Concerns about student debt and its impact on the finances and retirement savings of workers has spurred interest in student loan repayment programs.
For the past couple of years, there have been growing calls to make it easier to save for retirement while simultaneously paying off student loans. And those calls appear to have grown louder since the IRS’ private letter ruling (PLR) saying that a 401(k) plan that includes a student loan benefit program will not be in violation of the contingent benefit rules.
In PLR-131066-17, issued in May and released Aug. 17, the IRS permitted a 401(k) plan sponsor to move forward with its program to make nonelective contributions and true-up matching contributions for plan participants who are making student loan repayments but are not necessarily contributing to their 401(k) plans.
An important caveat: PLRs only apply to the taxpayer requesting the ruling. As a Groom Law Group client alert advises, while the PLR “provides helpful comfort for employers who provide a similar program for employees,” it may not be legally relied upon by taxpayers generally. However, in the broader sense, PLRs do provide some idea of how the IRS may interpret future policymaking.
ERIC Calls for Broader Application
Most recently, the ERISA Industry Committee (ERIC) called for expanding upon the PLR. In an Aug. 29 letter to the IRS, ERIC urged the IRS to issue a revenue ruling broadening the reach of the PLR to enable all sponsors of 401(k) plans to make similar contributions, explaining that many employers recognize the burden that student loan debt can have on their workers’ ability to save for retirement.
The letter states that, “while we believe that current law allows employers to make contributions to their retirement plans on behalf of workers who repay student loan debt, the IRS has yet to clearly articulate that such contributions will not affect the tax-qualified status of an employer’s retirement plan.” It goes on to suggest that “more employers would be encouraged to implement programs similar to the one described in the PLR if the IRS would issue a revenue ruling or other guidance of general applicability on this issue.”
EBRI Analysis
The Employee Benefit Research Institute (EBRI) has been examining how the growing level of student debt can have adverse consequences for overall financial security and retirement preparedness. EBRI held a webinar Aug. 29 featuring EBRI Senior Researcher Craig Copeland, Mercer’s head of DC & Financial Wellness Research Neil Lloyd; the City of Memphis’ Chief HR Officer Alex Smith; and EBRI Chair Stacy Schaus of PIMCO reviewing the latest trends in student loan debt, the evolution of the market and the employer perspective.
Copeland presented findings from a recent EBRI Issue Brief, “Student Loan Debt: Trends and Implications,” showing that those with student loans are more likely to have DC plans, but they have lower balances in these plans. Copeland explained that the higher likelihood of participating in a DC plan is driven by higher incomes resulting from obtaining a college degree, but the presence of student loans leads to lower amounts being accumulated.
According to the data, for families with heads younger than 35 and with a college degree, the median DC balance was $20,000 and the average balance was $53,638 for the families without a student loan, compared with $13,000 and $32,987, respectively, for the families with a student loan. Consequently, Copeland notes that at the median and the average those without student loans had in excess of 50% more in their DC plan than those with student loans.
Perhaps more troubling, he explained, is that those who obtain student loans but do not finish their college degree have a lower a likelihood of DC plan ownership, and when they do have a DC plan, the balance generally is smaller than for those who do finish college with a student loan.
EBRI’s brief further shows that the median outstanding student loan balance increased from $5,363 in 1992 to $19,000 in 2016 — a 254% increase. The average student loan balance saw a similar increase from 1992 to 2016, rising from $11,751 to $34,293. And while the median required monthly student loan debt payment for families was $200 in 2016, these loan payments varied significantly, with the 25th percentile being $100 and the 75th percentile being $350, while the 90th percentile reaches $630, the data shows.
Survey Says
Retirement plan sponsors reportedly do recognize the financial impact student loans are having on their employees and there are a number of existing programs they can use to help their employees.
According to a new OneAmerica survey, nearly 4 in 10 respondents indicated they are paying toward a student loan for themselves or on behalf of someone else. Of those, an overwhelming 85% of respondents paying toward student loans reported that their obligation to repay the funds are impacting their ability to prepare for retirement. Of that group, 38% said that student loans are having a “significant impact” on their ability to prepare for retirement.
“The reality that many participants face when it comes to student loans is tough,” explains Marsha Whitehead, OneAmerica vice president of enterprise marketing. “These survey results make it clear that retirement plan providers, in partnership with retirement plan sponsors and advisors, are in position to help participants understand the impact student loans can have and the best way to balance current and future financial demands.”
The online survey, which ran from Aug. 25, 2017 to Jan. 31, 2018, included more than 12,200 OneAmerica retirement plan participants who shared their thoughts on financial wellness, education and resource preferences, and potential roadblocks to retirement.
