How Repaying Student Loans Can Actually Help You With Your Retirement Goals

The weight of student loans can feel stifling at times. The average debt volume for federal student loan borrowers is $37,853, with a cost north of $30,000 in borrowed funds for the typical bachelor's degree in modern America, according to the Education Data Initiative's analysis of Federal Student Aid data. That figure is about $10,000 higher than a borrower averaged in 2014 while also making less on average than their parents did at the same age (per CNBC), adding insult to injury. A study by Self Financial found that average graduate salaries have essentially remained unchanged in the last decade, and have even decreased by about $500.

Once you finish your education and start working, not only will you have to fight within a competitive landscape for potentially underwhelming pay (not to mention a job market devoid of loyalty to employees), but you'll also have to service your student loans. With new legislative agendas changing the strategy for many, this isn't the same kind of extreme burden it once was. Even so, the weight of this enormous borrowing figure can seem crippling. However, with new guidance from the IRS hitting the airwaves recently (in August 2024), there's a new lease on life for student loan borrowers. The landscape has changed once again, and it features a new quirk that can actually make paying off your student loans a financial decision that returns a solid benefit rather than just acting as an outgoing expense.

The SECURE 2.0 Act of 2022 created the provision for employers to make matching contributions to a 401(k) account based on student loan repayments. At the time, it wasn't entirely clear how this might work. A newly released guidance from the IRS (Notice 2024-63) hammers down on what this means for employees trying to juggle retirement savings contributions and student loan repayment obligations.

Generally speaking, matching-fund programs are based on personal contributions. The more you deposit into an employer-sponsored 401(k) account, the more the company matches — up to set contribution limits stipulated in the fund's terms or your employment contract. This allows you to double a portion of your savings for retirement and has been a key ingredient in the success of a retirement funding strategy for many. (Read about the real reason companies offer 401(k) matching.)

With this guidance in mind, money directed toward paying off student loans can now act as a qualified contribution figure that receives an employer's matched deposit into your 401(k) account. Employees looking to utilize this newly established avenue will want to speak with their employer's HR manager or a similar point person who deals with 401(k) and employee benefit questions. Even if your company hasn't adopted this policy yet, you may be able to receive a stipend to reduce student loan repayment costs.

A 401(k) match is one of the most potent tools you have at your disposal as a saver eyeing a future retirement date. Whether that's looming in the near future or you're planning decades out for your exit from the workforce, boosting retirement contributions through any means at your disposal should be high on your priority list. Matched contributions make it easier to save, and allow you to reduce your own contribution figures, alleviating a potentially major stress point from your budget.

Plenty of savers will want to hit their personal target figure for retirement savings and may not feel a heap of pressure to "over-contribute." Your goal might require a $400 investment per month, and with company matching, your personal portion falls to just $200, freeing up $200 to be used in saving for your first home purchase or to help with monthly bills elsewhere. Of course, keeping with that $400 personal contribution figure and taking advantage of company match options will get you there faster (potentially allowing you to retire early and help bridge the income gap) or enhance your retirement lifestyle by providing even more financial resources later on.

The reality is that company matching and any other options at your disposal to push free money into your retirement accounts provides added breathing room for your finances. Anything you can do to take the pressure off is a welcome change. As many as 78% of Americans live paycheck to paycheck, according to a PayrollOrg 2023 survey. Given this, you're likely a part of this majority, even if you're a high earner. Reducing a portion of your budget while still hitting your goals is a great way to achieve better financial stability and serious peace of mind. (Find out what it means to be a HENRY.)

The ability to leverage student loan payments to generate eligible matching-fund opportunities is a huge swing in favor of savers. Any matching dollars are welcome for those planning to eventually retire, but the option to put away money for later without actually contributing yourself is a massive balm for those juggling numerous financial obligations (like paying back student loans), alongside their envisioned retirement lifestyle. This change will bring plenty of added agency to the financial realities of American workers everywhere.

Incentivizing the choice to pay off student loans in this way doesn't really change things for employers. They've chosen to match eligible contributions already, and this just adds another option to your toolbox without shifting employer responsibility. For savers, you might consider paying down the entire amount you wish to contribute each month to your retirement. This allows you to reduce your student loan burden while still meeting your retirement planning goals.

Before this guidance, savers might have opted to slash both line items in their budget in half, or reduce outgoing expenses elsewhere to meet their obligations in both camps. Now, a saver can benefit both in student debt reduction and retirement planning at the same time, and with the same dollar.