Count on the 401 (K) Benefits of Your Job Versus Student Loan Assistance Offers
Americans have borrowed about $ 1.48 trillion in student loans, and about 70% of undergraduate students borrow money to go to college, according to research by Oliver Wyman , a consulting firm specializing in banking. An increasingly popular employee benefit can help ease that burden, but it may not be as good as employees think.
Employers such as Aetna, Fidelity and Penguin Random House now contribute monthly student loan payments to their employees. Payments in each company are structured differently: some are lump sum payments, such as $ 100 a month in principal, while others are capped at a certain amount per year. Other companies offer a fee like the traditional 401 (k). It might not sound like a ton of cash, but that $ 100 monthly payout makes a huge difference, as Oliver Wyman reports:
For an employee with a loan balance of $ 26,500, the median debt of a borrower with a bachelor’s degree, the monthly employer contribution of $ 100 on a typical student loan will bring cumulative savings of over $ 10,000 in principal and interest, a reduction more than 30%. general payments. It will also shorten the time it takes to pay off student debt in full by more than 3 years, which is 30% less time.
But you don’t want to pay off debt instead of saving up for retirement. If your employer contributes to the loan and you don’t make up for that loss with your retirement savings, your long-term financial health will suffer. Investing, especially in your 401 (k), is a long game. Getting more money early in your career is critical to building up savings in the decades to come. We’ve all seen compound interest charts and heard the statistics – saving as much as you can when you’re young will really pay off.
Pension savings and student loan repayment
You can play around with a calculator from Gradifi , a platform that manages incentives for companies like Penguin Random House, to see the difference the potential student loan benefits will bring – here’s an example of $ 100 a month on a $ 25,000 loan at 5% interest. , after 10 years.
About 58% of those surveyed by Oliver Wyman said they would rather have their employer pay off their student debt rather than make additional contributions to their pension funds. “As student loan arrears grow, workers have to choose between paying off their student loans or prioritizing other important financial goals,” Jamie McInnes, senior vice president and head of general retirement solutions at Prudential Retirement, told the Society for Human Resource Management . “Our research shows that many workers will choose to pay off debt rather than save for retirement.”
But this kind of thinking can backfire on many employees. To see why, use this tool from Student Loan Hero, which allows you to compare where you would be if you invested a certain amount of money in a loan, or invested it instead. Early contributions to retirement will pay off.
Of course, it’s really hard to think of investing $ 100 in a 401 (k) that shouldn’t be touched when you have $ 25,000 in student loan debt hanging over your head. Immediate relief at the sight of this decrease and a reduction in the time it takes to pay off debt are real benefits. At the end of the day, it is about what matters most to you.
“Unlike 401 (k), student loan payments offer immediate financial relief,” says Elissa Kirkham of Student Loan Hero. “For workers today struggling to make ends meet, this help could be more meaningful than the additional dollars invested in retirement, which is still decades away.”
But don’t worry about your credit burden so much that you settle for or overlook lower pay or less generous benefits (including 401 (k) contributions, but also medical and vacation days, etc.) because your the employer promises $ 100 a month. to your director.
And think about your interest rate, says Chris Walters, founder and CEO of GradFin , another platform that manages payout .
“If a borrower has variable rate or high interest rate private student loans, they need all the tools at their disposal to pay off quickly — the employer picks up and returns options,” Walters says. “If the borrower has fixed or low interest rate loans, it might make sense to keep them at their current terms and use your additional cash to invest in 401 (k).”
Another thing to keep in mind is that paying you back student loan debt counts as income, so it is tax deductible. So, as the Student Loan Hero points out, they look more like a bonus than an allowance . Either your employer will deduct taxes from your paycheck, or you will need to report this at tax time. Congress introduced a bill in 2015 that would make payments on student loans similar to the 401 (k) plan, since they are not subject to income or payroll taxes, but are not going anywhere. (Some public sector benefit programs are tax deductible.)
If you’re lucky, you don’t have to choose: some employers match employee student loan payments with contributions to their (tax-free) retirement accounts. In this case, it’s the best of both worlds: you can prioritize your debt while continuing to build your nest.