As most experienced financial planners will advise, it is usually in your best interest to reduce or eliminate debt in order to create personal wealth. The principle rings particularly true if that debt isn’t related to income-producing real estate or cash-flow generating property, plant, or equipment.
Student debt could be considered income-producing because it helps graduates land higher paying jobs or careers they might not have been able obtain otherwise. However, recent graduates have accumulated significantly higher student loan balances than their counterparts graduating decades ago.*
Compounding their higher loan balances, some recent grads haven’t been able to secure those higher-paying jobs. Even those who land their “dream job” face student loan-related challenges. As they enter the workforce, they typically are offered benefits such as healthcare insurance, healthcare savings accounts (HSAs), and retirement savings accounts (401(k)s or 403(b)s). But those benefits can be accompanied by conflicting or at least confusing choices. Should you pay down your student loan or contribute to the savings accounts? Paying down debt is generally advisable, but at the expense of missing out on company matching funds in the retirement account?
One recent solution that progressive employers are deploying is to make matching contributions to employees’ retirement accounts based upon how much the employee pays down their student loan. Rather than matching the salary deferral dollars, as most retirement plans work, the employer will “credit” paid down student debt as if it had been contributed into the plan. The company would match student loan payments, up to a certain percentage of an employee’s salary, and deposit the matching contribution in the employee’s retirement account—even if the employee doesn’t’ make contributions of their own. Understanding that both saving for retirement and paying down debt are beneficial to the employee, employers offering this plan feature are saying they won’t penalize employees who are more inclined to reduce debt as a first priority. The feature is quickly gaining traction with large employers. In fact, proposed federal legislation (Securing a Strong Retirement Act a.k.a SECURE 2.0) would cement the practice into law.
Another crafty solution is financial planning software that optimizes where your “next dollar” should go. Many retirement plan websites have built-in financial planning tools. The next-dollar software makes a comprehensive inquiry into your current financial situation—income, benefits available to you, debt as well as savings—then recommends strategies for allocating your dollars. For example, the analysis might recommend saving 2 percent in an employer-sponsored HSA account, paying down student debt with 3 percent of your wages, and contributing 4 percent of your salary to your the retirement account **. Married couples can combine spousal benefits in the analyses as well to determine which spouse’s benefits merit higher contributions or greater attention to reducing debt.
You can expect to see more features in retirement plans that will assist with debt repayment, especially as it pertains to student debt. Also, expect to see more employers developing creative solutions and benefits to assist college graduates with empowering tools to minimize and retire their student debt. Who knows, maybe someday there will be a college course or even a degree in Student Debt Minimization?
** This is only an example for illustration purposes. Please consult a financial planner or adviser who can create a personalized solution for your financial condition, needs and goals.
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