Participants Voice Student Debt Concerns as Balances Grow

Results of the latest OneAmerica client plan participant survey show student debt is a widespread challenge facing U.S. workers as they contemplate retirement savings.

According to OneAmerica’s most recent client polling, which reached more than 12,200 individuals between August 2017 and January 2018, nearly four in 10 workers indicate they are paying toward a student loan for themselves or on behalf of someone else.

“Of those, an astounding 85% of respondents paying toward student loans reported that their obligation to repay the funds are impacting their ability to prepare for retirement,” warns Marsha Whitehead, OneAmerica vice president of enterprise marketing. “Of that group, 38% said that student loans are having a significant impact on their ability to prepare for retirement.”

As Whitehead points out, the reality that many participants face when it comes to student loans is tough—and only getting tougher. Related research published last week by IonTuition shows the total amount of student debt held per individual worker is growing fast, as is the length of the average repayment period for both new and existing student debt. Overwhelmingly, employees surveyed by IonTuition agree with the statement, “I would like my company to offer a voluntary student loan assistance benefit.”

“Our survey results make it clear that retirement plan providers, in partnership with retirement plan sponsors and advisers, are in position to help participants understand the impact student loans can have and the best way to balance current and future financial demands,” Whitehead adds. “This is critical to retirement preparation.”

OneAmerica survey results further show working women generally are more likely to be paying toward a student loan than their male counterparts (41% compared to 34%). This matches findings from related research published earlier this year by CommonBond, showing that student loan debt burdens vary not only by sex but also quite a bit by industry and even geographic region.

Melissa Musial, OneAmerica marketing research and data manager, suggests retirement plan participants will benefit from education on how to prepare future generations for post-secondary educational expense, for example by learning more about 529 tax-advantaged savings plans. 

“Participants may feel that their immediate financial needs are more pressing than preparing for retirement,” says Musial. “Although it is difficult being tied to the past and paying towards debt, participants need to understand how important it is to prepare for the future. While participants were able to finance their schooling, they will not be able to borrow in order to finance their retirement years.”

While student loan payback programs are described in the research as “a great benefit to help participants gain control of their student loan debt,” OneAmerica actually cautions sponsors “not to replace or provide employees the option of applying an employer retirement plan contribution to student loan debt.” Just this month, though, a 401(k) plan sponsor requested and received an affirmative Internal Revenue Service (IRS) private letter ruling regarding a proposal to amend the plan to provide student loan repayment non-elective contributions in such a way that will not violate the “contingent benefit” prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6) of the Income Tax Regulations. IRS Private Letter Rulings are directed only to the taxpaying entity requesting it; however, they can give retirement plan practitioners an idea of what the IRS thinks about plan sponsor decisions or programs.

HSA programs also examined in detail

The OneAmerica survey examines other topics relating to participant financial wellness, including health care expenses and the use of health savings accounts (HSAs) as short- and long-term savings vehicles.

“HSAs have recently received attention as an attractive retirement planning tool with their triple tax advantage feature,” the survey report explains. “When positioning HSAs as a way to help prepare for retirement, it is important to evaluate why participants choose to open an HSA.”

According to OneAmerica, the survey shows that a majority of respondents choose to open an HSA in order to put money aside to pay for “future medical expenses” (68%). Participants also recognize the tax benefits HSAs offer, with 56% opening an HSA “in order to save money on taxes.”

On the other hand, less than one-quarter (23%) report opening the account “as a long-term savings vehicle.”

“Respondents who indicate they use an HSA to save for future medical expenses and those who report contributing in order to receive an employer contribution tend to be age 18 to 34,” the survey report states. “Men, participants with household incomes of $50,000 or more, participants with retirement plan balances of $25,000 or more and participants with children in the household tend to use HSAs as a way to save on taxes.”

What can plan sponsors and advisers do to help these groups?

“If an HSA-eligible health plan and HSA option is offered to employees, plan sponsors have an opportunity to position the HSA as a tool to not only help pay medical expenses and save on taxes, but also to help with retirement preparation,” the report concludes. “Explaining the triple tax advantage and the ability to use HSA dollars for non-medical expenses in retirement may build awareness and clear up misconceptions regarding HSAs.”

The full survey results can be downloaded here.