The Secure 2.0 Act of 2022 provides relief to student loan borrowers by allowing employers to count qualified student loan payments as contributions to a retirement savings plan. Learn how this new federal law can help you save for your retirement while paying off student loans.

Questions Answered in this Article

Q1: What is the Secure 2.0 Act of 2022? The Secure 2.0 Act of 2022 is a federal law that aims to increase the number of student loan borrowers who can save for their retirement by allowing employers to consider “qualified student loan payments” as contributions to a retirement savings plan.

Q2: What is the purpose of the Secure 2.0 Act of 2022? The purpose of the Secure 2.0 Act of 2022 is to alleviate the stress of saving for retirement for student loan borrowers amid the $1.76 trillion student debt crisis in the U.S.

Q3: What are “qualified student loan payments”? Qualified student loan payments” refer to payments made towards debt taken out for eligible higher education expenses incurred by the employee.

Q4: How can the Secure 2.0 Act help student loan borrowers? The Secure 2.0 Act can help student loan borrowers by allowing employers to match all or a portion of an employee’s student loan payment and deposit the money into an employer-sponsored retirement plan.

Q5: When does the Secure 2.0 Act come into effect? The Secure 2.0 Act comes into effect starting January 2024.

A New Solution for Student Loan Debt and Retirement Savings

The burden of student loan debt is putting immense pressure on borrowers, with job insecurity and high inflation adding to their financial woes. However, a new federal law has come into effect that could alleviate the stress of saving for retirement while paying off student loans. The Secure 2.0 Act of 2022, signed into law by President Joe Biden on December 29, 2022, aims to increase the number of student loan borrowers who can save for their retirement.

Starting from January 2024, employers will be able to consider “qualified student loan payments” as contributions to a retirement savings plan. This means that an organization can match all or a portion of an employee’s student loan payment and deposit the money into an employer-sponsored retirement plan such as a 401(k).

According to a U.S. Senate Finance Committee summary, “qualified student loan payments” refer to payments made towards debt taken out for eligible higher education expenses incurred by the employee. It is yet to be determined if there are any restrictions on the types of student loans that qualify, whether federal or private or if the borrower needs to be on a standard repayment plan as opposed to an income-driven repayment plan or loan forgiveness program.

What is the Secure 2.0 Act of 2022 and How Does it Help Student Loan Borrowers?

The Secure 2.0 Act offers relief to student loan borrowers amid the $1.76 trillion student debt crisis that affects nearly 44 million individuals, with an average debt of $35,000 according to the College Board.

This student loan debt can make it difficult for employees to save for their retirement. In a 2018 report by Fidelity, 79% of respondents stated that student loans impacted their retirement savings and 69% said they had to reduce or stop contributions or make early withdrawals to cover expenses.

As a certified financial planner and director at Financial Finesse, a workplace financial wellness company, Greg Ward has witnessed the challenges faced by many employees trying to pay bills and save enough in a workplace retirement account to take advantage of employer matching contributions.

“Employees may only be able to save a few thousand dollars in their 401(k), but then they have to borrow that money,” says Ward. “We want employees to save enough for the match and still have enough cash flow to live on.”

How the Secure 2.0 Act Can Impact an Employee on a Standard Federal Student Loan Repayment Plan

The Secure 2.0 Act has the potential to greatly impact an employee on a standard federal student loan repayment plan.

Suppose an employer matches 100% of an employee’s 401(k) contribution up to 4% of their base salary. A recent graduate earning the average starting salary of $58,862 would have to contribute $196 to their 401(k) each month to receive the full employer match.

However, with the Secure 2.0 Act, starting in January 2024, if the recent graduate is making qualified student loan payments of $371 (based on the estimated payment on a $35,000 student loan with a 4.99% federal interest rate and standard 10-year repayment term), their employer can now count this monthly student loan payment as their 401(k) contribution.

Under the previous law, the employee would have had to put $196 a month from their salary into their 401(k) to receive the $196 monthly 401(k) contribution from their employer. With the new law in place, the employee only needs to make their $371 monthly student loan payment, and they will still receive the $196 monthly employer 401(k) contribution.

The Secure 2.0 Act Has Limitations

Despite being a significant step forward in addressing the student loan crisis, the law’s full impact won’t be realized until January 2024. It remains to be seen which employers will choose to offer this benefit and how it will be rolled out in both the private and public sectors.

Moreover, not all borrowers will benefit from this new legislation. Individuals who are in default or forbearance with their student loans, as well as those who have not seen a return on investment from their degree, may not be able to take advantage of the employer’s retirement savings match. As a result, they will continue to face the challenge of repaying their student loans while also saving for retirement.

According to Crystal Cox, a certified financial planner and senior vice president at Wealthspire, a wealth management firm in Wisconsin, these borrowers may struggle to earn a wage that justifies the amount of debt they incurred and therefore won’t receive much benefit from the new law.

What Else is Included in the Secure 2.0 Act of 2022?

The Secure 2.0 Act offers more than just the option for student loan payments as elective deferrals. It also includes:

1. 401(k) auto-enrollment – Employers are required to automatically enroll employees into the company’s sponsored retirement plan once they are eligible.
2. Rollover from 529 to Roth IRA – A beneficiary of a 529 college savings plan can transfer up to $35,000 to a Roth IRA without any penalty if the 529 accounts has been open for at least 15 years.
3. Penalty-free early withdrawals from tax-preferred retirement accounts – Up to $1,000 per year can be withdrawn without penalty for qualified emergency expenses.
4. Saver’s match – Eligible individuals can receive a 50% matching contribution from the government, up to $2,000, directly deposited into eligible retirement savings accounts. This replaces the previous tax credit for contributions to IRAs and retirement plans.
5. Pension-linked employer savings accounts – Employers can offer pension-linked emergency savings accounts, including both employer and employee contributions, to non-highly compensated employees. The first four withdrawals from these accounts would be fee- and penalty-free.

Summary

• The Secure 2.0 Act of 2022 was signed into law by President Joe Biden on December 29, 2022, and aims to increase the number of student loan borrowers who can save for their retirement.
• Starting from January 2024, employers will be able to consider “qualified student loan payments” as contributions to a retirement savings plan and match all or a portion of an employee’s student loan payment.
• “Qualified student loan payments” refer to payments made towards debt taken out for eligible higher education expenses incurred by the employee, with further details on restrictions to be determined.
• The Secure 2.0 Act offers relief to student loan borrowers amid the $1.76 trillion student debt crisis that affects nearly 44 million individuals with an average debt of $35,000.
• According to a 2018 report by Fidelity, 79% of respondents stated that student loans impacted their retirement savings and 69% said they had to reduce or stop contributions or make early withdrawals to cover expenses.
• The Secure 2.0 Act has the potential to greatly impact an employee on a standard federal student loan repayment plan, allowing their employer to count the monthly student loan payment as their 401(k) contribution.
• The law’s full impact won’t be realized until January 2024, and it remains to be seen which employers will choose to offer this benefit and how it will be rolled out in both the private and public sectors.
• Not all borrowers will benefit from the new legislation, such as those in default or forbearance with their student loans, or those who have not seen a return on investment from their degree.
• The Secure 2.0 Act offers more than just the option for student loan payments as elective deferrals, including 401(k) auto-enrollment, the rollover from 529 to Roth IRA, penalty-free early withdrawals from tax-preferred retirement accounts, saver’s match, and pension-linked employer savings accounts.