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Helping Financial Advisors Understand Student Loan Repayment Options
• Lauryn Williams • February 20, 2020
Today’s students are faced with a tough situation when it comes to student loan repayment. I’ve witnessed firsthand just how urgently young students need something different from what the financial industry is currently offering. I’ve also seen how impactful sound financial advice can be at this point of a young adult’s life.
Financial advisors who understand the full breadth of student loan repayment strategies can offer much needed guidance. They can help graduates achieve their long-term goals in life while sparking productive, meaningful relationships with a younger generation of clients.
The Need for Expert Financial Advice on Student Loans
I began focusing on student loan repayment when a new type of client first came to me. She was a high earner with a salary around $150k, but her student loans exceeded $350k and were growing despite regular payments. She didn’t know where to go or what her options were, and this debt was a major stress in her life. I was new to student loan repayment as well, but I told her I’d research her options and we’d find a path forward together. After helping this client tackle her debt, I realized just how widespread the need is for guidance on student loan payment.
In the U.S., federal student loan debt is growing quickly, reaching an all-time high of $1.41 trillion in 2019—up 33 percent since 20141. The average student owes $35,359 and, according to the Federal Reserve Bank of New York, 10.8 percent of student loan debt was at least 90 days delinquent or in default as of the second quarter of 20192.
Graduates are taking on unprecedented amounts of debt and struggling to pay it off. Financial advisors can step in and prove their value to young adults by offering support and guidance at this crucial point of their financial lives.
With Baby Boomers nearing the peak accumulation and distribution periods of their financial life cycles, advisors can view this as a new opportunity for business growth as well. Becoming an expert on student loan debt can be a great avenue for connecting with a younger generation of clients to build long-term relationships that secure future revenue.
How Financial Advisors Can Help Students Pay Off Their Loans
Financial advisors can help recent graduates in two main ways. First, by understanding the situation these students face and assuring them there are options available. And second, by developing expertise in repayment strategies to offer advice in their best interest.
Many recent graduates, when faced with large amounts of student debt, are unsure of how they’ll pay off the entirety of their loans. Advisors can step in and take a holistic, long-term approach to repayment. Those who understand the situation these graduates are in can offer highly valuable assurance that their debt is manageable, as well as motivation to budget and achieve their financial goals, such as pursuing further education, buying houses, getting married, or switching careers
Unfortunately, the options available to young adults with student debt are not widely known. The most common course of action is to do nothing—to let the 6-month grace period pass by and then start making payments on federal loans. This is rarely the best option available, however, as there are many ways to better accommodate a student’s budget and projected income.
Advisors who want to offer their clients student loan repayment advice should understand a variety of concepts and strategies, including:
- What the default payment is and why it’s not always the best
- The value of income-driven repayment and why it’s different from refinancing
- Deferment vs. forbearance
- Extended vs. graduated
- The rare circumstances that warrant an income-contingent repayment plan
- The relationship between loan payments and taxes
While there are certainly other considerations when it comes to developing a student loan repayment plan that works for each individual client, having a deep understanding of the payment methods above is essential for offering impactful advice.
Become an Expert in Student Loan Repayment
A whole generation of young adults are leaving school with record levels of debt and little knowledge of the repayment options available to them. There is a huge opportunity for financial advisors to offer valuable guidance and financial advice to these graduates, if they’re well-versed in all the ways to tackle student debt.
For advisors looking to learn more on the topic, I’m hosting a 60-minute webinar in partnership with eMoney called Smashing Student Loan Debt. CFP® professionals are eligible to earn CE credits from the CFP Board. We’ll discuss strategies to repay student loans as a part of a strong financial plan so you can be an expert for your clients.
1. Tatham, Matt. “Student Loan Debt Climbs to $1.4 Trillion in 2019.” Experian. 2019. https://www.experian.com/blogs/ask-experian/state-of-student-loan-debt/.
2. “Quarterly Report on Household Debt and Credit 2019:Q2 (Released August 2019).” Federal Reserve Bank of New York. 2019. https://www.experian.com/blogs/ask-experian/state-of-student-loan-debt/.
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