I think we can all agree there are few things that can steal our joy as quickly and easily as having debt. If we were to pinpoint one type of debt that has delayed recent graduates from saving for retirement, it’s student loans.
While the CARES Act provided a brief respite for those in need, it remains critical that we take ownership of our financial worlds. With the current student loan tally in the U.S. at just over $1.7 trillion, it is evident that the concern will endure for the approximately 44 million Americans that currently have an average of $40,000 in student loans. The CARES Act respite expired on September 30, 2021. So, if you have taken a break from making payments, it is time to prepare for that monthly outflow to kick back in gear.
Our experience, through thousands of one-on-one fiduciary planning sessions each year, has been that the average retirement saver has been conditioned to prioritize their student loan payoff ahead of retirement savings. On the surface, it seems like the right path, right? Pay off the debt and then have decades ahead to make up ground.
“The reality is that it’s a give-and-take situation. If I focus on student loan payoff, it means sacrificing retirement savings, or sacrificing vacations, or sacrificing…fill in the blank. With more employers aligning their 401k and HSA offerings with technology we believe there is a path forward that allows for each of these goals to be addressed sooner than later.”
Let’s look at some potential next steps from our perspective as an individual as well as those we may be seeing from our employers.
What About My Needs?
Focusing on ourselves is essential when addressing our financial futures. Laying it all out on the table and crafting a path forward is crucial to our future financial success. The below steps are critical:
- Know the financial ins and outs of your day-to-day. Yes, a budget will be a must if you are going to understand how your income can best impact your debts.
- Learn how your company’s 401k plan works. Does it have an “Auto Increase” feature? If so, set your contributions to what you can afford today and have them automatically increase by 1% each year while you are paying down your student loans. You won’t even feel the increases, and before you know it, you will be saving more than you ever thought possible.
- Use any “variable income” as a lever to move that debt down more rapidly. Tax refunds, bonuses, stimulus checks, etc. should go straight to paying off debt.
How Can My Employer Help?
There is no doubt that the last five years have brought student loans to the forefront of employers’ attention. The CARES Act has opened the door for employers to provide educational assistance benefits to employees in a more tax-advantaged environment under section 127. With that being positioned for at least the next five years, it is easy to see employers becoming more creative and aggressive in assisting their valued employees in wiping their slate clean of student debt.
Another potentially huge impactor, yet still in its infancy, states are beginning to offer tax credits for employers who step up to assist with their employees’ student loan debt. We have seen some states incentivizing businesses to help their people save into 529 plans but are beginning to see that same strategy deployable toward loans.
Wait, were you expecting a conversation around Student Loan forgiveness? It’s not that we don’t believe it is possible for some Americans to see some degree of forgiveness with their student loan debts. Our view is that the problem can’t afford to continue meddling with our financial dreams and eroding our confidence in our ability to become financially free.
If there is a silver lining to debt, it is the fact that it requires us to live without that income. We will naturally develop our lifestyle around the amount that makes its way into our bank account each month. So, save what we can afford in our 401k accounts with an automatic increase propelling us forward, get the most from our employers’ HSA and use any variable dollars that come our way to attack our student loan debts.
Investment advice offered through OneDigital Investment Advisors, an SEC-registered investment adviser and wholly owned subsidiary of OneDigital.
Some information has been obtained from sources we believe to be reliable. OneDigital Investment Advisors makes no representation as to the accuracy or validity of this information.
Article provided by OneDigital