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3 Benefits of Employee Student-Loan Matching

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Thursday, 27 September 2018 11:11 AM Current | Bio | Archive

As the number of student loan debt holders has reached over 44 million borrowers, the IRS released a private ruling Aug. 17 that allows an unnamed company to use its 401(k) match plan to help employees who are repaying student loans.

This company filed to match its employees' student loan payments up to a certain amount, directing those funds into employee retirement plans.

The ruling signaled the IRS' willingness to potentially allow other companies to help their employees save for retirement without the employee having to contribute to the 401(k) plan.

According to the National Institute on Retirement Security, approximately 66% of millennials don't have anything saved for retirement, which many believe to be partially caused by the burden of student loan debt. In order to help, some companies are exploring ways to get their employees to start saving for retirement and use the match programs, as these help the employee and lower the company's overall tax bill.

What This Could Mean For Student-Loan Borrowers

Many employers offer retirement plans and contribution matching to their employees, with some offering to match up to 8% of the employee's income. Employers are incentivized to offer and contribute to these plans, as it lowers the company's overall tax bill and helps attract employees.

With employers matching student loan contributions, student loan borrowers won't have to choose between paying down their student debt and saving for retirement.

Here are three of the best benefits to student loan matching.

  1. Utilize employee benefits: Many young employees are not taking advantage of their employer match benefits due to not contributing to their 401(k) because of other bills, such as student loan payments. By offering to match student loan contributions, student loan borrowers can still take advantage of the "free money" that employers provide, while still continuing to pay down their loan balance. It's also an incentive for borrowers to meet their student loan payments each month or even pay more than their monthly bill.
  2. Retirement savings: It's important for borrowers to start saving for retirement as soon as possible, as the money you save now will gain compound interest and create a nest egg for retirement. For example, let's say you are 25, earn a $50,000 salary, receive a 2% income increase per year and save 5% of your income in your retirement account. When you retire at age 65, you will have almost $600,000. If you start saving for retirement at 30 with a salary of $55,204, you're projected to have only $442,595, which is $157,400 less than if you had started to save five years prior.
  3. Tax benefits: The funds that are contributed to your 401(k) are tax-deferred, meaning taxes are only paid when you take it out of your account. So, the full contribution from your employer will be compounding while left in your account, allowing your retirement funds to grow even more. If you are not taking advantage of the 401(k) match, you don't have to pay taxes on the funds, as you do not receive them. However, you are losing out on the opportunity for untaxed free money to grow and make a sizable profit for when you retire from your job.

Going Forward

Although this ruling was just for one company, it could indicate a shift for the IRS to allow other companies to offer this contribution setup as well. Student loan debt has increased to more than $1.5 trillion and is continuing to grow.

Even with some of the best student lender options, borrowers are facing an average of $32,731 in debt. It's still unclear whether this will become a practice for other employers and whether the IRS will allow other companies to offer it.

However, many businesses may want to consider including this benefit. Companies can get tax benefits, help their employees and potentially increase employee retention.

Joe Resendiz is a Research Analyst at ValuePenguin, where he focuses on personal finance and credit research to assist consumers. Previously, Joe specialized on public sector and infrastructure financing at Goldman Sachs. He graduated from the University of Texas at Austin with a BBA in Finance.

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As the number of student loan debt holders has reached over 44 million borrowers, the IRS released a private ruling Aug. 17 that allows an unnamed company to use its 401(k) match plan to help employees who are repaying student loans.
three, benefits, employee, student, loan, matching
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2018-11-27
Thursday, 27 September 2018 11:11 AM
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