When federal student repayments resume later this year, many retirement plan participants will find themselves in a familiar predicament: deciding whether to pay off their loans or save for retirement. A recent survey found that nearly 70% of adults with student loans have delayed saving for retirement because of their student debt.
The matching contributions provision of the Secure 2.0 Act, which matches student loan payments into retirement plans, will enable many participants to tackle both financial goals once it goes into effect in 2024. But that’s not the only measure making it easier for borrowers to contribute to their retirement accounts. The updated Income-Driven Repayment (IDR) plan, which is slated to go into effect this summer, will make monthly federal loan payments more affordable for the largest share of borrowers to date. And the less participants have to pay toward their loans, the more they can contribute to their retirement. Here’s why now is the perfect time to incorporate the new IDR plan and Secure 2.0 into your plan sponsor offerings.
Paying off debt vs. saving for retirement
The average monthly federal student loan payment falls between $300 and $400 – an amount that borrowers haven’t had to budget for in three years. After the Supreme Court issues its ruling on the President’s student loan forgiveness plan, many borrowers will need to quickly find that non-paltry sum in their budgets. This arrives at a time when young Americans are already under significant financial strain due to rising interest rates and high inflation. Per The Wall Street Journal, credit-card and auto-loan delinquencies among borrowers in their 20s and 30s rose more in Q4 2022 than they did pre-pandemic.
Research repeatedly shows that participants will prioritize paying off their debt over saving for retirement. Secure 2.0 addresses part of the problem by allowing plan sponsors to match participants’ qualifying loan payments with a contribution to their retirement account. But what about borrowers who struggle to make their monthly payments? Considering that up to 20% of federal student loans are in default, this clearly applies to a large number of borrowers. Having more affordable monthly payments would alleviate financial strain for these borrowers and free up cash flow that they can put towards retirement. This is where the revised IDR plan comes in.
Greater Savings, Fewer Financial Obstacles
Under existing IDR plans, the “best deal” a borrower can get is a monthly payment equal to approximately 10% of their discretionary income. The revised plan will lower the monthly payment to 5% for undergraduate loans, and it will increase eligibility by raising the amount of non-discretionary income from 150% of the federal poverty guideline to 225%. According to the Department of Education, the average graduate of a public four-year university would save $2,000 annually under the revised IDR plan.
In addition to lowering monthly payments, the new IDR plan makes it easier for borrowers to achieve forgiveness and caps loan interest accrual. These changes address two major downsides to existing IDR plans that have negatively impacted borrowers’ ability to manage loan payments for years. Another important update is that forgiveness obtained via IDR won’t be subject to federal taxes until 2026. This is another key update: current IDR plans forgive a borrower’s outstanding balance at the end of the repayment period, but the forgiven amount may be taxed. The new IDR plan gives borrowers a break from a tax bill, and there’s talk that the respite may be extended.
Why should this matter to recordkeepers? When participants are under less financial stress, it’s easier to think proactively about financial goals; they can take the savings they unlock via the new IDR plan and put them towards retirement. Furthermore, the new IDR plan is timely: when the payment freeze ends this year, recordkeepers who can seamlessly help participants transition into affordable repayment will be at an advantage as participants won’t feel the need to sacrifice their retirement planning. IDR is also available to all federal loan borrowers, whether they work in the private or public sector, so the benefits of the new plan are relevant to many participants.
Ultimately, by providing access to a solution that simplifies the IDR enrollment process, you can increase the share of plan participants who turn their increased cash flow into retirement contributions.
The right IDR solution for your needs
Historically, the Department of Education has fallen short when it comes to providing clear and actionable information regarding student loan repayment programs. The easiest way to avoid confusion, misinformation, and frustration is to work with an expert who can deliver a turnkey end-to-end solution that unlocks savings for participants and provides comprehensive support for Secure 2.0. At Summer, we pair state-of-the-art technology and hands-on support to deliver a streamlined, secure solution that works for recordkeepers, plan sponsors, and participants alike.
Get a head start on the new IDR plan and Secure 2.0 today. Schedule a no-obligation ROI analysis or exploratory call with one of our specialists to learn more about what Summer’s technology can accomplish for you.