What’s New In Financial Aid For 2024

There are several new financial aid programs that go into effect in 2024. These include rolling over leftover money from 529 plans into a Roth IRA and employer matching of student loan payments with contributions to retirement plans. 

These provisions were included in the SECURE 2.0 Act as part of the Consolidated Appropriations Act of 2023 (P.L. 117-328). 

Some aspects of the SAVE repayment plan go live on July 1, 2024, saving borrowers money. 

Here's what you need to know about what's new in financial aid for 2024.

529 Plan Rollovers

Starting January 1, 2024, the account owner of a 529 plan (or prepaid tuition plan) can rollover up to $35,000 from a 529 plan to a Roth IRA. This lets families save for both college and retirement using one investment vehicle. 

529 plan rollovers are subject to the following requirements:

• The beneficiary of the 529 plan must be the account owner of the Roth IRA. (Of course, you can change the beneficiary of the 529 plan to a relative of the old beneficiary, if you wish, before executing the rollover.)
• There is a $35,000 aggregate lifetime limit, per beneficiary, regardless of the number of 529 plans.
• The annual contribution limits for a Roth IRA still apply. These limits are $7,000 per year ($8,000 if the Roth IRA account owner is age 50 or older) in 2024. This means it will take several years to fully rollover the lifetime limit. 
• The income limits on Roth IRA contributions do not apply. 
• The 529 plan must have existed for at least 15 years. (Changing the beneficiary may restart the 15-year clock.)
• The funds to be transferred must have been in the 529 plan for at least five years.

The transfer to the Roth IRA will have earnings and contributions in proportion to the earnings and contributions in the 529 plan. 

If you wanted to use leftover 529 plan money to repay student loan debt, and have already reached the $10,000 limit on a qualified distribution to pay down student loan debt, the rollover to a Roth IRA might present a solution for paying down more debt. After the Roth IRA rollover is complete, you can use a tax-free return of contributions from the Roth IRA for any purpose, including paying down student loan debt. 

The IRS has not yet clarified whether the 5-year rule applies to just the principal, or also the earnings. From a practical perspective, it is probably just the principal, since it would be difficult to determine the earnings that have occurred in the last five years. 

Finally, you need to check to make sure that your state's plan will allow it as a qualifying distribution. Since this is an outbound rollover, many states assess penalties and will need to update their laws to conform. For example, New Mexico's 529 plan was one of the first to allow the 529 plan to Roth IRA rollover. But other plans, like California and New York, have not.

Retirement Plan Matching Of Student Loan Payments

Starting on January 1, 2024, employers can count student loan payments as though they were a retirement plan contribution when making a matching retirement plan contribution.

Employers can match student loan payments with contributions to 401(k) plans, 403(b) plans, 457(b) government plans and SIMPLE IRA plans.

The new tax code provision is modeled after the Freedom 2 Save plan from Abbott Laboratories, which was approved by an IRS private letter ruling. 

Abbott pioneered matching student loan payments as contributions to retirement plans in 2018. Abbott’s plan contributes 5% of employee’s salary into a 401(k) plan if they are putting at least 2% of their salary toward student loan payments. 

With the restart of repayment on September 1, 2023, borrowers are worried about repaying their student loans and more companies are looking to offer some kind of student loan payment benefit. 

Abbott says that their plan had a big impact on the number of employees who are saving for retirement. 

Diego Martinez, Divisional Vice President, Benefits and Wellness, Abbott said, “Freedom 2 Save has played a critical role in employee recruitment and retention. Prospective employees see the program as an alluring workplace benefit, and current employees say it makes them feel that we care about them as people, not just workers.”

According to an Abbott survey, more than half of survey respondents (54%) said that a student loan repayment benefit would have a significant impact on their decision if choosing between multiple job offers. 

All the rules relating to regular matching contributions also apply to the matching contributions based on student loan payments. The program cannot discriminate in favor of highly-compensated employees and the matching contributions count toward annual limits.

There are several important advantages of these matching contribution plans. They do not interfere with the student loan interest deduction, so employees can still exclude up to $2,500 a year in interest on qualified education loans from their income. Employees are not required to make contributions on their own to their retirement plans. 

The new plans are easier for companies to set up, due to simplified reporting. Employers can rely on employee certification that they have made the student loan payments. 

SAVE Repayment Plan Updates

The new SAVE student loan repayment plan, an updated version of the REPAYE plan, goes into full effect on July 1, 2024.

The key changes that start in 2024 include:

• The monthly payments on undergraduate loans will be cut in half, from 10% to 5% of discretionary income.
• Forgiveness will occur sooner for borrowers who started off with less debt. Borrowers who started off with $12,000 or less in federal student loan debt will have the remaining balance forgiven after 10 years, instead of 20 or 25 years. Each additional $1,000 in federal student loan debt adds a year until the remaining debt is forgiven.
• Consolidation will no longer reset the clock on forgiveness. Borrowers will receive credit for payments made prior to consolidation.
• Borrowers will receive forgiveness credit for certain deferments and forbearances, counting them the same as loan payments. This includes the military service deferment, unemployment deferment, cancer treatment deferment, administrative forbearances and national service forbearances. Previously, only the economic hardship deferment counted toward forgiveness. 

Other Developments In 2024

Employer student loan repayment assistance programs, or LRAPs, have resumed operation. During the pandemic, most federal student loan borrowers benefited from the payment pause and interest waiver, leaving employer LRAPs with no student loan payments to match. Now that repayment has restarted, employer LRAPs are once again matching student loan payments, providing borrowers with an extra $100 or $200 a month to pay down their debt. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) made employer LRAPs tax-free through the end of 2025.

The IDR account adjustment consolidation deadline has been extended. Borrowers with loans in the FFEL program must consolidate them by April 30, 2024 to qualify for the one-time adjustment. 

The 12-month on-ramp and Fresh Start Initiative will expire on September 30, 2024. The on-ramp provides borrowers who miss federal student loan payments with a retroactive forbearance. Interest continues to accrue, but delinquencies will not be reported to credit bureaus. The Fresh Start Initiative helps defaulted borrowers get out of default, removing the default from their credit histories and returning them to a current status.