The NCSL Blog


By Anna Petrini

The IRS released a groundbreaking private letter ruling on Aug. 17 that could make it easier for borrowers to pay down student loan debt and save for retirement at the same time.

Graduation messageMillennials whose sizeable debts hamper their ability to take full advantage of workplace retirement savings opportunities could make qualifying student loan payments and receive 401(k) matching contributions from their employers as well. This could help workers avoid leaving money on the table early in their careers and boost long-term investment earnings.

Between 2001 and 2016, the real (inflation-adjusted) amount of student debt owed by American households more than tripled, from about $340 billion to more than $1.3 trillion. 

Those with student debt have much lower 401(k) assets by age 30 than those without, and this holds true whether the loans are large or small, according to a new study by the Center for Retirement Research at Boston College. Even if the student loan payments are manageable, the mere fact of having loan debt may color other significant financial decisions, including those related to retirement savings.

A 2018 report from the National Institute on Retirement Security (NIRS) revealed that two-thirds of working millennials have nothing saved for retirement. Only 5 percent of working millennials are saving enough to retire comfortably.

But millennials are not the only cohort with retirement savings challenges on top of student debt woes. Some older Americans are struggling to repay debt they took out to help children or grandchildren finance their education. Americans over 60 years old are the fastest-growing category of student loan borrowers.

Policymakers at all levels of government have been seeking ways to help borrowers manage student loan debt and meet other financial goals and obligations. The recent IRS private letter ruling blessed a type of employer-provided student loan repayment benefit within a retirement plan that some observers feared might run afoul of federal rules.

Now, under the right circumstances, an employer could link the amount of its contributions made on an employee’s behalf under a 401(k) plan to the amount of student loan payments an employee makes outside the plan. This would be a boon to employees whose student loan repayment obligations make it difficult to afford contributions to their retirement plans. It would also aid employers eager to attract and retain an educated workforce.

Importantly, the IRS letter ruling only relates to the individual company that applied and ultimately received approval for its plan. There are a host of IRS compliance considerations for companies interested in pursuing similar arrangements, and other student loan plan designs not covered by the ruling are certainly possible.

The ERISA Industry Committee (ERIC) has already asked the IRS to issue a revenue ruling that would broaden the reach of its recent guidance, enabling all sponsors of 401(k) plans to make similar contributions.

How mainstream might this type of assistance become? Smaller and mid-size employers may not have the resources to offer this type of benefit. The Society for Human Resource Management’s 2018 Employee Benefits Survey found that just 4 percent of organizations offer any sort of student loan repayment benefit. But the recent action by the IRS may portend an increasingly comprehensive effort to address student loan repayment and retirement savings needs.

Anna Petrini is a policy specialist in NCSL’s Employment, Labor and Retirement Program.

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Posted in: Fiscal policy
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This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.