Thursday, July 18, 2024

This Retirement Change Congress is Considering Will Help Many Families Struggling With Student Loan Debt

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Two bipartisan bills (there's one in the House, and a similar companion bill being considered by the Senate) being considered will change retirement for the better—and could also be game-changers for families burdened with student loan debt. The bills include a number of ideas for improving how Americans save for retirement, including raising the required minimum distribution age and changing how catch-up contributions work. But the most exciting provisions for parents might be the suggestion to allow employers to make contributions to retirement plans (like 401(k)s and similar) on behalf of those who are paying off student loans instead of saving for retirement. 

Translation: If you are paying student loans, your employer may soon be able to make matching contributions to your retirement fund—even if you're not contributing yourself. 

More than one in four people who aren't saving for retirement at all cite student loan debt as the reason. More than four in five people say their student loans have some negative impact on the amount they save for retirement, according to a 2019 survey from TIAA and the MIT AgeLab. 

Allowing employers to start nest eggs on behalf of employees could be a boon for anyone with student loans, says Misty Lynch, CFP, director of financial planning at Beck Bode. "The employee gets an account started and funded, which can be half of the issue when they finally pay off the debt." For parents still chipping away at their own student loans, it's even more helpful, since families have more constraints to their budgets than child-free people might, Lynch adds. "When you're young and single, you might think, I'll start saving for retirement after I pay off those loans. But then when you have a child, you might be more tempted to start saving for college, delaying retirement savings even more."  

So, how would this work exactly? How much money could this really amount to? And how likely is it to pass? Answers to your questions, ahead. 

Where the bills stand now 

Congress is almost certain to move on some form of retirement law change that builds on changes made in 2019 within the year, watchers say. "Both [Senate and House] bills enjoy strong support from the retirement industry, lawmakers on both sides of the aisle, and everyday American taxpayers," says Jay Schmitt, principal at Strategic Benefit Advisors in Atlanta. 

Right now, the House's version (HR 2594) was unanimously passed by the House Ways and Means Committee on May 5, and is now being considered by the full House of Representatives. The Senate version (S1431) was introduced May 20, but needs to be passed by the Finance committee. If both bills pass, then any differences between the two would need to be reconciled before being sent to the President to be signed. While there are a few differences between the two versions, both include the student loan provision. 

Who, exactly, would the change help?

"This provision is designed to assist employees who may not be able to save for retirement because they are overwhelmed with student debt," Schmitt says.  It doesn't really help those who have so far been able to pay down student debt and contribute to retirement. Those folks should keep doing what they're doing (and keep rallying for loan forgiveness!) 

But this is still a significant change, because the option has never explicitly been allowed in our retirement laws. In 2018, the IRS issued what's known as a "private letter ruling" stating that employers could do it if they wanted to—and some employers are already doing it. But putting this into the law would mean more pressure on employers to participate. 

"If employers are competing for young, talented workers, then this is going to be one way they're going to be able to attract people," Lynch says. "The employers also get a tax deduction for contributions that are made. If employees are not participating, they're not able to take those deductions. It really benefits everybody."

Ok, so how much money are we talking? 

It's true that this change alone will not solve the student debt crisis. It also won't be enough to fund your retirement on its own. But when it comes to investing for retirement, saving as early as possible is super important so you can leverage the powers of compound interest. This is exactly what this change could help families do.

"Employers who choose to add this benefit will help more of their younger employees—especially those who are parents and have expenses to support their families—to not miss out on the opportunities presented to build a retirement nest egg through a workplace retirement plan," says Paul Richman, chief government and political affairs officer for the Insured Retirement Institute.

Here's a good example: Let's say you're earning $50,000 and you get a 3% employer contribution thanks to this change. Assuming you get a 3% raise annually and a 6% return on your investment, in 10 years you would have $23,017. In 30 years, you'd have $170,786—even if you didn't add a dime yourself. 

The psychology of that growth is really important, Lynch says. "Our brains love evidence that things work. For people who've never invested before, this could make them more likely to take the money they once used to pay debt with, and use it to fund their retirement rather than have it go to other bills and expenses that exist."

How would it work? 

That's still unclear in some ways. What we know for now is that the law would allow employers to voluntarily make a matching contribution with respect to "qualified student loan payments." But beyond that, "the bill directs the Treasury Secretary to issue rules which will guide how employers and employees can use this provision of the bill, including rules to address the frequency that matching contributions can be made, and procedures for employees to claim matching contributions for qualified student loan payments," Richman says. 

Is there anything else in the bill that will help parents? 

Experts agree that basically all the provisions will be helpful to American workers, parents or not. But Schmitt points to two other provisions parents should know about: First is that both bills expand 401(k) eligibility to part-time workers. This could be huge for parents, since we know that 57% of working moms work part-time. 

Next is a provision in the house bill that directs the IRS to raise awareness of an income tax credit called the "Saver's credit" that gives a tax break of up to $1000 for individuals or up to $2000 for married couples filing jointly who are contributing to a 401(k), 403(b), 457 or SIMPLE/SEP IRA.

"For some taxpayers, that could be enough to eliminate their tax bill altogether, " Schmitt says. "Even though the Saver's Credit has been around for nearly 20 years, studies have consistently shown that only a fraction of low-income households, plenty of whom are parents or young families, are aware of its existence."

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