Balancing Retirement Savings and Debt Repayment

As the student loan payment pause comes to an end, borrowers are faced with the challenge of juggling retirement savings and debt repayment. Experts warn that the resumption of loan payments may cause individuals to prioritize short-term financial needs over long-term retirement goals.

During the student loan forbearance program that began in March 2020, a significant number of federal borrowers took advantage of the pause to bolster their retirement contributions, according to data from Fidelity. The percentage of student loan borrowers contributing at least 5% of their pay to their 401(k) increased from 63% to 72%.

A recent study conducted by Corebridge Financial and Morning Consult reveals that three-quarters of borrowers anticipate that resuming student debt payments will impact their ability to save for retirement. Additionally, a survey by Nationwide found that 29% of borrowers aged 45 and over plan to adjust their retirement plan contributions in order to meet their student loan obligations.

The impending increase in consumer stress is a concern for Andrew Housser, co-founder and co-CEO of Achieve, a digital personal finance company. He emphasizes the importance of carefully managing one's retirement savings despite tight budgets, as financial advisors often stress that taking out a loan for retirement is not a viable option.

"It’s really important not to hinder your own retirement," advises Chelsea Ransom-Cooper, founding partner and director of financial planning at Zenith Wealth Partners.

As the student loan payment pause ends, borrowers must find a balance between repaying their debt and securing their future financial well-being. The decisions made in the coming months will have a lasting impact on individuals' retirement plans.

Balancing Act: A New Initiative to Help Workers

The Secure 2.0 law, set to begin in 2024, brings a new benefit for employees. Under this law, employers can make contributions to their workers' retirement plans based on their qualified student loan payments. To take advantage of this benefit, employees need to certify their student loan payments, and their employers will match the contribution to their 401(k) accordingly. This means that instead of contributing directly to their retirement plan, employees can pay off their student loans and still receive the matching contribution.

Not only does contributing to a retirement account provide financial security for the future, but it can also lead to lower monthly loan payments. Those who participate in the government's income-driven repayment plans will see a reduction in their monthly loan payment. By making tax-deferred retirement plan contributions, employees lower their adjusted gross income (AGI), which in turn impacts the expected monthly contribution towards loans. Matt Watson, the founder and CEO of Origin, a money management platform accessed through the workplace, highlights that this benefit may take some time to take effect if the calculation is based on the previous year's AGI.

Additionally, certain companies go the extra mile by offering assistance in repaying student loans. For instance, New York Life provides eligible employees with a monthly $170 contribution towards their loan repayments, along with valuable advice and online planning tools. This program supports employees for up to five years and can contribute up to $10,200 towards reducing their student loan debt.

Clients advised by Ransom-Cooper have taken on additional consulting work to expedite the process of paying down their debts. By allocating extra funds towards principal payments, individuals can make significant progress in reducing their overall loan burden. Not only does this strategy alleviate financial stress, but it also brings a sense of fulfillment as clients explore side ventures that often include small business services.

Overall, the implementation of the Secure 2.0 law introduces a much-needed solution for employees juggling student loan debt and retirement savings. It not only relieves financial pressure but also offers opportunities to make substantial progress towards financial freedom.