Pay Off Student Loans While Funding Your Retirement!

Written by Kevin P. Gilmore
From the Director

from-the-director-09-21_article.jpgIf you have student loan debt and serve in ministry, you are aware of the challenge to meet repayment obligations and also make elective contributions toward retirement savings. I want to encourage you about potential assistance on the horizon that could be very beneficial in helping pastors to get a good start on funding their retirement plan.

This benefit has been available to participants of some secular 401(k) plans since 2018 via IRS private letter rulings, but Congress is currently considering expanding the legislation to include all 401(k) plans, as well as church-sponsored programs, such as the Nazarene 403b Retirement Savings Plan, and 457(b) educational plans.

The “Retirement Parity for Student Loans Act” was originally introduced in 2019 and has been under consideration by both houses of Congress in one form or another. While many lawmakers are pushing for student loan forgiveness (don’t hold your breath on that one), this legislation proposes a way to help address the issue of existing student loan debt without muddying the water with the forgiveness issue.

What you would accomplish is a completely tax-free way to retire student debt while saving for retirement.

Here’s how it works. Persons make regular (or additional) student loan payments, certify the amount of those payments to an employer, the employer then matches the payments (or some portion of them) with contributions directly to the participant’s 403(b) retirement savings plan. As long as the payments are within IRS annual regulatory limits, the employer contributions are made to the 403b account on a pre-tax basis (i.e., not taxable to the participant) until funds are withdrawn at retirement.

One of the significant benefits of the Nazarene 403(b) Retirement Savings Plan is that, like 401(k) plans, funds that are set aside avoid taxes when they are deposited. In retirement, however, ordained or district-licensed ministers may receive up to 100% of their plan distributions as housing allowance, thereby avoiding taxes again (subject to IRS guidelines) on that income. See P&B Memo #6: Housing Allowance in Retirement

So, if this legislation is enacted and if you are on a mission to get out of debt, and your employer is willing to help by matching student loan payments as contributions to your 403(b) plan, one strategy might be to discontinue elective contributions to your 403(b) account and redirect those funds to student debt repayment. Your employer would then need to match those payments with contributions to your 403(b) plan account. What you would accomplish is a completely tax-free way to retire student debt while saving for retirement. But cooperation and participation from your employer is critical to the success of this strategy.

While no one can be certain if this legislation will pass, there seems to be broad consensus from many in Washington that this type of parity makes sense—especially when it is already being done for participants of some 401(k) plans. Our 403(b) record keeper, Fidelity Investments, has already established a process for assisting plan participants and their employers to accommodate this procedure and is actively doing so for some 401(k) participants. Now, we just need to encourage a deeply divided Congress to grant the opportunity to participants of all similar plans! Do you believe in miracles? I do.

Kevin P. Gilmore is director of Pensions and Benefits USA for the Church of the Nazarene.
Copy of the proposed legislation in the Senate
Summary of the legislation