Among the primary goals of a financial advisor is to help clients accumulate assets and manage the risks to their financial well-being. But student loan debt is one of the primary roadblocks to achieving these goals.
In fact, nearly a third of student loan borrowers are delaying saving for retirement because of their student loan payments, according to a survey by Bankrate.
Financial advisors can better help clients by giving them a holistic approach to their financial health. Here are some ways to do it.
Understand the Different Repayment Plans
Federal student loan borrowers start out with a 10-year standard repayment plan, but it doesn’t necessarily remain that way. The reality is that it typically takes borrowers 16 to 19 years to pay off student loans.
That’s primarily because the U.S. Department of Education offers several different repayment plans, including income-driven repayment plans, extended repayment plans and graduated repayment plans. Depending on which one you choose, you may extend your repayment term to up to 30 years.
Advisors can help their clients with student loans by providing education and advice on how to handle their monthly payments. If they’re struggling to get by, an income-driven repayment plan may be a good option.
Use our income-driven calculators below to understand how each plan impacts monthly payments and overall student loan debt.
- Income-Contingent Repayment Calculator (ICR). Income-contingent repayment bases the monthly payment on 20% of discretionary income, which is defined as the amount by which income exceeds 100% of the poverty line, with a 25-year repayment term.
- Income-Based Repayment Calculator (IBR). Income-based repayment bases the monthly payment on 15% of discretionary income, which is defined as the amount by which income exceeds 150% of the poverty line, with a 25-year repayment term.
- Pay-As-You-Earn Repayment Calculator (PAYE). Pay-as-you-earn repayment bases the monthly payment on 10% of discretionary income, which is defined as the amount by which income exceeds 150% of the poverty line, with a 20-year repayment term.
- Revised Pay-As-You-Earn Repayment Calculator (REPAYE). Revised pay-as-you-earn repayment bases the monthly payment on 10% of discretionary income, which is defined as the amount by which income exceeds 150% of the poverty line. The repayment term is 20 years for borrowers with just undergraduate loans and 25 years for borrowers with at least one graduate loan.
On the flip side, if a client has room in their budget, making additional payments or refinancing their loans with a shorter repayment term — many private lenders offer terms as short as five years — can help them become debt-free sooner.
Weigh the Pros and Cons of Early Repayment
Paying off student loans more quickly can free up a lot of cash flow in a client’s budget. But depending on the interest rates they’re paying, it may not make sense to put all their eggs in one basket.
For example, if a client is trying to decide between accelerating their student loan payoff or saving for retirement, run the numbers to provide them with the expected results of their decision.
If the weighted-average interest rate on their student loans is 5% and they can get an average return of 7% or higher with long-term investing, they’ll get more value in the long run by putting additional cash flow toward their 401(k) or an individual retirement account (IRA).
It’s also important to help clients compare student loan debt with other debts. For example, if a client has $5,000 in credit card debt with a 20% APR, they’ll get a much greater benefit by paying off their credit card balances before focusing on student loans.
In all of these scenarios, it’s crucial that financial advisors provide hard numbers to help their clients visualize the true benefits and drawbacks of making one decision over another.
Use our prepayment calculators to see how much can be saved:
- Our Loan Prepayment Calculator shows you how much you can save and how much sooner you can pay off your loans by making extra payments. It includes a nifty graphical display of the progress in paying down your debt, plus a detailed payment schedule. This calculator can be used with student loans as well as fixed-rate auto loans and mortgages.
- Our Student Loan Prepayment Calculator evaluates the impact of making extra payments, showing you how much you save on interest by making extra payments and how much extra you’d have to pay to pay off your debt quicker.
Find Repayment Assistance Programs
The federal government provides a few student loan forgiveness programs, and there are also several government-sponsored repayment assistance programs that can help clients eliminate their debt faster. Depending on the program, it’s possible to receive tens of thousands of dollars in assistance.
Additionally, 4% of employers in the U.S. offer some form of student loan repayment assistance as an employee benefit, according to the Society for Human Resource Management. Help clients to find programs and employers in their area that can help them pay down their debt more quickly.
Also, help them understand the eligibility requirements of these programs. Some, for instance, are available only to student loan borrowers on certain career paths. Others require you to commit to service obligations with a branch of the military or make other major career decisions.
While the benefit of one of these programs is clear, clients should understand the potential long-term costs associated with changing their career path.
Consider if Refinancing is a Good Option for Clients
Refinancing student loans may be a good option for some borrowers. There are many things to think about when considering refinancing. For federal student loans, it means a loss in many benefits – income-driven repayment plans, generous deferment periods, subsidized loans, and the potential for student loan forgiveness.
Talk with clients about the pros and cons of refinancing and if it’s right for their situation.
Use our Loan Refinancing Calculator to see how much you can lower your monthly loan payments or total payments by refinancing your student loans into a new loan with a new interest rate and new repayment term.
The Bottom Line
As a financial advisor, you have the opportunity to help clients tackle one of the greatest threats to their financial security: student loans. As you work with individual clients, continue to use best practices, including:
- Identifying and prioritizing their goals
- Analyzing their current financial situation and course of action
- Educating clients to help them make the right decision for their situation
Also, keep in mind that as you work to provide the best possible experience and results, acting in a client’s best interests often includes focusing on paying down debt instead of investing to set up a bright future.