The White House’s new plan for student loan forgiveness could lead to increased savings in retirement plans, experts said, but the issue of student loan debt isn’t going away any time soon.
“This loan forgiveness (is) very helpful for a lot of people, but it doesn’t solve the burden of student debt,” said Kirsten Hunter Peterson, Boston- based vice president of workplace thought leadership at Fidelity Investments. “For many borrowers it’s really just a minor dent in their balance.”
Announced by the Biden administration on Aug. 24, the plan promises to cancel up to $20,000 in debt for Pell Grant recipients and up to $10,000 for non-Pell Grant recipients. Eligibility is limited to individuals making less than $125,000 per year, or $250,000 for married couples and heads of household.
Though the relief only impacts a portion of Americans with student loan debt, “younger workers, in particular, are going to have more money available to save now that they don’t have to use it to pay down their student loans,” which could allow for an increase in retirement savings, said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, based in Washington.
For workers under 40, 70% of those with student loans said that debt significantly or somewhat impacted their ability to save for the future, according to Alight Solutions’ 2021 Employee Wellbeing Mindset Study.
Young people have several other expenses to worry about, Mr. Copeland added, so it’s difficult to determine how much of their newfound savings will be diverted into retirement accounts.
“I think the younger generation has definitely wanted to be able to save for retirement, they just, in our experience, have felt very burdened with student loan debt,” said Heather Kessler, Seattle-based team lead and wealth manager at Coldstream Wealth Management, which manages $7.2 billion in assets and works with individuals as well as institutions, including retirement plans.
Student loan debt is often associated with younger generations. According to an EBRI study published in January 2021, 66.7% of families with student loan debt in 2019 had family heads younger than 45, and 40.5% had heads younger than 35.
But, as Ms. Hunter Peterson said, “people of all ages, all generations, all demographics, struggle with student debt.” A Fidelity Investments case study from June found that while millennials are the most likely generation to have student debt, baby boomers pay the most amount of student loan debt, on average.
“Even though people have student loans, that hasn’t totally prevented them from participating in retirement plan benefits, because in many cases, they are — particularly those that finish their education — in higher-paying jobs,” EBRI’s Mr. Copeland said.
Mr. Copeland’s research report from December shows millennials had higher median balances in their defined contribution plans than Generation X did, when comparing balances from when both generations were ages 25-36. He said this could be because millennials had immediate access to defined contribution plans, whereas Generation X may have only participated in defined benefit plans when they first entered the workforce.
Regardless of age, Mr. Copeland said the new student loan forgiveness plan will likely be most impactful for those who never completed their bachelor’s degree but are still paying off student loans.
“That’s the one group that we can really change in the loan forgiveness issue is those that didn’t really get the full benefit of their education debt that they took on,” he said. “And now that they don’t have to pay it, then they could certainly be the ones that would have the ability to really change what their retirement savings is.”
The EBRI study from January 2021 found that those with student loans who did not finish their degree are less likely to participate in a defined contribution plan, and when they do, their plan balance is smaller than those with loans who did complete their degree.
U.S. President Joe Biden.
As student loan debt remains a major issue for Americans, research shows that parents are increasingly focused on saving for their children’s college education. In Fidelity Investments’ 2022 College Savings Indicator study, 27% of parents ranked saving for college as their top priority, compared with 22% that ranked saving for retirement as their top priority.
“I think—this statistic—it speaks to both the financial and emotional weight of student debt and parents not necessarily wanting their children to have to bear that burden of student debt if they don’t have to,” said Fidelity’s Ms. Hunter Peterson.
Even with a potential $20,000 in student debt relief, many Americans will still have loans to pay off in the future. According to The Institute for College Access and Success, a non-profit organization advocating for college affordability, 2019 graduates of public and private non-profit colleges owed an average of $28,950 in student loan debt.
“There still could be a role for employers, looking at how they can incorporate student loan debt reimbursement programs into their benefits programs,” Mr. Copeland said.
In 2018, Abbott Laboratories started a first-of-its-kind program, allowing employees who put 2% of their annual salary toward student loan payments to receive a 401(k) contribution of 5% of their salary, the equivalent of the company match. This came after the company received a private letter ruling from the IRS, allowing them to do so. Starbucks just announced this month that it will start a student loan management benefit program to help employees optimize student loan repayments.
In Washington, both the House and Senate are working to put together a retirement security package that would allow for employers to make matching contributions to a 401(k) plan, 403(b) plan or SIMPLE IRA based on qualified student loan payments.
In light of the upcoming student debt relief, plan sponsors can take a three-pronged approach to encourage increased retirement savings from plan participants, said Virginia Maguire, Atlanta-based vice president of wealth solutions at Alight Solutions.
Ms. Maguire recommends personalized messaging and engagement, whether that takes place through an app, email or website. She said having those messages specifically tied to loan forgiveness could encourage participants to invest more in their retirement, especially if there’s an example tied to it, such as how saving an extra $100 a month could help build their retirement savings.
The other thing plan sponsors can offer is a paycheck savings planner so that they can help participants determine how to divide up their paycheck each month, Ms. Maguire said. Finally, offering access to live, unbiased advisers via phone could help plan participants save more, as that person “also can be the touch point that they speak to repeatedly,” she added.
“It’s an opportune time for plan sponsors to engage their participants,” said Fidelity’s Ms. Hunter Peterson. “Maybe it’s a communication strategy, maybe it’s something else, but make sure that participants are aware of some of these changes that might impact their cash flow.”
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