IRS to Allow 401(k) Matching via Student Loan Debt Payments

Employers Can Start Counting Student Loan Debt Payments as 401(k) Contributions

Due to a new private letter ruling issued by the IRS on August 17th, it’s now easier than ever before for employers to provide student loan debt benefits via their 401(k) retirement plans.

How? The new ruling states that employers can start linking the amount of their 401(k) matching contributions to the amount of money that the employee is paying toward their student loan debt!

This means that the employee doesn’t have to be actively contributing anything to their 401(k) plan, and can simply be attempting to pay down their student loans, but still receive the 401(k) matching benefits from their employer!

This is especially great news for anyone who’s NOT participating in 401(k) programs simply BECAUSE they have been funneling all of their available funds toward paying off student loans, because now you can pay off your debt, AND save for retirement at the same time!

How Will the Program Work?

First off, participating in the program is voluntary, just like it always has been for 401(k) participation, but now an employee who participates can receive nonelective contributions based on student loan repayments, as if those repayments had been put toward the 401(k) plan itself.

If the employee doesn’t make full use of the employer match based on their student loan repayments, then whatever is left over of the match can also be put toward contributions made toward the 401(k) plan, giving far more flexibility to the options we have when deciding whether we need to be paying down debt, or investing toward retirement.

Technically, the program won’t cost employers anything because the IRS is assuming that employees are taking advantage of these sorts of 401(k) matching plans, but in reality, I think it’s going to cost employers a lot more from people (like me! and my friends!) who weren’t able to invest in a 401(k) because we had to allocate our limited funds toward paying off loans, rather than investing.

Our employers therefore didn’t have to match anything, since we weren’t contributing to the 401(k), but now that debt payments will count the same way as 401(k) contributions, employers are going to end up paying out on benefits that previously weren’t being utilized.

Why Is This Rule Being Updated?

There’s two main reasons spurring the IRS changes mentioned here:

The Student Loan Debt Bubble is worse than anyone ever predicted it’d become. Americans now hold about $1.4 trillion dollars in student loan debt, and it’s become a serious issue for the economy since so many people are spending all of their available income on paying down loans, rather than purchasing new cars, homes, or investing in retirement plans.
Boston College’s Center for Retirement recently conducted a study that found that student loan debt didn’t discourage 401(k) participation (I’m not sure I agree with that, but I only have anecdotal evidence to support my stance…), but that graduates with student debt were accumulating 50% less retirement wealth in their 401(k)s by age 30 than those without debt.

Basically, the Federal Government and the IRS finally woke up to the fact that student loans are buying people in lifelong debt, preventing them from putting money aside toward retirement, and they realize that they need to get ahead of the debt bubble before it bursts, and this is their first step in that process.

I, for one, certainly applaud this decision and wish that it’d been made way back when I was struggling to keep up my own student loan payments.

My 401(k) is severely under-funded because I wasn’t able to allocate any money toward it when I first started working… those student loan payments needed to be made NOW, while retirement savings could be taken care of LATER… and I’m hoping that companies will readily adopt this new option because it’s going to make a massive difference for new college graduates!

Is This Actually a Big Deal, or Is It Just Hype?

Don’t believe me that this is a big deal?

As of the time of this post, the topic is literally the number one trending thread on Reddit, and I think we can all agree that this speaks volume to how important it is, and badly people want to figure out what’s going on here.

Check out the thread for yourself here, or take a look at some of my favorite comments from the thread, listed below:

Why Is This So Important?

