- Many Americans feel they have to choose between paying off their student loans and saving for retirement.
- SECURE Act 2.0 would allow companies to add money to 401(k) plans for workers as they repay loans.
- But Congress must pass the bipartisan legislation by the end of the year or start over.
Americans struggling with student debt who are struggling to save for retirement could get a major boost, but it’s up to Congress to do its job — and quickly.
Congress has until the end of the year to pass SECURE Act 2.0, a set of proposed retirement changes to help Americans save more for retirement. Nestled in the wide package is a measure this would allow employers to count employees’ student loan repayments toward their retirement, thereby increasing those employees’ pension contributions. Currently, companies can only match employee contributions.
Student loans have become a flashpoint, with the Biden administration saying it wants to forgive up to $20,000 in student debt for qualified individuals to give them, among other things, the ability to save for retirement. According to a 2018 study by Boston College’s Center for Retirement Research (CRC), graduates with student loans accumulate 50% less retirement wealth by age 30.
“Interestingly, graduate retirement plan assets are not sensitive to the size of their student loans, suggesting that the mere presence of a loan looms large in their financial decision-making,” said the CRC.
What is SECURE Act 2.0?
Earlier this year, the U.S. House of Representatives passed the Securing a Strong Retirement Act of 2022, and the Senate approved the Enhancing American Retirement Now (EARN) Act and the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act. These three bills are the basis of the SECURE 2.0 law, which builds on the SECURE law of 2019.
The SECURE Act of 2019 planned to give part-time workers greater access to retirement benefits and to raise the age at which required minimum distributions (RMDs) from certain retirement accounts must begin at age 72 from age 70 and half.
How would this affect me?
SECURE Act 2.0 is intended to help Americans save for retirement, but a particular proposal that would allow companies to contribute to 401(k) plans for an employee making student debt payments could help solve a problem affecting millions of people.
According to a 2019 study by the MIT Age Lab and TIAA, 84% of adults said student loans limit the amount they can save for retirement. Of those not saving at all for retirement, 26% said it was because they had to invest their money in paying off student loans.
“Employees, including those unable to contribute at all to their 401(k) accounts due to student loans, who participate in the new program could accumulate tens of thousands of dollars in their 401(k) accounts. over a decade, which could be worth hundreds of thousands of dollars in retirement,” insurance company The Travelers Companies said in a statement announcing its Pay It Forward savings program in 2020.
The program considers student loan repayments when determining the company’s 401(k) contribution. “This demonstrates the importance of starting to save for retirement early to realize the benefit of compounding returns over time,” Travelers said.
Although some companies have launched programs like Travelers to help their employees, Congress is formalizing the guidelines in the SECURE 2.0 Act to make it easier for all companies.
Details such as start dates, compliance requirements, tax treatment and whether nonprofits and government employers could offer the benefit have yet to be determined, but Democrats and Republicans support the plan. idea that Americans shouldn’t have to choose between paying off education debt and saving. for their future. They say workers should be able to do both.
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How could such a plan work?
Abbott Labs was the first to launch such a program in 2018 with permission from the IRS. Its Freedom 2 Save program allows employees who contribute 2% of their salary to their student loans to receive 5% of their salary in their 401(k) even if they don’t contribute a penny to that retirement savings account.. Since then, around 1,900 have signed up and more companies have followed suit.
“We’ve heard from our employees that it’s hard to get into the 401(k) match when they have a monster student loan to pay off,” said Jenny Guldseth, director of human resources at Allianz Life, which launched his retirement student loan program in 2020. “We wanted to help them and show that we care about our employees, their personal and professional lives. We knew it would be really meaningful, especially for lower paid employees.
Allianz Life assesses an employee’s student loan repayments and determines the amount the company will contribute to their 401(k) account, up to a maximum of 7.5% of eligible salary consideration. About 2% of eligible employees in the program participate, Guldseth said. The company has 2,100 employees.
“Once I started my career, I started saving and paying off that (student) loan and trying different ways to pay it back,” said Lauren Childers, compliance analyst at Allianz Life. When she started working in February 2021, she heard about the company’s student loan/401(k) program when she was onboarded and signed up.
“I kept making payments on my student loan and saw that balance go down and I knew I was going to get a lump sum payment in the first quarter of 2022 in my 401(k),” she said. declared. Allianz accepts uploaded photos of employee student loan payments as documentation and makes an annual payment into the 401(k).
“It was just nice to know that I was like, ‘Okay, I’m going to put all my money into this (debt payment) and next year I’ll have an extra bonus amount from the company. for the months I wasn’t putting money in my 401(k),” Childers said.
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What other proposals are included in SECURE Act 2.0?
Proposals supported by the House and Senate in the three bills passed by the chambers include:
- Automatic enrollment in new company pension plans
- Increase when required Minimum distributions must begin at age 75 from age 72
- Increase in catch-up contribution ceilings for people above a certain age to be determined
- Financial incentives for contributing to a plan
- Expanded access to pension plans for long-term and part-time workers
- Expanded access to savings credit (a tax credit for contributions) for low- and middle-income workers
- Easy access to retirement accounts for emergencies
The differences have yet to be reconciled in a final bill for a vote in Congress. If adopted, it will be sent to the President for signature. All of this must happen by the end of the year. Otherwise, the whole legislative process would have to start again with the next Congress in January.
“It’s a tight window for passage, but it’s still likely because it’s such bipartisan law,” said Dave Stinnett, a director who leads Vanguard Strategic Retirement Consulting.
Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at email@example.com and sign up for our free Daily Money newsletter for personal finance tips and business news Monday through Friday mornings.
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