A recent IRS ruling opens the door for millions of workers who make student loan repayments to receive matching contributions into their 401k account.
Totaling over $1.41 trillion nationwide, student loan debt is a real problem. Young people walk away from college with both their diploma and a crippling amount of debt.
We’re setting an entire generation up for failure.
And while I have been lucky enough to pay off my student loans, my daughter is only a few short years away from college. That scares the hell out of me.
I stress to my kids the importance of saving for their future but how is someone in their twenties or thirties supposed to establish themselves in their career, start a family, and save for retirement while they are burdened with absurd student loan payments?
And you don’t have to go to Harvard or Yale to find yourself deep in debt. These days, even an average college will cost you.
Inevitably, something has to give.
Here’s the problem:
While financial experts and personal finance bloggers alike continuously advise you to max out your 401k, most people just simply can’t afford that.
So when faced with crippling student loans, rent, and other bills that need to be paid, 401k contributions are often sacrificed.
After all, retirement is a long time away and you’ll have plenty of time to catch up later. Right?
Well, the problem is that waiting until you’re in a better financial situation to start saving for retirement will significantly reduce your nest egg when you finally reach retirement.
Even worse, you can put off saving forever while you wait for the right time and then be left with nothing at all in retirement.
SLR Nonelective Contributions – A New Hope
A new ruling by the IRS might just make it possible for you to both pay down your student loans and save for retirement.
It’s still early and there are many details to be worked out, but here’s what we know so far.
The ruling technically only applies to a single employer who specifically asked the IRS for an opinion because they wanted to offer an employer match to their employees who are saddled with student loans. The IRS opinion letter states that the specific provisions suggested by this company do not violate any sections of the code.
That’s great news!
Because if one company is looking to offer this benefit and the IRS says it is okay then you expect many others to be interested and before long this will likely be written directly into the code and offered widespread.
Here’s a breakdown of how the match would work in the specific example laid out in the IRS ruling (keep in mind your company’s match could be different):
Let’s say you earn $4,000 per month. As long as you make a student loan payment equal to at least 2 percent of your pay ($80), you’d receive a student loan repayment nonelective contribution (SLR NEC) of 5 percent ($200) into your 401k at the end of the year.
So just like that you’d have $2,400 contributed into your 401k and all you had to do was continue making your student loan payments on time!
It’s important to remember that nothing is finalized yet. It’s possible there will be no government support for this idea and it will never get off the ground.
BUT, I think it will happen. Student loan debt is a huge problem and I think this is an effective way for people to pay down their debt and save for their future at the same time.
It may take some time to hammer out all the details and the final product might not look exactly like what we’ve heard so far, but personally I think it’s only a matter of time.