Time’s up! Student loan payments resume next week: Will retirement savings suffer?

Interest has already begun accruing on student loans as of September 1, and repayments are set to begin October 1 after a three-year pause enacted as a COVID-19 relief measure.

Many young workers took advantage of the emergency payment pause to build retirement savings. Fidelity’s Q2 2023 Retirement Analysis found that 72% of student loan borrowers contributed at least 5% to their 401(k) during the pause, compared with 63% beforehand, and there has been a 5.8% decrease in student loan borrowers with a loan out against their 401(k) during the pause.

Financial services company Betterment at Work, which offers investing and retirement solutions tailored for small and medium-sized businesses, found student loan borrowers were already worried about the resumption of loan payments last year. According to its Financial Wellness Barometer, almost half of student loan borrowers don’t feel financially ready to resume payments and two-thirds said that their student debt impacted their ability to save for retirement.

“The end of the moratorium on payments is going to negatively impact their ability to save and certainly going to exacerbate the stress they are feeling,” said Edward Gottfried, senior director of product management at Betterment at Work. Gottfried noted the recent rapid cost of living escalation over the past year compounds anxiety around the resumption of student loan repayment and the ability to save for retirement while still meeting day-to-day expenses.

Gottfried shared his thoughts on how the resumption of student loan repayments could impact how employees save for their future and how employers can help them do both.

Q. Why should employers care about helping employees manage student debt/?

A. Our study found that 51% of employees thought their employer should play a role in helping them pay off student loan debt, and what’s interesting about that was that it was skewed pretty aggressively toward younger demographics: 62% of respondents who identified as Gen Z and 60% of millennial respondents felt strongly that their employer should be taking a more active and participatory role in helping them manage student debt.

Q. Is the concept of employers helping employees with the cost of education new?

A. There has been a lot of increased attention on how large the debt crisis has become over the past few years relative to where it was a decade ago. It’s a pretty massive increase in the amount of debt held by Americans that is just purely student loans. There have been a couple of different legislative moves that have opened up some new capabilities or new tax treatments for employers who are looking to participate in repaying student debt. Historically it has been more common for employers to offer a tuition stipend for employees who are actively in some kind of educational program during their employment because there were tax benefits employers could take for making tuition reimbursement payments. Legislation in early 2020 (Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act) expanded that to include student loan repayment, so an employer can take advantage of the same tax preferential treatment to now help pay down the debt employees accrued from previously going to school.

Q. How does the SECURE 2.0 Act expand on those capabilities?

A. The SECURE Act responded directly to some of the tension between how to think about saving for retirement vs. how to stay on top of student loan debt. There’s a new provision that employers can start taking advantage of on Jan. 1, 2024, which will allow them to treat qualified loan repayments as eligible for an employer match in a 401(k). Employees who are not contributing to their 401(k) at all, or who are not contributing enough to max out the match that their employer is offering, can instead provide evidence of the required monthly payments they’re making toward qualified loans, and their employer can elect to treat those payments as part of what makes them eligible for the 401(k) match. It’s a really exciting way for an employer to demonstrate its commitment to supporting employees who have student loans, but do it without opening up incremental budget beyond what they have already planned for an employer match on the 401(k).

Related: Student loan payments are resuming: It’s time to roll out financial wellness benefits

Q. What can employers do to help employees deal with student debt in addition to saving for retirement?

A. It is incumbent on employers to be asking their 401(k) provider about how they can hit the ground running at the beginning of next year offering a match to more of their employees than what they’ve historically been able to do. Anything that an employer can do, any incremental steps that they can take, to help an employee manage those two massive stressors and make them feel like they are less in competition with one another is incredibly impactful to the employee’s mental health. Employers need to be doing what they can to stay on the pulse of what’s possible and what’s new and then ask the 401(k) provider what they can be armed with to help educate their employees. The benefits you offer as an employer are only as good as how aware your employees are that they exist.

Q. Should employees ask their employers for help with student debt if their employer doesn’t already provide it?

A. Absolutely. Employers often wait to hear employee demand for different benefits before making the leap to them. While I think the primary burden for education and understanding of what is possible in the benefits space exists with the employer, an employee who’s not feeling that progress and not feeling that commitment should feel comfortable letting the HR team at their employer know that these things exist and asking if their company can take the leap as well.