What the End of the Student Loan On-Ramp Period Could Mean for Retirement Savings

Student loan borrowers were given a one-year “on-ramp” on loan repayments after the September 2023 expiration of the federal government’s three-year moratorium on loan payments that began during the COVID-19 pandemic.

This on-ramp ends on Monday, September 30, which means borrowers will face consequences if they default on their loans. As a result, this could negatively impact retirement plan participation and savings.

While interest still accrued on loans during the federal moratorium and the last year, the on-ramp safety net protected student loan borrowers from being reported to credit bureaus for nonpayment or late payments; being placed in delinquency or default; or being referred to debt collection agencies. As some borrowers may have taken advantage of this on-ramp period and delayed making payments, many will want to start making payments now, as their credit scores are no longer protected.

Will Sealy, co-founder and CEO of Summer PBC, a startup that offers programs for student loan repayment and college savings, says about 45 million Americans are currently on the hook for $1.7 trillion of student debt. The average monthly payment is about $400 per month, but Sealy says about one-third of borrowers are paying more than $1,000 per month.

A report published by the Government Accountability Office in July revealed that, as of January, about half of borrowers were up to date on their student loan payments, nearly 30% were past due, and the rest—accounting for about $254 billion in loans—were not expected to make payments because of deferments or forbearance.

Sealy explains that when the on-ramp period ends, if debtors do not make payments for nine consecutive months, they will default on their loan, which results in, on average, a 50-to-100-point drop in that person’s credit score. A lower credit score makes it more difficult to qualify for credit when buying a car or home or getting a new credit card, and it may make that credit more expensive. Inevitably, Sealy adds that borrowers would also be hit with a very high fee, potentially up to 20% of the balance of their loan.

“All of those things have been paused during the 12-month on-ramp, but starting [on October 1], those benefits to the borrower [and] those protections will be waived,” Sealy says.

“What I believe will happen when these penalties come in is that there will be a number of borrowers who will be like, ‘Oh, I now have to actually pay [off my loans], because I’m getting told that I [will] have fees, fines and potential credit score dings,” Sealy says. “So now … I’ll pay my $500 a month, but where’s this money going to come from? [Borrowers] will look at their finances, and there will be a portion of people that will pull money out of their 401(k), either through a 401(k) loan, which is a very bad idea, or they will lower their contribution to their retirement plan to cover the student loan.”

Sealy says he would not be surprised to see a dip in retirement plan contributions because of the on-ramp period ending, as up to 25 million people are expected to resume payments next month. The student loan matching provision in the SECURE 2.0 Act of 2022 could help bolster retirement savings , he adds, as employers could put money toward borrowers’ 401(k) plans while those participants are paying off their loans.

D.C. Student Loan Retirement Forum

Earlier this month, the Plan Sponsor Council of America, the American Retirement Association and the SPARK [Society of Professional Asset Managers and Recordkeepers] Institute hosted a student loan retirement forum at Georgetown’s Center for Retirement Initiatives in Washington, D.C.

Also in the room were policymakers from the IRS and the Department of the Treasury, research organizations like the Employee Benefit Research Institute and representatives from the 25 largest recordkeepers. The forum centered on discussing how to effectively implement the student loan matching provisions introduced in SECURE 2.0, which took effect on January 1.

Sealy, who also attended the event, says recordkeepers like Fidelity, T. Rowe Price, Empower and Alight all highlighted that they are prioritizing student loan retirement matching and have hundreds of employer clients—both small and large—that have adopted the SECURE 2.0 provision.

The IRS recently put out interim guidance on student loan matching payments, and regulators from the agency spoke at the forum asking for feedback during the open comment period, which ends October 18. Regulators emphasized the importance of hearing from recordkeepers, plan sponsors and other stakeholders to ensure the final guidance is practical and comprehensive, according to Sealy.

Will Hansen, the executive director of Plan Sponsor Council of America, says industry leaders at the forum seemed pleased with the proposed guidance. He says there was also a discussion on finding ways to create a standard stream for the transfer of data that can be used industry-wide to ease the burden on recordkeepers and plan sponsors when employees move from job to job.

“I think once guidance is finalized and once some of the larger companies have implemented [it], that’s where I think we’ll start to see that domino effect of more companies adopting it as a plan design feature,” Hansen says.