A New Way to Retire Student Loan Debt While Investing For Retirement

“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” Ogden Nash

If you were parents were like mine there were simple requirements I had growing up which were make good grades, get a scholarship, go to college, graduate and get a good job.  That was thirty years ago when college costs were a fraction of what they are now, but the same requirements given to me by my parents for most now is easier said than done. Student loan debt in this country is now the second highest consumer debt category – behind only mortgage debt – and higher than both credit cards and auto loans. According to Make Lemonade, there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. alone. The average student in the Class of 2016 has $37,172 in student loan debt.  The latest student loan debt statistics for 2018 show how serious the student loan debt crisis has become – for borrowers across all demographics and age groups.[1]

These startling student loan debt statistics may be the reason the Internal Revenue Service ruled that one company can allow their employees to retire their student loan debt while investing for their retirement.

On August 17, 2018 the IRS released a private letter ruling (PLR 201833012) approving a tax-deferred program to help offset student loan costs. The program was run through Abbott Laboratories’ 401(k) plan and is sure to create wider interest.[2]

Ed Slott summarized the plan this way,

“Abbott’s 401(k) plan allows pre-tax, Roth and after-tax contributions and provides a matching contribution. If the employee contributes at least 2% of compensation into the plan, the company makes a matching contribution equal to 5% of compensation. If an employee doesn’t contribute to the plan, he or she does not get the employer matching contribution. Its new plan feature looked to extend that same contribution to employees that are making student loan repayments. Called a Student Loan Repayment program, or SLR, this 401(k) plan perk was added to the existing matching contribution rules. Under the SLR, if an employee remits a student loan repayment equal to at least 2% of compensation, the company will make a nonelective employer contribution to the 401(k) equal to 5% of compensation. That means the employer will make a retirement plan contribution for the employee regardless of whether the employee contributed to the plan.[3]

This ruling may now pave the way for smaller companies to utilize this same strategy in order to help their employees as well.

This ruling, in my professional opinion, is the start of a much needed solution to our growing student loan debt problem.

[1] https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017/#3e43e9c05dab

[2] https://www.irs.gov/pub/irs-wd/201833012.pdf

[3] https://www.financial-planning.com/news/irs-allows-student-loan-repayment-benefits-within-401-k-plans