Student debt is a problem for millions of Americans. Collectively, U.S. borrowers owe close to $1.6 trillion in student loans, and keeping up with that debt often puts a major strain on borrowers' budgets.
A new bill proposed by Kentucky Senator Rand Paul may change that. It's called the Higher Education Loan Payment and Enhanced Retirement (HELPER) Act, and it's designed to make the process of repaying student debt easier on those saddled with it.
Key features of the HELPER Act
Perhaps the most prominent feature of the HELPER Act is the option for student loan borrowers to withdraw up to $5,250 annually from a 401(k) plan or IRA tax- and penalty-free to either pay for college, or to repay student loans. That's huge because currently, 401(k)s don't allow for education-related withdrawals at all. If you remove funds from a 401(k) prior to reaching age 59 1/2, you risk a 10% early withdrawal penalty on the sum you take out, plus taxes on that sum in the case of a traditional 401(k).
IRAs, meanwhile, do allow savers to take early withdrawals penalty-free to pay for college. But that allowance doesn't extend to repaying student loans, and removing funds early for that purpose triggers the same penalty. By allowing borrowers to tap their retirement funds to repay student debt, the HELPER Act could, in many cases, help those with loans avoid default and the consequences that come with it, like damaged credit and wage garnishment.
The HELPER Act also calls for up to $5,250 a year in employer-sponsored student loan repayment assistance to be tax-free. Currently, if employers pay that much money toward workers' tuition, it's not treated as taxable income. But that doesn't hold true for dollars granted to repay existing debt, so this change would be a positive one for employees who receive this benefit.
Finally, the bill seeks to repeal the phase-out and cap associated with the student loan interest deduction -- a tax break for borrowers that higher earners can't capitalize on. Borrowers can currently deduct up to $2,500 annually in student loan interest, but only if their income falls below a certain threshold. The deduction is off the table for single tax filers with modified adjusted gross incomes higher than $85,000, and for joint filers with modified adjusted gross incomes higher than $170,000. But higher wages don't negate the presence of student debt in workers' finances -- nor the fact that those who earn more money often have to take on higher levels of debt to achieve that higher-paying career success.
Is the HELPER Act actually good for student loan borrowers?
Two provisions of the HELPER Act -- tax-free student loan repayment assistance and the broadening of the student loan interest deduction -- are positive changes that could help a large number of borrowers repay their debt more affordably. But allowing borrowers to tap their retirement accounts early to repay their student debt is a move that could backfire.
The purpose of funding an IRA or 401(k) is to have money on hand during retirement. Those who raid their savings early to repay their student debt risk falling short once their careers come to a close. That could leave them limited to a meager paycheck from Social Security to cover their senior living costs.
In fact, Social Security will generally only replace about 40% of the average worker's pre-retirement income. Most seniors, however, need close to double that amount to live comfortably. By making it easier to access IRA or 401(k) funds for non-retirement purposes, the HELPER Act, if passed, could threaten the future financial security of millions of Americans, especially in a day and age when pensions are far from common.
Should laws be passed that offer more relief to student loan borrowers? Absolutely, and in many regards, the HELPER Act is on the right track. But those in favor of it should recognize that while it may help ease the burden of repaying student debt, it exposes borrowers to a world of financial struggle later in life.