10 Nov

4:10

Ho! Ho! Ho! Christmas comes early this year, thanks to the IRS with their IRS Student Loan Benefit Program.

Student Loan Crisis

As we all grow up, the need to get an education, a quality one at that, is a song we all know too well with our parents and relatives leading the band. “Get good grades, attend a nice college, get a diploma, go after that dream job as long as you have the papers” and so on and so forth.

Truth be told, this is usually just about the only dream most millennials have out there. With good papers, a great job will come right up, followed by a nice house and that dream car among other life luxuries. Unfortunately, no one prepares you for the menace that is the student loan. According to research, the student debt owed by over 44 million American citizens is around $1.5 trillion.

We are not saying student loans are all bad. Yes, you will make it through campus and attain that diploma or degree you have worked so hard for. Yeeah! The issue though, is whether the job market will be that nice to you.

Job hunting is a job on its own, and yet, after a 6-month grace period, you need to start servicing your student loan. A headache that most millennials are having right now when it comes to student loan repayment will range from how to repay it faster to student loan refinancing among others.

The crippling debt, of course, trickles down to other life’s major decisions like saving for retirement or buying a house. The most common scenario here is that the largest percentage of millennials with student loans forgo saving for their retirement because their salaries cannot cater to both.

IRS Student Loan Program: Your Knight in Shining Amor

However, the saving culture, especially saving for retirement among millennials, is about to hit a turn for the best, thanks to the Internal Revenue Service (IRS). The new ruling by the IRS makes it possible for an employer to match the 401(k) contributions of employees who repay their student loans. It is important to note that this ruling only affects employees with student loans.

The private letter ruling (PLR) that was recently released by the IRS addressed an employer that had requested to make nonelective contributions to an employee’s 401(k) plan, only if the employee paid their student loan. The Student Loan Benefit Program requested by a company that remained unmentioned in the PLR achieves this by matching a 5% contribution of the employee’s income to their 401(k) as long as the employee devotes at least 2% of their pay to repaying their student loan. The program, however, is on a voluntary basis.

How it Works

Mathematically, this is how it will work- for the anonymous company, which is the only company with this plan so far:

If an employee makes $100,000 and decides to join in the program, they will channel at least 2% of their income to repaying their student loan, which brings the amount to $2,000 (2%*$100,000). The employer will then match this with a 5% contribution towards the employee’s 401(k) plan, which means the employer will contribute $5,000 (5%*$100,000).

Although the ruling only applies to this one company, this could be the light at the end of a millennial student debt tunnel. By approving this request, the IRS has paved the way for other employers to follow suit.

Hopefully, more employers will follow in the footsteps of this anonymous employer and come up with their own strategies to help their employees repay their student loans and save for retirement. An influx of requests by employers to have this strategy on their 401(k) plan may lead to the IRS formulating a general rule that can be adopted by any employer in the US.

However, it is hard to tell when such a ruling would be made general for all employers out there. For starters, if such a general ruling is made, how will it be applied? Will there be a minimum amount that all employees should contribute? Will employers have a minimum contribution package? What privacy policies will be in place for employees’ that want to know the status of their student loan repayment? Will there be any compliance implications for employers that choose to adopt such a strategy?

Other questions that might arise could deal with the extension of such contributions to not just the 401(k) plan but to other savings plans such as Health Savings Accounts (HSA’s).

The only hope that the influx of these requests might be achieved soon is the need for employers to not only attract but also retain key talents in their workforce. In the past years, the need for this has led to the formulation of unique and attractive packages for employees and prospective talents.

For example, CVS Health and TIAA have included paid parental leave for their employees regardless of their gender while Walmart and others have an adoption benefit. These are not the only companies enticing their workforce with better and unique perks.

This goes without saying, that an employer with a young, talented, and educated workforce needs to up their game not only in salary packages but also in other perks. Money alone is no longer good enough when it comes to retaining employees. It certainly does not work for millennials.

The IRS Student Loan might be one of those much-needed perks by millennials. This ruling might gain momentum as employers try to find ways to attract and retain key talents into their workforce.

Nevertheless, the possibilities of having to repay your student loan on a monthly basis and still manage to save for retirement is worth an early celebration. Hopefully, the IRS Student Loan program will be adopted across the US. This will help you to clear your student loan without postponing your retirement saving prospects.