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.

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