401(k) student loan repayment: How this could work for small businesses

12 MIN READEditorial Policy

Throughout the U.S., employers are facing the tightest job market in history. While the nationwide unemployment rate stood at 3.7 percent on September 2018, about half of the states reported unemployment rates equal or lower to the national rate. Hawaii and Iowa topped the list with unemployment rates reported at 2.2 and 2.5 percent, respectively.

As employers aggressively compete to attract qualified applicants, more and more employees are looking at ways to lure new workers with improved perk packages that beef up existing retirement saving and flexible spending offerings. One of such new benefits is the 401(k) student loan repayment program.

Keep in mind that this is still a very new program that is in the conceptual stage for most financial institutions. In order for this type of benefit to be usable by actual employees and employers, there are still many financial and technical steps that need to be taken by several connected parties (the government, loan providers, 401(k) providers, in-house HR teams, payroll companies, etc.). Although it’s not a program you could launch tomorrow, you may still want to learn about the general benefits and logistics that go in to it so that you may include it in your future plans and research.

Get started with an affordable, full-service 401(k) plan.

What is a 401(k) student loan repayment program?

A 401(k) student loan repayment program enables part-time and full-time employees eligible for a employer-sponsored 401(k) who contribute a minimum of their pay toward student to receive an equivalent employer match deposited into their 401(k) plans.

An example is Abbott’s Freedom 2 Save Plan in which 401(k) plan participants who contribute 2 percent of their eligible pay toward students loans would earn the same 5% match from Abbott that those plan participant would have received from a regular 401(k) deposit.

Why would an employee be interested in a 401(k) student loan repayment program?

There are two powerful reasons.

1. Too much student debt

Outstanding student debt hit a record $1.53 trillion at the end of the second quarter of 2018, according to the Federal Reserve. To put things in perspective, outstanding student debt was $600 billion just 10 years ago and arrived to the $1 trillion mark in 2012. Student debt levels are quickly are growing at such a rate that one in six graduates holds student debt that exceeds their income.

2. Starting (or beefing up) a nest egg

This benefit may very well be the tipping point for a hesitant worker to set up his or her 401(k)!

In 2017, nearly 3 in 4 workers not currently saving for retirement said they would be at least somewhat likely to save for retirement if contributions were matched by their employer. Approximately two-thirds of those non-saving workers said they would be likely to save for retirement if automatic paycheck deductions with the option of changing or stopping them, at either 3 percent or 6 percent of salary, were used by their employer.

Deferred tax treatment of 401(k) matches

A key incentive of 401(k) student loan repayment programs is that the employer match receives tax-deferred treatment by the IRS. Abbott is a trailblazer by persuading the IRS to consider its employees’ loan payment as equivalent to standard 401(k) contributions. Being able to reduce taxable income is a great incentive for graduates to pay down their student loans faster. And on top of that, those same graduates are able to build up a nest egg.

Reducing taxable income is one of the many 401(k) tax advantages.

Ok, but what’s the benefit for the employer?

The main benefit is the ability to attract and retain talent. The average federal student loan debt, according to the Education Data Initiative, is $37,574. This explains why 48 percent of job seekers would give at least some consideration between a higher-paying job and a lower paying-job with student loan assistance (44 percent to a lower-paying job with tuition assistance).

Even more importantly, 19 percent and 18 percent of respondents to a Glassdoor poll valued employee development programs and tuition reimbursement, respectively, more than a pay raise.

Let’s use Hawaii as a case study. Since last year, Hawaii has been enjoying the lowest unemployment rate in the nation. With a state unemployment rate at 2.2 percent, how can employers differentiate among employers offering similar salaries and company perks in such a tight job market?

The answer is to offer a way not only to address climbing student debt but also to reduce taxable income. Students graduated from four-year public and private colleges in Hawaii with an average of $26,092 in student loan debt in 2017. With the new tax bill limiting the amount of itemized deductions, the main way for workers to fight off taxes is with deferred contributions through workplace retirement plans and flexible spending accounts. A 401(k) student loan repayment would become a new way for your potential employees to pay down student debt and reduce their tax liability, and for your company to stand out from the competition.

How does this compare with other options for paying down student loan debt?

As an employer or employee, you may be thinking wouldn’t it be better just to provide the cash to the employee and let the employee handle its student loan payments himself? Not so much.

You see, a 401(k) student loan repayment program makes the most out of every dollar dedicated to reducing student loan debt. Let’s imagine that you’d like to offer your employee a $1,000 cash bonus to pay down student loans. If you give that employee that bonus in cash, she’ll pay income and employment taxes on the money, and you’ll also owe Social Security, Medicare, unemployment and other taxes. The average worker faces a 22.4% tax burden, and the average employer an 8.9% tax burden. All told, a $1,000 bonus ends up costing employers an average of $80, while putting only $776 in employees’ pockets.

