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Friday, October 18, 2019

How financial avisors can help clients overcome student debt

Having student debt is one of the number one reasons that millennials are discouraged from saving for retirement right away, and for good reason. Student debt is a massive contributor to financial stress, and it’s something that affects so many. When you have tens of thousands of dollars hanging over your head right as you are starting your career, it’s a perfectly natural reaction to be more worried about that than your distant retirement.

According to research sponsored by AIG, too many former students will begin their careers under financial burden. The Money Matters on Campus survey showed the necessity of better financial literacy and education to deal with stress. The key findings reveal that money managing is a serious problem for nearly half of all college students, and six out of ten either have taken or are planning to take loans, in order to cover their tuition bills, whereas only 65% are planning to pay off their loans on time. As a result of students’ financial illiteracy, more and more young professionals feel stressed under the feeling that they won’t have enough money to last the semester, or if their tuition fee will rise, or, most importantly, they won’t be able to find a job after graduation.

As a matter of fact, it is now the top source of debt for Americans other than home mortgages. According to the Federal Reserve Bank of New York, about 40 million Americans owe a total of $1.3 trillion in student loans. Also, about 70% of the recent college graduates will have student loan debt, on average, equal to $37,142. This is not an ideal situation to start off with your life and this is even more burdensome for those students who have dropped out of college because they are three times more likely to default on their student loans than college graduates. The direct consequence of having a student loan results in a delay to saving for retirement or buying a first home.

The issue of the student debt should be addressed by the financial advisers when they work with their clients. A careful analysis of the situation is mandatory in order to work out the best course of action on how to repay the student loan while planning for other important goals like retirement. Often, the clients need to be nudged in the right direction to start to remedy the situation. The first step is to understand the terms of the loan if it is a direct subsidized or unsubsidized loan or a private loan, the current interest rate paid on the loan, etc. The second step in this process is to find out about all possible options on how the situation can be made better by finding options with the better terms than they have and begin by checking out programs offered by the federal government or trying to qualify for an income-driven repayment plan that would have trimmed their payments to the manageable amounts.

Regardless of how difficult the situation is, one thing is obvious, you cannot turn a blind eye on the problem of the student debt. Working with a financial adviser can help to build a road map that can solve this problem and let the client start plan for other stages in life like retirement.

When it comes to overcoming debt, one of the most effective strategies could be to reconsider before even taking it on. However one must weight the decision thoroughly because a degree is probably one of the biggest investments that a person will make. As student debt will be a major financial burden throughout their life, it is important for a potential student or their parents to have a financial discussion before making the decision to take on the debt. To look at education coldly as an investment and asses the ROI may be a valuable exercise. Career outcomes should also be discussed, such as expected income and job prospects. If it is determined that taking on the debt for a course which will not likely provide an income level high enough to repay the debt then alternates should be consider. Some alternatives could be:

  • Universities offering income share agreements.
  • Compare loan options from private loan / refinancing firms.
  • Pursue a career that can be built within a company.
  • Community college, trade school or the military.
  • Delay or part time college to allow to work to pay for it upfront or as you go.
  • Employer sponsorship, with a commitment to work for a firm who may be desperate for staff.

When all else fails, student loan forgiveness programs are still an option for many. The federal government offers a few loan forgiveness options, including Teacher Loan Forgiveness, Public Service Loan Forgiveness (PSLF) and forgiveness from income-driven repayment plans. When you think of loan forgiveness, there is a chance that the only program that comes to mind is the Public Service Loan Forgiveness program for federal loans. But loan forgiveness isn’t limited to government workers with federal loans. Depending on your client’s situation, he might be eligible for several forgiveness programs — even for private loans.

Public Service Loan Forgiveness is a federal program available to government and certain nonprofit employees. Eligible applicants remaining loan balance could be forgiven tax-free after 120 qualifying loan payments made.

Private student loans don’t qualify for income-driven repayment, though some lenders offer student loan repayment options that temporarily reduce payments. Also dozens of lenders offer student loan refinancing. If your client’s credit score is in at least the high-600s there’s little downside to refinancing private student loans at a lower interest rate.

Moreover, financial advisors can play a key role in educating younger clients with how to responsibly manage their debt with saving for retirement. For example, being able to explain to your clients how their compounding returns in a retirement portfolio may still be able to outperform your student loan interest in the long run. So there’s good reason to be contributing to your 401(k) or Roth IRA even though they may be desperate to get ahead of their loan interest. Of course it’s a great stress reliever to get debt out of the way before thinking of saving for your retirement, but especially with very lenient Federal Loans, it’s the crucial  role of an advisor to make sure their clients understand how to reach a good balance between saving and paying down their debt

Essentially, financial advisors can help their clients to overcome their debt with effective financial education. This includes developing a better understanding of their loan repayment options, making a repayment plan, and having a clearer picture of their debt.

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