Sen. Paul Would Allow 401(k) Plan Withdrawals to Repay Student Debt

As the latest entrant to address the increasing student loan debt burden, Sen. Rand Paul (R-KY) has introduced legislation to permit withdrawals from certain retirement plans to repay the debt.

Paul’s Higher Education Loan Repayment and Enhanced Retirement (HELPER) Act (S. 2962) would allow annual tax and penalty-free withdrawals up to $5,250 from a 401(k), 403(b), 457 or IRA to help individuals pay for college or to pay back student loan debt.  

According to a summary, the bill would also allow parents or spouses to make withdrawals from their accounts to help make payments. Paul notes that up to $15,750 pre-tax dollars per year could be available to pay for college if two parents and their college-bound child each put aside the maximum amount of $5,250 per year.

S. 2962 would also allow employer-sponsored student loan and tuition payment plans to be tax-free up to $5,250, which Paul observes is a “top asked-for benefit that new graduates are seeking from employers.”

While Paul does not address concerns about retirement plan leakage, he contends that because of student loan debt, workers are often not fully contributing to their 401(k)s in the first place. He notes that his bill changes the incentive to invest, since that money can be used to pay down debt. “And the quicker student loan debt is paid down, the sooner workers can focus on retirement savings,” he argues.  

As an example, Paul contends that investing $5,250 in student loan repayment through a 401(k) instead of U.S. Bonds is $163 more advantageous to workers. He notes that U.S. bonds are currently paying less than 2%, while the federal government charges nearly 5% interest on an undergraduate student loan and up to 7% on a graduate loan. Given that option, Paul reasons that 95% of the student loan payment would go to principal, and thus, loans would be paid off faster.

Writing in an op-ed in the Lexington Herald Leader, Paul further notes that in the last decade, U.S. student loan debt “has skyrocketed” to $1.6 trillion, with the average 2018 college graduate owing approximately $29,200 in student loans.

S. 2962 would also provide workers the option to take employer contributions as Roth contributions. “This is a huge benefit to younger workers, who have 30, 40, or even 50 years of potential retirement gains,” Paul states, further adding that workers would have more money at their disposal since less of their retirement would be taxed.   

Several proposals are currently pending in Congress that would address the student loan debt burden, including one that would permit 401(k), 403(b), SIMPLE and governmental 457(b) retirement plans to make matching contributions to workers as if their student loan payments were salary reduction contributions. In addition, the Treasury Department and IRS recently updated their Priority Guidance Plan to include guidance on student loan payments under qualified plans.

S. 2962 was referred to the Senate Committee on Finance.