Student loan debt is taking a toll on 401(k) plans, but there are proactive steps employers can take to address student loan issues, such as providing better information on loan forgiveness eligibility and creating incentives like matching contributions, according to a new MissionSquare Research Institute study.
Mission Square highlights the significant differences in how student loan debt impacts the financial well-being of public and private sector workers. Based on a national survey of more than 2,000 public and private sector employees, the research report “How Employer-Provided Resources Can Elevate the Impact of Student Debt Across Sectors” reveals sharp disparities in financial security and retirement readiness between the two groups, underscoring the need for employer-driven support initiatives.
SECURE 2.0 now allows employers to allocate matching dollars to the 401(k) plan, 403(b) plan or SIMPLE IRA to offer matching contributions based on student loan payments, rather than solely on what participants contributed to their retirement plan. However, only 5% of employers now allow this, but prevalence is expected to increase this year.
Also complicating saving for retirement is that after five-year hiatus – and an end to pandemic-era relief on student loans during the Biden administration, the Department of Education’s Office of Federal Student Aid resumed collections of its defaulted federal student loan in May. While the Biden administration provided numerous student debt relief packages, the Trump administration put an end to those programs and began efforts to resume student debt and begin wage garnishment.
There are 42.7 million borrowers who owe more than $1.6 trillion in student debt, and will be subject to wage garnishment in the coming months, according to the Department of Education.
“Balancing competing financial priorities while managing student debt can significantly hinder wealth accumulation,” said Dr. Dennis Liu, co-author of the report and head of the MissionSquare Research Institute. “Employees may be forced to delay contributing to retirement accounts … creating lasting gaps in financial well-being, even after their loan obligations are fulfilled.”
“Student loan debt continues to be a significant challenge for both public and private sector employees, but the differences in how it impacts their overall financial well-being are notable,” said Dr. Zhikun Liu, vice president and head of the Institute for MissionSquare. “Our study shows that employer-provided resources and policy improvements can help to address these long-term financial impacts of student loans, helping employees build a secure financial future.”
The study examines the opportunities to assist student loan borrowers’ challenges, including further insight into the unique resources available to public sector employees. Specifically, the study found that public sector employees (43%) are more likely to have student loan debt than their private sector employee counterparts (36%).
In addition, private sector employees continue to experience financial strain even after paying off their loans, reflecting a unique phenomenon called a “debt-overhang” effect.
Public sector employees often have more access to student loan forgiveness programs, such as the Public Service Loan Forgiveness (PSLF) program, which forgives federal student loans after 120 consecutive qualifying monthly payments for employees of qualified government agencies or nonprofit organizations.
However, less than one-third (29%) of public sector employees surveyed received information about PSLF from their employer. Moreover, nearly half (48%) of all employees reported their employers did not provide debt management resources, with slightly higher rates in the private sector (49%) compared to the public sector (42%).
While public sector employees have access to PSLF, employers should enhance PSLF communication and support strategies to help employees navigate the application process and utilize the available programs effectively. “The qualification process can be complex, providing accurate and up-to-date information to employees is important in helping them navigate the program,” said Gerald Young, Senior Researcher, MissionSquare Research Institute.
Related: Student debt takes a toll on 401(k)s: Worker incentives that improve savings
All employers should consider offering more resources on student loan debt management, according to MissionSquare.
“Comprehensive debt management support, financial literacy education, and personalized counseling services are all opportunities where employers can offer support for their workforce, particularly those in the public sector,” added Liu. “To help improve financial outcomes for all workers, employers and policymakers need to not only offer these resources, but ensure they guide their workforce in understanding them as well.”
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