How to take advantage of student loan 401(k) rules

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Tabulator
Posts: 265
Joined: Sat Mar 31, 2012 4:03 pm

How to take advantage of student loan 401(k) rules

Post by Tabulator » Sat Oct 20, 2018 4:13 pm

I didn't see a thread about the following piece of news. (If one exists then please post a link here.)

Several authors at National Law Review reported about a letter from the IRS this year. Quoting Mr Holdvogt:
the IRS released a private letter ruling which will help clear the way for employers to provide a new type of student loan repayment benefit as part of their 401(k) plans. This ruling is important because many employers have been looking for ways to help their employees manage student loan repayment obligations, but to date the options available for doing so have been rather limited.
Would it be correct to assume that this news from the IRS is only relevant to a borrower if his or her employer finds it worth the time and effort to offer the benefit? In other words, if only a few employees in a company have student loans, perhaps those who do have student loans will be unable to get help.

If you have student debt, do you plan to ask your employer to implement a program such as the one described above?

texasdiver
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Location: Vancouver WA

Re: How to take advantage of student loan 401(k) rules

Post by texasdiver » Sun Oct 21, 2018 1:17 am

I tried to read the IRS letter and found it absolutely unreadable. I couldn’t figure out exactly what they are saying.

I assume the point of this is to use pre tax dollars to pay student loans? If not then what is the point? It seems rather inequitable to allow students to use pre-tax dollars for loan repayment when those who save and pay tuition up front have to use post tax dollars. There should at least be consistency in how tuition dollars are treated. Students loans can also be used for housing and meals. It would be especially inequitable to allow wealthy students to deduct their living expenses when poor kids working regular jobs do not have that option.

The other twist would be using 401k loans to refinance existing student loans. If a person has 50k in their 401k and student loans equal to 50k it would make sense to allow them to refi their student loan and pay it off with a 401k loan in which the interest is paid back to the employee rather than to a loan financing company.

Ragnoth
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Location: New York

Re: How to take advantage of student loan 401(k) rules

Post by Ragnoth » Sun Oct 21, 2018 2:16 am

This makes it so you can get up to a 5% matching contribution into your 401k if you either (1) contribute a certain amount into your 401k or (2) pay a similar amount of money into student loans.

You can only do one or the other (there is no way to get two employer matches). Really this is only going to help people that put *almost nothing* into their 401k because they have chosen to aggressively pay down student loans instead.

For example, in the past maybe you had to chose between putting $10k into a 401k and getting a $5k match, or pay down $10k of your loans and give up on the free money. As a result, people might be slow to pay down loans.

Now, you can pay down $10k of student loans and your employer will “pretend” like it was a 401k contribution for the purposes of putting matching funds into your account (i.e., you pay the loan and they will drop a $5k match into your 401k so you don’t feel like you are “missing out” on free money).

texasdiver
Posts: 2719
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Location: Vancouver WA

Re: How to take advantage of student loan 401(k) rules

Post by texasdiver » Sun Oct 21, 2018 2:27 am

Ragnoth wrote:
Sun Oct 21, 2018 2:16 am
This makes it so you can get up to a 5% matching contribution into your 401k if you either (1) contribute a certain amount into your 401k or (2) pay a similar amount of money into student loans.

You can only do one or the other (there is no way to get two employer matches). Really this is only going to help people that put *almost nothing* into their 401k because they have chosen to aggressively pay down student loans instead.

For example, in the past maybe you had to chose between putting $10k into a 401k and getting a $5k match, or pay down $10k of your loans and give up on the free money. As a result, people might be slow to pay down loans.

Now, you can pay down $10k of student loans and your employer will “pretend” like it was a 401k contribution for the purposes of putting matching funds into your account (i.e., you pay the loan and they will drop a $5k match into your 401k so you don’t feel like you are “missing out” on free money).
That makes sense. I couldn’t figure out exactly what they were describing based on the convoluted IRS memo.

An employer would need actual IRS permission to do this as provided by this IRS memo because they are required to treat all plan participants equally under 401k rules. So they couldn’t just give matches to employees paying down student loans but not to others who are spending their money on other things such as car loans or just random spending.

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