’re paying off loans, Taylor said.

Another recent development came via the Consolidated Appropriations Act of 2021, which specified that companies that provide tuition reimbursement for workers can use those funds to help pay down student loans, she noted. Notably, that benefit is a tax incentive for employers.

Last year, those types of payments increased by 3,700% in Candidly’s system, she said.

Currently, just over 70% of the company’s clients set aside money for tuition reimbursement, with 17% also having a student loan repayment incentive available for those funds. Taylor said she expects that to increase to 31% over the next year.

POTENTIAL

Eighty percent of respondents to Fidelity’s College Savings plus Student Debt survey who have loans said they would be more likely to apply for jobs that have a student loan and retirement savings benefit. Nearly half of employers currently offer such benefits or plan to, according to Fidelity.

And potential demand for help with student loan payments is evident by the number of 401(k) have those services for clients.

One firm, Vestwell, recently announced a deal to acquire student loan benefits company Gradifi Solutions from Morgan Stanley.

Vestwell plans to have the 401(k) matching provision available through Gradifi next year, when that aspect of Secure 2.0 goes into effect, said Douglas Magnolia, president of Vestwell State Savings.

“That has potentially big impact if you are an employee with student loan debt,” Magnolia said. “We expect more employers to be looking to offer that. It’s a really strong employee benefit. It’s great for recruitment.”