‘Tis the season to contemplate New Year’s resolutions. With 44.5 million student loan borrowers in the U.S. owing a total of $1.5 trillion, student loans are certain to be a factor in most financial wellness resolutions.
Not only are more people in debt, but people are deeper in debt because of higher education. Average debt at graduation is currently around $35,000 — up from $10,000 in the early 1990s. The effects on the individual are clear. Beyond straining budgets, student loan debt is preventing individuals from saving and building net worth. Research by the Federal Reserve found a strong correlation between the decline in American home ownership and increasing student loan debt. Studies by the National Association of Realtors and Pew support this analysis; in each study a majority of respondents believed student loan debt was preventing home ownership.
Beyond the effect of debt on the individual, ballooning student loan debt — now the second highest consumer debt category — is affecting the larger economy. The meteoric run-up of student loan debt is being likened to the run-up in mortgages that led to the housing bubble in 2008. More troubling, economists now predict that nearly 40 percent of borrowers will default on their student loans by 2023. With those defaults, credit scores will drop, access to credit will dry up and student loan debt will be a stronger headwind against consumer spending.
Amid all of this gloom, there are signals of hope and an opportunity for Congress to act.
On Aug. 17, the IRS publicly released a private letter ruling regarding an employer’s proposal to amend its 401(k) plan to include a student loan benefit program. If an employee enrolls in the program and makes a student loan repayment equal to 2 percent or more of the employee’s eligible compensation for a pay period, the employer will make a non-elective contribution to the plan equal to 5 percent of the employee’s compensation for that period.
While this is a positive sign, it is important to note that a private letter ruling is directed to the specific taxpayer requesting the ruling, and it is applicable only to the specific set of facts and circumstances included in the request. That means others cannot rely on the private letter ruling as precedent. It is neither a regulation nor even formal guidance.So as Americans resolve to tackle their personal student loan debt and improve their financial wellness in 2019, let’s ask the new Congress to resolve to give them tools to do so. One such tool is codifying the arrangement approved by the private letter (known as “PLR 201833012”). With clear formal guidance, record keepers will be encouraged to add this feature to their plans. In a tight labor market, employers will be keen to add this benefit to help attract talent. Americans will be given a means to pay off debt and save for retirement within tightening personal budgets.
This is by no means a salve for all of the ills of the student loan debt crisis, but it is an easy first step to improving the financial well-being of a generation that is being stretched too thin.
Scott T. Gibson is the senior vice president of people and programs at the Melwood nonprofit. Additionally, he serves on the adjunct faculty of Mount Saint Mary’s University, where he teaches political science. He can be reached at SGibson@Melwood.org.