After College: A New Way to Ease Retirement Savings While Repaying Student Loans

Last week we reported that 44 million Americans are struggling to repay $1.5 trillion in student loan debt, that Millennials have the most college debt, and that 66% of that age group have nothing put away for retirement, while only 5% of them are are on track with their retirement savings.

If these numbers prove nothing else, it’s that saving for retirement and repaying student loans at the same time is difficult, if not impossible.

But a recent Internal Revenue Service (IRS) private letter ruling (PLR) can help fix this. The PLR offers links an employer’s 401(k) contributions for an employee to that employee’s student loan payments. For any pay period in which the employee spends at least 2% of her eligible compensation (usually her salary) repaying her postsecondary loans, her employer may contribute an amount equal to 5% of such compensation to her 401(k) plan

Here’s an example — a bachelor’s degree recipient owes $28,650 (the national average) on her student loans and earns an annual salary of $36,000. She pays $294 toward her student loans in each of her 12 monthly pay periods That’s way above 2% of her eligible compensation for each of those pay periods. So with IRS permission, her employer may contribute $150 a month (an amount equalling 5% of her eligible compensation) to her 401(k).

The PLR covers only the company that requested it, but it’s expected to motivate other employers — which offer 401(k) plans to 67% of workers — to seek IRS approval for similar arrangements.

Interested employees should consult their Human Resources offices, because the PLR can be helpful to both employees and employers.

The employee wins because:

• Her employer’s 5% contribution grows her 401(k) even her relatively high student loan payments severely limit her contributions to it;

• Those student loan payments reduce her college debt faster, helping her avoid close to $1,700 in interest expenses; and

• Her federal taxes are lowered because the IRS doesn’t tax employers’ 401(k) contributions, but it does tax some other fringe benefits, including student loan repayment assistance.

Her employer wins because it:

• Gains a tool for recruiting well-educated employees — 65% of today’s college graduates have student debt, 80% of them want student loan repayment options in their benefit packages, and 81% of all workers say retirement benefits are a major factor in choice of jobs;

• Creates an employee retention incentive, as oday’s workers say they’d switch employers for better retirement benefits; and

• Earns a tax deduction on its 401(k) contributions.

Employers that adopt/adapt the PLR can help curtail their employees’ struggles to both repay student loans and save for retirement. That’s a win-win for everyone!

Contact College Affordability Solutions for a free consultation if you’re looking for alternative strategies for managing your college debt.

Before and During College: Massive Student Debt Is Undercutting Millennials’ Financial Goals, But That Can Change!

By month’s end millions of college borrowers who graduated last spring will have made their first payments on their postsecondary debts. So College Affordability Solutions is designating this “Student Loans Month.”

Every Wednesday in February we’ll post an article about how to keep our national student loan crisis from becoming your personal student loan crisis. Today’s focus is on strategies to minimize borrowing.

First, some facts . . .

Student loans are the second largest form of U.S. consumer debt. They’ve more than doubled since 2010; 44.2 million Americans now owe a record $1.6 trillion on them.

Millennials (ages 30 – 39) owe the most on student loans, and their debts undercut their efforts to meet important financial goals. For example, while 89% of millennial renters hope to buy homes, 48% have nothing saved for down payments. Likewise, two-thirds of working millennials have no retirement savings.

Good news? The improving economy helped Americans borrow 15% less for college in 2017-18 than in 2010-11.

But the economy is undependable, so other strategies are needed. They fall into three categories:

Personal Strategies

Saving and investing as much as possible for college as early as possible helps families significantly reduce student borrowing.

Aggressively seeking scholarships before and during college also helps, as does part-time employment while in high school and college. When selecting schools, comparing financial aid offers and net prices is critical. Starting at community colleges can reduce student costs and indebtedness.

There are various ways to cut tuition, housing, textbook, transportation and other postsecondary costs. And those who graduate early or on-time not only enter the workforce and start making money faster, they also lower their educational costs and borrowing needs. Toward this end, students should earn college credits in high school and avoid dropping postsecondary courses they’ll need to take (and pay for) again.

Finally, everyone interested in curbing college debt should should push institutions and elected officials to implement strategies under their control.

Institutional Strategies

One academic year now costs an average of $17,930 at community colleges and $25,890 at public 4-year colleges. These institutions need to redouble their efforts to contain their charges for tuition, fees, books, class supplies, room, and board.

Governmental Strategies

State higher education appropriations remain $1,000 per student lower than before the Great Recession, so legislators should help limit tuition increases by boosting appropriations to their institutions.

From 2008 through 2018, public 4-year college tuition and fees rose 55%, causing net college prices to rise. Therefore, Congress and the legislatures need to significantly increase grant and scholarship appropriations to reverse this trend.

Today’s students borrow too much, but they don’t have to. Pursuing the personal and other strategies listed above can help downsize college costs and borrowing.

Want more information on strategies to limit reliance on debt to pay for higher learning? Contact College Affordability Solutions at (512) 366-5354 or to arrange face-to-face or telephone consultations, which we provide at no charge to students and families.