Student Loan Repayments Are Back. What Does That Mean for Your Financial Plan?

When life as we knew it was put on hold in March 2020, so were federal student loans. The coronavirus had prompted broad shutdowns that reduced health risks but created financial hardships. In response, the federal government enacted the Cares Act of 2020. One of its provisions gave borrowers the option to pause their repayments, with interest waived. That reprieve has been extended several times since.

But as of Sept. 1, interest on federal student loans is accruing once more. And repayments must resume in October.

Even some borrowers who were able to continue their student loan repayments took the government up on its offer, often for reasons that made good financial sense. They may have taken the opportunity to build up an emergency fund, pay down credit card debt, or bulk up retirement savings.

For these borrowers, resuming loan repayments may not pose an immediate hardship—but it may come at the expense of their other goals.

Turn Student Loan Repayments Into Retirement Savings

You may not need to sacrifice saving for retirement, though, thanks to the Secure 2.0 Act.

Enacted late last year, the law includes a number of provisions aimed at strengthening the U.S. retirement system. One of these allows employers to match qualified student loan payments with contributions to 401(k) accounts—and 403(b), 457(b), and Simple IRA accounts—beginning in 2024.

So, even if you can’t manage to contribute directly to your 401(k) while repaying your loans, you may be able to build a nest egg with tax-deferred employer contributions.

In fact, some employers already offer this matching benefit or will soon do so. More than 75% of the 250 companies surveyed by the Employee Benefit Research Institute in 2022 offered 401(k) contributions tied to employee’s student loan debt payments, planned to do so, or were interested in the idea.

Employers already offering this benefit are outliers, says tax and retirement planning specialist Ed Slott. They are operating under an assumption that a 2018 IRS private letter ruling allowing one company to do so would apply to others. Many employers, however, were waiting for explicit permission to match student loan payments with retirement plan contributions. Now, Secure 2.0 gives them exactly that.

If your employer isn’t yet planning to offer 401(k) matches for student loan payments, ask for it. “This benefit may catch on,” Slott says, “because it is a good way to attract educated talent.”

That’s the silver lining to resuming repayments, at least for some. And if you receive other forms of student loan assistance from your employer, note that up to $5,250 a year will be exempt from federal taxes through 2025, an extension of another provision of the Cares Act.

Work Student Loan Repayments Into Your Financial Plan

Repaying student loans shouldn’t preclude working toward other financial goals. If you can swing both, do. Easier said than done, perhaps, but these tips may help:

• Put saving and investing on autopilot. Disciplined budgeting practices can help you set money away without having to think about it. Split the direct deposit of your paycheck, diverting a portion into savings right away. Sign up to increase your 401(k) contribution a little bit each year if your plan offers automatic escalation.
• Cut back on discretionary spending where you can. If you need to cut back on unnecessary spending, you won’t be alone. Preston Caldwell, senior U.S. economist at Morningstar Research Services, expects resumed student loan repayments to be “a modest negative headwind to consumption growth in the second half of 2023.” He estimates these payments to equal about 0.5% of total personal consumption expenditures—though he notes that the actual impact on spending will be lower because some people had saved the extra cash from their deferred payments instead of spending it.
• Balance financial and personal priorities. Your own best approach will depend on qualitative as well as quantitative assessments. For example, purchasing a home isn’t always the “correct” financial decision, especially with today’s higher interest rates, but it may be the right choice for your family.

“Some people might have the money to pay their loans off aggressively, but they prefer to add to their retirement savings or pay off higher-interest debt or save for a home,” says Betsy Mayotte, president of The Institute of Student Loan Advisors. “Other people might qualify for forgiveness [eventually], but the idea of having a student loan hanging over their head for 25 years is not something that makes them comfortable.”

Apply for a More Affordable Repayment Plan

Not everyone will be able to pick up where they left off back in early 2020. If you qualify, an income-driven repayment plan can lower your monthly payments and lead to loan forgiveness after 20 or 25 years of qualifying monthly payments (depending on loan type and IDR plan).

In July, the Department of Education unveiled a new IDR, the SAVE Repayment Plan, which is more generous than its predecessors. With the SAVE plan, if your payment is less than the amount of interest that’s accruing, your balance won’t decrease—but it won’t increase either.

“The revised plan addresses one of the biggest critiques of the income-driven plans as a whole, which is that you could be making a payment every month only to see your balance go up because interest still accrues,” notes Mayotte. “There’s a real emotional toll to making a payment that you probably have to struggle to make, only to see your balance go up, despite the fact that you know that there will be forgiveness at the end.”

The SAVE plan also might lead to lower monthly payments than prior versions, but Mayotte cautions that this is not a given. Her organization, TISLA, is a nonprofit that can help navigate this terrain. The Department of Education has a simulator that can help borrowers calculate their best course of action.

Running the numbers is necessary because there’s no blanket answer that covers every borrower. “The name of the game is paying the least amount over time. For some people that means pursuing forgiveness, and for other people it means paying their loans off aggressively,” explains Mayotte. That said, borrowers who work for, and plan to stay with, an employer that’s eligible for public service loan forgiveness “probably should be paying the least amount they can each month.”

Parents who took out Parent PLUS loans to help their children pay for college are not eligible for the SAVE plan, but there is a “double consolidation” loophole that will remain open until July 2025, says Mayotte. The TISLA website details the process.

Mayotte suggests borrowers start researching their options now and make sure their contact and loan servicer info is up-to-date, because she expects the Department of Education to be flooded with inquiries come October.

“Nothing like this—every single borrower all entering repayment at the same time—has ever happened before,” Mayotte says. “This is an extraordinary event, and unfortunately, I think it’s going to lead to extraordinary wait times.”