Secure Act is a good but small step in relieving student-debt

09 January 2023

In one of its last acts of 2022, the Biden administration and the Democrats in the Congress passed a measure that reaffirmed their commitment to addressing the student-loan debt crisis.

The measure was buried in the Secure Act 2.0, an overhaul of the retirement system. That act was itself buried in the end-of-year $1.7 trillion spending package (known as the omnibus) that included $45 billion in aid to Ukraine and vital fixes to the electoral system.

Given those items, it’s not surprising that student debt got lost.

Still, with Joe Biden’s debt relief package held up in court, the Secure Act 2.0 is a hopeful indication that the president and the Democrats continue to look for ways to help those crushed by student debt.

Debts literally doubled

Secure Act 2.0 includes a number of provisions to encourage savings and make retirement accounts more flexible. It raises the age at which workers must begin to take minimum distribution from retirement savings from 72 to 75 by 2033. It also allows older workers to increase the amount put away for retirement.

The act permits employees to withdraw $1,000 from retirement accounts without penalty “for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.” It also encourages companies to help them set up emergency savings accounts using payroll deductions.

The hope is that these measures will provide people with more of a cushion if they are faced with a sudden financial shock.

Another important provision requires employers to make their 401(k) enrollment opt-out rather than opt-in. Employees are automatically enrolled unless they specifically say they don’t want to be.

Finally, Secure Act 2.0 makes it easier for workers with student debt to save for retirement.

Average student debt for college graduates is around $30,000. One study found that students take an average of 21 years to pay off their debts. That means that people are paying off student loans into their 40s—when they should, in theory, be working to save for retirement.

One survey found that 84 percent of adults said student loans limited the amount they can put away. For those who were not saving any money at all, 26 percent said student loans were the main barrier.

Generally, employers match employee contributions to retirement accounts. If employees are paying off student loans, though, they may not be able to put any money into their retirement. That means they don’t get employer-matching funds either.

The harm from student debt is literally doubled.

Secure Act 2.0 treats student loan payments as retirement payments for matching purposes.

In other words, it allows employers to make matching contributions to employee savings accounts when employees make student loan payments. For instance, Abbott Labs started a program in 2018 that allowed employees to put 2 percent of their pay towards student loans and receive 5 percent of their pay from their employer in their 401(k). Some 1,900 employees have participated in the program.

Abbott’s savings plan predates the Secure Act 2.0. The new law formalizes structures for such savings plans, though, so employers setting them up don’t run afoul of the IRS. It will hopefully make it easier for more businesses to inaugurate these programs.

A broad constituency

The Secure Act 2.0 is at best a small effort to ameliorate the massive student debt crisis. Only 79 percent of Americans work at places with a 401(k) plan, and only 41 percent of those contribute to it. Even fewer people are going to work for employers who match student loan contributions.

As far as helping workers with student debt save for retirement, Biden has already done much more than Secure 2.0 by pausing student loan payments.

The payment pause began under Donald Trump in early 2020 at the beginning of the pandemic. Biden extended it throughout his two years in office. The most recent extension pauses payments through at least June 30, 2023.

Biden has also forgiven a substantial amount of student debt — or tried to. Using executive authority, he has erased up to $10,000 in debt for borrowers with less than $125,000 in income, and up to $20,000 in debt for Pell Grant recipients.

He’s also reduced monthly payments and drastically reduced interest.

Obviously, reducing payments, interest, and eliminating debt outright all would make it much more feasible for those with student loans to save for retirement. And the Biden administration has already approved 16 million people for relief.

Unfortunately, Republicans have managed to use the courts to stall debt relief, which is now on hold awaiting a hearing before the Supreme Court. As the Biden administration noted, Republican cruelty and petty intransigence “leaves millions of economically vulnerable borrowers in limbo.”

On the merits, it seems clear that the federal government and the Education Department should have the authority to restructure loans. But the current activist conservative Supreme Court has already shown it is willing to ignore the law and even the facts in a case in order to arrive at Republican-preferred decisions.

The Secure Act 2.0, though, passed in an omnibus spending bill that received bipartisan support in both the Senate and House.

Some Republicans, at least, are willing to acknowledge that crushing student loan payments are bad. Saddling teenagers with debt so severe that it makes it impossible for them to ever retire is cruel, nonsensical policy.

That doesn’t necessarily mean the GOP is going to be a partner in further efforts to roll back student debt. But it does indicate that there is a broad constituency for student debt relief.

Good but not enough

Employers should take advantage of Secure 2.0 to provide matching contributions for employees making debt payments. The Supreme Court should let Biden’s debt relief plan go forward. And Congress should consider proposals to zero out college tuition at state schools.

College should provide people with opportunities, not close them down. The Secure Act is a step in the right direction.

But we need more than a step.

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