Student loan debt—or more precisely, the forgiveness of some part of it—has dominated the headlines of late—but it’s been on the minds of retirement plan sponsors for a while now. The question is—why?
While the issue is hardly new, the connection between retirement savings and student debt really came to the fore in mid-2018 with the announcement by Abbott Laboratories of a new benefit designed to “address student debt.” Specifically the “Freedom 2 Save” program was designed to “enable full-time and part-time employees who qualify for the company's 401(k)—and who are also contributing 2 percent of their eligible pay toward student loans—to receive an amount equivalent to the company's traditional 5 percent ‘match’ deposited into their 401(k) plans.” In fact, those who qualified for the program “…receive the match without requiring any 401(k) contribution of their own.”
Well, once word of that program got out, it seemed that every employer in America wanted to know more about this program, and what they needed to do in order to offer one of their own.[1] And if that focus has dissipated some in the wake of the COVID pandemic, it’s still not far from the focus of many. Consider that it was just recently listed as one of the top 2021 benefit trends cited by Fidelity, been noted as a worker benefit priority and there’s even been legislation introduced to broaden the access. The Employee Benefit Research Institute (EBRI) recently devoted an Issue Brief to the subject, based on data from the Federal Reserve’s Survey of Consumer Finances (SCF).
There are those who would argue that employers benefit from that education, and there’s something to be said for that. But what about those workers with identical academic credentials who made financial sacrifices on their own to obtain their education without debt, who either chose more affordable schools, or who chose to work while pursuing their degrees—some alongside the burdens of work to minimize the financial impact? Workers who did so without the support or encouragement of the employer match that some wish to now reward college debt repayments.
I can understand and appreciate the financial tradeoffs that student debt imposes—that those who might otherwise contribute to a 401(k) plan find it impossible, or perhaps just impractical, to do so on top of that obligation. But, education aside, how is that different from the tradeoffs necessitated by a mortgage, a car payment, or even the routine costs of everyday living? Even when you discount how much of the college debt “problem” has been racked up by households of higher income, or for the purpose of obtaining a degree that positions individuals for relatively high-paying jobs in engineering, medicine or the law (and those are real inequities[2])—what’s the rationale for, in effect, subsidizing, the timing of that particular financial decision over any other?
Don’t get me wrong—I feel for the kids who come out of college in a tough job market, some with a debt load as large as my first house (though, in fairness, my paycheck at that time was commensurately smaller). I’ve no doubt that it’s an obligation that likely dissuades individuals from saving for retirement, and yes—they may be missing out on compounded savings and the employer match as a result. But then so does the choice to pay rent, or to buy a car when your old one dies. Going to college, choosing a college, and, ultimately the obligation of paying for those decisions, are individual choices, however badly counseled they might have been to do so at the time.
It is now “trendy” to talk about student debt as a retirement “issue,” and employers are, of course, free to construct their benefit programs in ways that allow them to attract and retain workers in the ways that make sense, and to take advantage of the tax laws to do so. Yet, for all the attention it has drawn of late, we should remember that it’s debt—not just student debt—that really undermines retirement savings and security.
In that sense, there’s nothing really “special” about student debt—beyond our individual choice(s) to treat it so.
Footnotes
[1] As it turns out, most couldn’t “match” that particular program, because it relied on a private letter ruling that applied only to that specific program—though alternatives that included a non-elective contribution have emerged.
[2] A recent report by the Employee Benefit Research Institute notes: “Thus, in aggregate, student loan debt is overwhelmingly held by families with incomes in the top half, with a net worth in the top half, or who have heads with a college degree or higher. Consequently, those holding student loan debt either have a higher ability or have a higher potential ability to pay for expenses than American families having lower incomes or net worths or having heads with lower educational attainment.”
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