Financial advisers help clients graduate from student debt

They're adding value to their practices by helping millennials come up with better ways of paying down their college loans.

Aug 7, 2016 @ 8:00 am

By Liz Skinner and Alessandra Malito

Kirsten Buccigrossi graduated in 2010 with $32,000 in student debt spread out over 13 loans. When she tried to lease a car five years later, she discovered the number of loans was hurting her credit score.

Ms. Buccigrossi, a sales and marketing administrator for a yacht company in Michigan, earns a salary plus commissions. She has been working with a financial adviser for the past two months to clean up her credit score so she can refinance the final $15,000 she owes on her student loans.

When she sends in her last college loan payment, Ms. Buccigrossi will finally be able to start saving more for retirement. She equates getting out from under her student debt with paying off the mortgage on a house.

“It's that substantial when you think about it,” she said.

Around the country, financial advisers are helping millennials and others tackle their student loan debt so that they can concentrate on saving for what else in life is important, such as homes, children and retirement. They're helping clients refinance their debt and choose the best repayment schedule, as well as targeting other ways to pay down their loans.

The nation has become more concerned with the volume and dollar amount of loans being incurred to attend college because it's jumped so dramatically since the recession. It's now the top source of debt for Americans other than home mortgages.

TRILLION-DOLLAR DEBT

About 40 million Americans owe a total of $1.3 trillion in student loans, according to a May Federal Reserve Bank of New York quarterly household debt and credit report. In comparison, about $1.1 trillion is owed in car loans and $712 billion is due on credit cards.

About 70% of this year's college graduates will have student loan debt, according to Mark Kantrowitz, a higher-education expert who has analyzed the most recent loan data. On average, they owe $37,172, he said.

“Student debt is a huge issue for our generation,” said Shawn Tydlaska, founder of Ballast Point Financial Planning and Ms. Buccigrossi's financial adviser.

The situation is even worse for those who drop out of college after taking out loans. They are three times more likely to default on their student loans than college graduates, according to the Federal Reserve's Survey of Consumer Finances.

Student loan debt is on the rise
Source: Household Debt and Credit Report, Federal Reserve Bank of New York

Researchers are beginning to study how these growing student loan obligations are likely to affect financial prosperity down the road, and the results are worrisome.

Alicia Munnell, director of the Center for Retirement Research at Boston College, said starting out “in the hole” because of student loans causes people to put off saving for retirement and delays their ability to buy their first home.

“We should be very concerned,” she said. “This is not just like having car loans. Student loan debt has a big impact on households and the number of people who will not be able to maintain their standard of living during retirement.”

It's even become an issue in the presidential campaign. Democrat Hillary Clinton has pledged to eliminate in-state tuition for families that earn less than $125,000, and wants to give borrowers three months of debt relief in which time they'll be expected to refinance the debt.

Many financial advisers agree that student loan debt is a growing problem, especially among young professionals who are just starting out in their careers.

(Related read: Amazon and Wells Fargo latest to team up on student loans)

“Student debt does have an effect on financial planning as a whole,” said Chad Chubb, founder and adviser at WealthKeel in Philadelphia.

Especially for those with the greatest amount of student debt, there are only so many ways to plan for retirement and other goals when monthly college loan payments take up a significant portion of take-home pay, he said.

Many times clients come to advisers not even sure how much they owe or to which entities, so advisers often have to sort that out first. Advisers also have to figure out whether the debt is owed to the government or a private lender and what the interest rates are on each of the loans. In many cases, clients don't know what they've agreed to pay back, advisers said.

Graduates must begin paying direct government loans six months after earning their diploma or dropping below half-time status. The current interest rate for an undergraduate with direct subsidized or unsubsidized loans is 3.76%. Private loans, which account for less than 10% of student loan debt, have an average interest rate of 9% to 12%, according to Alltuition.com, although top credit unions offer members loans with an average interest rate of about 5%.

Many advisers work to find clients loans with better terms than they have, and begin by checking out programs offered by the federal government.

Uncle Sam offers half a dozen programs to help borrowers repay their loans on time; however, it can be hard to understand which one a borrower may qualify for, and when.

(Related read: Feds seek to make it easier to restructure student loan payments)

About 70% of those who have defaulted on federal loans actually earn incomes low enough to have allowed them to qualify for an income-driven repayment plan that would have trimmed their payments, according to a 2015 report by the Government Accountability Office.

A quarter of people who have outstanding student debt are in or near default. Advisers encourage clients to avoid defaulting because it can result in high fees and bad credit that can haunt them for years. Also, student loans can almost never be discharged through bankruptcy.

BALANCING ACT

Andrew Houte, director of retirement planning at Next Level Planning and Wealth Management, has worked with many clients who are physical therapists who have racked up sizable student loans. He sometimes advises them to aggressively pay off their debt, and other times he helps them request a deferment, such as when cash flow is too low.

“Like most things in life, it is a balancing act,” Mr. Houte said.

(Related read: Help women tackle their larger student debt burden)

Refinancing student debt through an online lender — including several startup firms like CommonBond, SoFi and LendKey — is another option some advisers recommend for clients.

Douglas Boneparth, a partner at Longwave Financial, has used an online lender to cut the time, and ultimately, the total amount that his clients pay in student loans.

In one case, he had a couple with more than $100,000 in federal loans that were due to be paid off over 30 years. Because their cash flow was strong, Mr. Boneparth helped the couple move off of the federal balance sheet to a private lender and halved their interest rate and the loan repayment time.

“I explained carefully the advantages and disadvantages of removing yourself from the federal government,” he said.

Disadvantages include losing federal loan benefits, such as access to income-based repayment plans, which could be a detriment if the person runs into financial issues later, Mr. Boneparth said.

Online lenders also have specific requirements for borrowers, including having a strong credit history and having graduated from accredited schools. Kirsten Buccigrossi graduated in 2010 with $32,000 in student debt spread out over 13 loans. When she tried to lease a car five years later, she discovered the number of loans was hurting her credit score.

Two other options advisers recommend clients consider are employee tuition reimbursement programs and opening credit cards with student debt-focused rewards.

About 3% of employers today offer workers ways to decrease the amount they owe on their student loans, according to a 2015 Society for Human Resource Management Employee Benefits survey. PricewaterhouseCoopers, Fidelity and Starbucks are among the companies with such a program.

(Related read: Fidelity offers to help employees pay off student loans)

More private companies are beginning to offer these benefits as well, a Nerdwallet study found. It concluded that those who have undergraduate student debt could erase nearly three years of payments and more than $4,000 in interest with help from their employers.

A few credit card companies allow customers to use their reward points for repaying student loans. Examples include the Citi ThankYou card and the Sallie Mae Upromise Mastercard. Other banks and retailers, including Amazon.com, are increasingly introducing offers to attract retail customers by helping them pay down or refinance the cost of attending college.

“We use credit cards and those points for miles and cash back, so it kind of makes sense with the growing burden of student loans to kind of reward spending for that particular type of use,” said Tim Baker, an adviser and chief executive of Script Financial.

The number of advisers who are working with clients to understand, refinance and ultimately pay down their student debt has risen along with loan balances, according to Heather Jarvis, a student loan expert who trains advisers.

“Students and families are borrowing more because of the increased cost of education, and families who might not have needed to borrow in past years are finding themselves in a position where it is necessary to borrow to meet the high cost of education,” she said.

COMPLICATED DECISIONS

Not everyone believes advisers know enough to be helping clients with complicated student loan decisions.

Jan Miller left his position as a Morgan Stanley investment adviser to be a full-time student loans consultant. He works with advisers to analyze their clients' debt as well. Mr. