Americans expect to reduce their spending by about $1.6 billion as they restart payments on student loans this month, outlays that were paused during the COVID-19 pandemic, according to an analysis released on Wednesday by economists from the Federal Reserve Bank of New York.
Those borrowers, who say they will spend on average $56 less a month as they grapple with having to serve their student debt, may be pleased to learn that starting in 2024, they can use the money dedicated toward student loans toward their retirement savings.
The Secure Act 2.0, which was signed into law in 2022, contains a new rule, Section 110,which aims to help Americans saddled with student debt and are unable to receive matching contributions for retirement plans as a result, to still save for when they stop working.
“Section 110 allows such employees to receive those matching contributions by reason of repaying their student loans,” the rule says.
JEMAL COUNTESS/GETTY IMAGES FOR PEOPLE’S RALLY to CANCEL STUDENT DEBT
The law allows employers to match contributions under a 401(k) plan, 403(b) plan, or Simple IRA for “qualified student loan payments.”
“A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee,” the legislation says.
The rule goes into effect beginning in January 2024.
“This will be a game-changing benefit,” Jesse Moore, head of student debt at Fidelity Investments, told The Wall Street Journal. “Plan sponsors will be able to rely on their existing budgets to help those that previously may not have been able to afford to save.”
Nearly 44 million Americans have federal student loan debt, totaling $1.65 trillion, according to data from the Education Data Initiative. The debt adds an expense for borrowers after years of being able to save the cash as part of the COVID-era economic stimulus plans. It comes at a time when there are indications that the Federal Reserve’s aggressive rate hikes, which were put in place to battle inflation and have pushed up borrowing costs, slowed spending by Americans.
The resumption of student loans payments may force about 22 percent of Americans to cut back on savings as they begin to fork over cash toward their debt, according to an August survey from Corebridge Financial. The survey found that lower-income Americans will be hurt the most on their retirement as a result of the payments, with 77 percent of those earning less than $50,000 saying that it will affect their retirement savings.
The savings that could come through the Secure Act may help recent graduates in particular, according to The Wall Street Journal.
“A huge portion of their paychecks go toward paying skyrocketing rent, mortgage payments and other living expenses,” Joelle Spear from Canby Financial Advisors told the outlet. “Adding monthly debt payments to this mix can leave them with very little extra to save for their retirement.”
Borrowers would get their loan payments matched as retirement savings if they are on the same schedule as other matching contributions, the payroll firm ADP said.
“Additionally, employees must be eligible for a match in order to receive the student loan matching contribution,” it said.
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