With the student loan payment pause coming to an end, borrowers will soon have to balance saving for retirement with paying down their debt. The problem, say experts, is that after a three-plus-year reprieve, the shock of resuming payments may mean the more distant goal will fall to the wayside.
Many federal borrowers used the pause to boost their retirement contributions, data from Fidelity suggests. The number of student loan borrowers contributing at least 5% of pay to their 401(k) increased from 63% to 72% during the student loan forbearance program that began in March 2020, the company found.
But the payment pause lifts in October, and many student loan holders will feel the squeeze. Estimates for the average federal monthly loan payment range from about $270 on the low end to around $400 on the higher end, according to Mark Kantrowitz, student loan expert and author of How to Appeal for More College Financial Aid.
Three-quarters of borrowers said that resuming student debt payments will impact their ability to save for retirement, according to a new study released by
Corebridge Financial
and Morning Consult. A separate survey from Nationwide found that 29% of borrowers age 45 and over plan to adjust their retirement plan contributions to keep up with their student loan payments.
“You’re going to see a significant increase in consumer stress,” says Andrew Housser, co-founder and co-CEO of Achieve, a digital personal finance company.
When workers need to tighten their budgets, retirement plan contributions might seem like the low-hanging fruit. Yet it’s important not to shortchange your 401(k). As financial advisors like to say, you can’t take out a loan to fund your later years.
“It’s really important not to hinder your own retirement,” says Chelsea Ransom-Cooper, founding partner and director of financial planning at Zenith Wealth Partners.
Soon, a new initiative could help workers with the balancing act. The Secure 2.0 law allows employers to make contributions to employees’ retirement plans based on their qualified student loan payments. The new benefit will begin in 2024 for companies that choose to participate. If your plan offers the benefit, you can certify that you’re paying off student loans and your employer will contribute the company match to your 401(k) based on those loan payments, rather than the amount you contribute to your retirement plan.
Contributing to a retirement account could even lower monthly loan payments for those participating in one of the government’s income-driven repayment plans. These plans base your monthly loan payment on a calculation involving your family size and adjusted gross income. Tax-deferred retirement plan contributions lower your AGI, which in turn may lower your expected monthly contribution, says Matt Watson, founder and CEO of Origin, a money management platform accessed through the workplace. (If the calculation is based on your prior year’s AGI, you’ll have to wait a bit to benefit.)
Some companies are also offering their employees help repaying their student loans. For example, New York Life offers eligible employees a monthly contribution of $170 toward their student loan repayments, as well as student-loan advice and online planning tools. The program lasts for five years, and in that time the company can contribute up to $10,200 toward an employee’s student loan debt.
Ransom-Cooper says some of her clients have taken on consulting work on the side to pay down their debt more aggressively. To the extent that you can pay extra and put that money toward principal, you’ll make quicker progress paying off your loans. As a bonus, she notes, clients have found satisfaction in their side ventures, which have included small business services.
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