Since a lot of people are confused, I’ll explain how a 401k match works. A 401k is a retirement savings plan that came into popularity as pensions fell out of the mainstream. The 401k is a tax-efficient vehicle to invest your money for retirement. Like the pension, employers can contribite to their employees’ 401k plans as a benefit. This is usually done via a matching mechanism: I contribute 4% of my paycheck, and my employer matches that amount. Matches are almost always capped.
With the method laid out in the article, you would be able to make qualified student loan payments and have your company match that amount as a contribution to your 401k, up to a certain amount. So say you make $2000 per month, your employer matches 5% of your 401k contributions, and your monthly minimum loan payment is $1000 (in this example, you have a lot of debt). You aren’t contributing to your 401k currently. If your company chose to take advantage of this program, they would put $100 ($2000*0.05 match) in your 401k each month you made a payment on your student loan.
This doesn’t “hurt” people without loans. This is only subsidized by the government insofaras the 401k is tax-sheltered (you still pay taxes on that money), and this doesn’t constitute your company paying your loans. Participation isn’t compulsory.
-u/broken_symmetry_

Another Basic Explanation

Well that sounds fascinating!
Just to make it clear for anyone who may have been confused as I was when reading the post before the article, the matching contribution from the employer would go into the employee’s 401(k) and not go towards repaying the student loan. In that way whether the employee chooses to put money away towards their retirement in the 401(k) or to pay down their student loans, it is simply treated equivalently in giving 401(k) matching contributions from the employer.
I look forward to seeing if employers start to adopt this!
-u/ElementPlanet

How Is This Different From the Current System?

Still aren’t getting it? Try reading this comment chain, which explains exactly why you should be excited about the new opportunity:

401k Matching for Student Loan Payments

Choosing Between Student Loans & 401(k) Payments

I could’ve used this. The first 10 years out of school I was paying 1k+ a month on my student loans and saving nothing for retirement. I’ve paid off two in full now along with a car loan so I’ve been contributing to my 401k for about 3 or 4 years now pretty consistently. This would’ve helped a ton.
-u/throaway_102000

Great for People who Can’t Afford to Invest in 401(k) Plans

A lot of people struggling with student loans can’t afford to contribute to their 401k’s. There are some people with a $1,000-$1,500 monthly loan payment that eats up all their free income. They are struggling just to get by and can’t afford to put money into a 401k too. Now these people will still be able to get the matching funds at least.
I think these are the people who will really benefit from this, not the people with the luxury to choose 401k or loans.
-u/PA2SK

“I’m Very Excited”

I’m actually very excited. I have 50k in private, 20k in federal. My average private payment will be about $700 a month, plus whatever my federal will be. I’m probably looking at $1000 a month. To know I could be saving for retirement while paying off my debt is amazing.
-u/GlitteringExit

What Do You Think?

Hopefully you understand that this new change is a significant improvement to the previous rules, which basically required you to decide what to do with your limited funds: pay down student loans OR invest in a 401(k) retirement saving plan, whereas under the new guidelines, you can accomplish BOTH things at the same time!

But is it enough? Will it make an appreciable impact on the overall level of student loan debt? Will it make enough of an impact on building up retirement savings accounts?

Let me know your thoughts in the comments section below!

Disclaimer:Information obtained from Forget Student Loan Debt is for educational purposes only. You should consult a licensed financial professional before making any financial decisions. This site receives some compensation through affiliate relationships. This site is not endorsed or affiliated with the U.S. Department of Education.

By: Tim Marshall

Tim's experience struggling with crushing student loan debt led him to create the website Forget Student Loan Debt in 2011, where he offers advice, tips and tricks for paying off student loans as quickly and affordably as possible.

2 Comments

J January 24, 2019
This is really less of a “guide”. I read through and still don’t know how to actually get my 401 k to match my student loan payments. Do all do this? Is it just something that some do? What if my institution’s HR department isn’t familiar with this policy? Do I go straight to the 401 K servicer itself? So many unanswered questions.
- Tim Marshall January 25, 2019
  Hi J,
  Only some companies offer this service, it’s brand new and basically the latest thing companies are using for recruitment and retention. If your HR team isn’t familiar with the process, then your company must not offer it.

2020 Guide to 401(k) Matching for Student Loan Debt Payments