As a financial advisor, one of the largest groups of people likely to come to you seeking guidance are college graduates saddled with loan debt. Unfortunately, the field of student loans is one of the trickier financial lands to navigate. It’s full of all kinds of pitfalls and hidden paths. And that’s exactly why a financial advisor is one of your best assets for dealing with student loans.
While financial planning software for student loan advisors can be a big help, it’s not a replacement for good, thorough, up-to-date knowledge. With that in mind, here are some of the major areas you should know about in order to better help your clients deal with student debt.
If a borrower has enough income to pay more than their required monthly payment, it might seem like a no-brainer to advise them to do just that. However there are reasons why it’s not always in your client’s best interest. For example, if your client has other forms of debt in addition to their student loans, it’s important to consider what debts warrant prioritization over the others.
Similarly, sometimes it makes better financial sense to put that extra income towards other things, such as long-term investments. An investment with a higher percentage return rate should take precedence over a debt with a lower percentage interest rate. Remember that, while your client’s student loans might seem like the most pressing issue to them at the moment, your role as a financial advisor is to provide them with guidance that will do more than just get them out of college debt, but will also ensure them a more financially stable future.
Though student loans typically come with a 10-year repayment plan, for most borrowers it actually takes closer to 20. How is this possible? Well, the U.S. Department of Education has several different repayment plans that alter the timetable in a variety of ways. When advising your clients, it’s important to know the difference between these different plans and how they can help different borrowers based on their financial situations.
Income-contingent repayment plans base their required monthly payment on 20% of a borrower’s discretionary income (defined as the amount their income exceeds the poverty line by 100%), instituting a 25-year repayment period. Income-based repayment plans base their required monthly payment on 15% of discretionary income (this time defined as the amount their income exceeds the poverty line by 150%), also with a 25-year repayment period.
Pay-as-you-earn repayment plans base their required monthly payment on 10% of discretionary income (once again defined as the amount their income exceeds the poverty line by 150%), with a 20-year repayment period. Finally, revised pay-as-your-earn repayment plans base their required monthly payments based on 10% of discretionary income (yet again using the 150% definition), with a repayment period of 20 years for undergraduate loans and 25 years for one or more graduate loans.
Assistance Programs – Where a Financial Advisor for Student Loans Can Really Help
As intimidating as student debt can often be, it’s worth noting that borrowers are not without options for shrinking that debt without shrinking their own income. The U.S. government offers a number of student loan forgiveness and repayment assistance programs. Eligibility requirements differ, including programs specifically geared towards those pursuing certain career paths as well as programs benefiting borrowers with U.S. Armed Forces service records.
Additionally, more and more businesses are beginning to offer their own repayment assistance programs as hiring benefits, especially companies in the STEM and healthcare sectors. While the number of programs is too numerous to describe here, it’s important for financial advisors to help clients research what programs they may be eligible for and determine if the advantages of enrolling in one outweighs any potential disadvantages.