When it comes to financing a college degree, student loans have become the norm. According to the Congressional Research Service, nearly 43 million individuals — about one in six Americans — have federal student loan debt. The burden of keeping up with your payments can make it difficult to save for other goals, such as building an emergency fund or saving for retirement. Thanks to new legislation, student loan borrowers can now get some relief. The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 classifies student loan payments as elective deferrals for the purposes of matching contributions to retirement plans. This change will have a big impact on workers who couldn’t afford to save for retirement — and missed out on their employer’s matching contributions — because of their student loan debt. Here’s how the Secure Act 2.0 works, and what you have to do to benefit from these changes.
What Is the Secure Act 2.0?
The original SECURE Act was signed into law in 2020 by then-President Donald Trump. The SECURE Act made significant changes, including allowing workers to contribute to traditional Individual Retirement Accounts (IRAs) after reaching the age of 70.5 and allowing individuals to withdraw money from 529 college savings plans to repay student loan balances without penalty. The SECURE Act 2.0 was passed in 2022, and it made further changes to retirement plans. One of the most significant changes for workers is how student loan payments are classified; under the SECURE Act 2.0, qualifying student loan payments count as elective deferrals for the purpose of employer matching contribution programs. What does that mean for you? If your employer has a matching contribution plan for retirement accounts and you make payments toward student loan debt, you may qualify for matching contributions to your retirement account — even if you don’t put a dollar of your own money toward retirement. The SECURE Act 2.0’s changes affect contributions made after December 31, 2023 to 401(k), 403(b) or SIMPLE IRA plans.
How Does the Secure Act 2.0 Affect Employer Matching Contributions and Student Loans?
Previously, you may not have been able to afford your student loan payments and contribute to your employer retirement plan. To avoid late payments, fees or even wage garnishment, you may have skipped setting aside money for retirement so you could keep up with your loan payments. As a result, you could have missed out on valuable matching contributions. Just how much did that problem affect you? Consider this information: According to Vanguard, a leading investment advisory company, nearly half of Vanguard employer retirement plans provided matching contributions. The most common structure of an employer match program was $0.50 per dollar that an employee contributed, up to 6% of the employee’s pay. In the U.S., the average annual wage was $61,900 in 2022, the last available data. Assuming you earned that much and your employer followed the most common structure for their matching contribution program, you could qualify for up to $1,857 per year in annual employer contributions. If you couldn’t afford to contribute to your retirement plan because of your student loan payments, that means you’ve been missing out on nearly $2,000 per year of free money from your employer. Considering compound interest and market growth, over time, the loss can be even more significant. The Secure Act 2.0 changes things for workers; now, you can still benefit from your employer’s matching contribution programs even if you can’t afford to contribute money to retirement yourself. As long as you make payments towards a qualifying student loan, you’ll qualify for your employer’s matching contribution program, helping you save for retirement while you tackle your debt.
How Do I Take Advantage of the SECURE Act 2.0 Changes?
The SECURE Act 2.0 changes have already gone into effect, so employers can allow payments made in 2024 to count as elective deferrals for the purposes of matching contributions. To take advantage of these changes, follow these steps:
- Check your loan eligibility: Under the guidelines of the SECURE Act 2.0, qualifying student loans are loans incurred by the worker to pay for their own qualified education expenses; both federal and private student loans would fit into this category and benefit from this change. Currently, the language seems to indicate that parent student loans, such as Parent PLUS Loans, would not be eligible, but discussion on that issue is ongoing, and future clarification may be issued.
- Talk to your human resources department: Although employers of all sizes can take advantage of the SECURE Act 2.0’s changes, companies aren’t required to allow student loan payments to count toward retirement matching contribution programs. Set up a meeting with your human resources representative to discuss how your employer is handling matching contributions and, if it’s permitted, what you need to do to have your student loan payments qualify for the employer match.
- Keep track of your payments: To qualify for matching contributions, you’ll have to go through a yearly review process to verify your student loan payments. To ensure you get credit for all of your payments, keep detailed records, including your loan statements, loan agreement or promissory note, and a list of dates and payment amounts for all of your payments.
