By Eric Reich
There has been a lot of talk lately about the government forgiving student loans. For those hoping for it to be a financial windfall, don’t hold your breath. It is incredibly unlikely that student loans will ever be forgiven for the masses.
In my opinion, they shouldn’t be either. This creates a moral hazard for those who took the loans, but why on earth should someone who didn’t go to college be saddled with the debt/ future tax burden of loan forgiveness for those who did? And please don’t compare it to Personal Protection Program (PPP) loans during the pandemic because they are completely different issues. PPP loans were to prevent an entire economic collapse of the country, and student loan forgiveness is for a select few with little to no immediate economic impact.
I certainly understand the arguments in support of it. If people didn’t have these loans, then they would have more money to buy a house or spend to stimulate the economy. This is purely hypothetical, and young grads without debt aren’t buying homes either, so the argument doesn’t hold up well.
The real reason mass student loan forgiveness is unlikely to happen is because nobody who wants to get reelected is likely to get behind this. It is just too politically volatile.
If loan forgiveness isn’t likely to happen, then what can we do to lessen the burden? Employers are able to make payments under the CARES Act up to $5,250 per year towards an employee’s student loans.
An even better option falls under the Secure Act 2.0. This option is one that many people have never heard about. The Secure Act 2.0 allows you to make Qualified Student Loan Payments (QSLP) and have your employer match those payments to your 401(k). It is as if those payments that you make towards your student loans were made to your 401(k). This way, you still get to save for retirement while paying off your student loans. It’s the best of both worlds. You are getting out of debt and saving for retirement at the same time. This includes student loan payments (for the current year) for yourself, a spouse or a dependent (assuming you are legally obligated to make payments). This new provision goes into effect on Jan. 1, 2025. For the employer, these contributions still follow the 401(k) rules for vesting and eligibility. This doesn’t just apply to 401(k)s. It also includes SIMPLE IRAs, 403(b)s and 457 plans as well.
This plan benefits everyone. Employees start saving earlier, which is crucial for maximizing the compounding effects of interest. This could add up to a huge difference when these younger workers reach retirement. They also don’t have to choose between saving for the future and paying off debt. Employers may be more likely to attract and retain their employees. Helping employees retire on time can save employers in benefits costs, sick time, and more.
There are several considerations. For example, the amount you pay towards the loans reduces the amount you can contribute to the retirement plan overall. So, talk to your CPA before you start. Talk to your employer or 401(k) plan provider about the student loan match option, or feel free to reach out to us with any questions.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
