Defined Contribution

Legislative Fixes for the Student Debt Tsunami

Legislative Fixes for the Student Debt Tsunami
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2 min 26 sec

A quarter of Americans have student loans, and the U.S. student debt burden grew to $1.5 trillion in 2018. This issue impacts new employees entering the workforce, career workers, and parents who have borrowed to finance their children’s education.

As financial wellness becomes a common theme in employee benefits, and as employers look to manage workforce retirement planning, managing student loan debt has become an increasingly significant concern for many employers.

Proposed legislation aims to sanction student loan repayment programs, allowing employers to support employee efforts to pay off student loan debt—both their own and any debt taken on for their children—while recognizing that paying down debt may hinder employees’ ability to save for retirement.

Congress has introduced a number of bills that seek to address the widespread student loan debt tsunami. Two key pieces of proposed legislation signal the direction that Congress may take:

  • The Employer Participation in Repayment Act intends to expand the existing Education Assistance Program, which covers workers pursuing additional education but does not cover employees who have already acquired student loan debt. The proposed expansion would allow employers to contribute up to $5,250 tax-free to employee student loans per year. However, employer repayment assistance may be considered an uneven employee benefit, providing additional monetary benefits for only those employees who hold student loan debt.
  • The Retirement Parity for Student Loans Act would allow employers to make matching contributions under 401(k) and 403(b) plans based on ongoing student loan repayments. This bill follows a private letter ruling (PLR) issued by the IRS in 2018. The PLR confirmed that employers can tie employer contributions under a 401(k) plan to the amount of student loan repayments made by the employee outside the plan. However, the PLR only applied to the specific plan requesting the ruling, and only addressed the specific issue and facts presented by the plan sponsor.

The Student Loans Act would treat student loan repayments as if they were deferrals into the defined contribution plan, which could then be matched within the plan (rather than the special non-elective contributions described in the PLR). In addition, the Student Loan Act would clarify nondiscrimination testing requirements and safe harbor plans. This type of legislation promotes retirement readiness while recognizing that paying down debt may limit the ability of employees to save for retirement.

Market forces continue to drive innovation in this area. In addition to these bills, some employers are exploring boosting student loan repayments with forfeited vacation time. This perk complements the reality that most Americans don’t use all of their paid time off.

Bottom Line: Employers continue to consider how financial benefits support their employees while looking to balance competing needs. Depending on the employee population and labor planning needs, a student loan repayment program may be a meaningful employee benefit. Plan sponsors should consider how these programs could be implemented, if needed, and how to continually manage them.

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