On the other hand, if you were to offer an additional $1,000 in matched 401(k) contributions, your addition to their retirement funds would grow tax-free until withdrawal. The employer would be able to write off the contribution, and employees would enjoy preferential tax treatment as their nest eggs grow. Putting extra funds into a matched 401(k) provides tax benefits to both employer and employee.

For a deeper dive on tax benefits of 401(k) matching for employers, see Is a 401(k) match contribution tax deductible?

Is 401(k) matching based on student loan repayment suitable to all companies?

Companies hiring college-educated workers are the best suited to reap the benefits of a 401(k) student loan repayment program the fastest. This is due to student loan balances being top of mind for the talent pool of college-educated candidates.

This benefit may also be of high interest to companies in industries that require ongoing education and licensing, such as engineering, accounting, real estate, banking and finance. One example in the consulting sector is PricewaterhouseCoopers, which offers associates and senior associates at the consulting firm receive $100 per month ($1,200 a year) toward student loan payments for up to six years. Another example in the financial services sector is Fidelity Investments, which makes an annual $2,000 direct payment to employees’ student loan servicers, up to a total of $10,000.

This benefit is particularly well-suited for companies looking to promote its future managers from within. Take for example, retailer Staples, which offers top-performing full-time employees $100 a month for three years, for a total of $3,600 in student loan assistance and grocer Kroger, which offers up to $3,500 annually ($21,000 over the course of employment) to support educational advancements like high school equivalency exams, professional certifications and advanced degrees.

How would a smaller company with no (or very small) HR team be able to handle this?

With limited manpower and resources, the task of running a 401(k) plan on its own can be daunting to a small- to mid-sized business. This is why outsourcing your 401(k) processing to a qualified third-party vendor is a cost-effective way to streamline 401(k) processes and implement a 401(k) student loan repayment program.

For employers, Human Interest’s small business retirement plans start at just $120 a month plus $4 per employee per month – less than half the cost of your typical 401(k) provider. In addition, eligible companies can get up to $5,500 back in each of the first three years of the plan to offset costs with the Retirement Plans Startup Costs Tax Credit. We aim to make our plans affordable to employees as well, so employees typically pay just 0.066%1 of their account balance annually, compared to a national monthly average of 0.133%2 for small business plans.

If you’re looking for a great 401(k) for your employees, click here to request more information about Human Interest.

Low-cost 401(k) with transparent pricing

Sign up for an affordable and easy-to-manage 401(k).

Damian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.

Related Articles

Subscribe to our Retirement Roadmap newsletter

Retirement isn’t just a destination. It’s a journey, and we’re here to help you. Our newsletter delivers succinct and timely tips, reviewed by Financial Advisors, to help you navigate the path to financial independence.

By providing your email above or subscribing to our newsletter, you agree to our Privacy Policy. You also elect to receive communications from Human Interest.



Investment advisory services are offered through Human Interest Advisors LLC, a Registered Investment Adviser and subsidiary of Human Interest Inc. An investment advisory fee is paid to Human Interest Advisors (HIA) of 0.01% of plan assets and a separate fee for recordkeeping services and custody-related expenses is paid to Human Interest Inc. (HII) of 0.05% of plan assets. Both fees are deducted on a monthly basis from the employee's account according to the HII and HIA Terms of Service. All prices are exclusive of applicable taxes. If the plan sponsor elects to hire an external investment advisor, the plan sponsor will pay such advisor as agreed between the plan sponsor and advisor. For more information, please see our pricing page. Similar services may be available at a lower cost from other vendors. Average fund fees as of 12/31/23. Asset-weighted average of mutual fund annual operating expenses ("expense ratio") for all plan participants invested in Human Interest Advisors' Model Portfolios ("Models"). Provided for illustrative purposes only. Actual, average fund expenses a participant experiences vary based on the specific Model selected, allocation changes to Models, whether participants opt out of Models and choose their own investments and allocations, or allocation drift, especially in volatile markets. Model allocations and underlying mutual fund expenses are subject to change. Before investing, carefully review the fund’s prospectus, which includes, among other things, a description of fees and expenses a fund will charge.


The average investment expense of plan assets for 401(k) plans with 25 participants and $250,000 in total assets is 1.6% of assets, according to the 23rd Edition of the 401k Averages Book, and is inclusive of investment management fees, fund expense ratios, 12b-1 fees, sub-transfer agent fees, contract charges, wrap and advisor fees, or any other asset based charges.