A little while back we wrote a Word about the impact of rising interest rates on areas that people wouldn’t necessarily think of. In that we detailed the state of consumer debt in the United States and I don’t think it would be a surprise for anyone to hear that the bulk of that debt resides in student loans. It is no secret that student loans are a problem that both citizens and politicians are struggling to find a solution to, but a recent IRS ruling might have laid the ground work for a potential fix.
On August 17th, 2018 the IRS released a private letter ruling (https://www.irs.gov/pub/irs-wd/201833012.pdf) stating their willingness to allow employers to make matching retirement plan contributions for qualifying student loan payments. This is important because recent college graduates are often faced with the decision of paying off their student loans early or trying to start saving for retirement as soon as possible, this is a no-win situation. Paying off debt as soon as possible in a rising rate environment is paramount, but the impact of saving for retirement early is dramatic. Currently its about 50/50 on whether or not these individuals opt into their employer sponsored plans.
In the grand scheme of things, we see it as more of a band aid to the overarching problems with college tuitions at this point in time. But as advisors this is something we see as a positive. It could allow employers to match payments to qualifying student loans and put them into a 401k or other qualified plan. This would allow those with student loans to focus on paying down that debt without worrying about mortgaging their future. The impact on the employers would be effectively cost neutral as the employer would be matching the employee contributions that in this case would have been going into their retirement plan that would have otherwise been used to pay student loans.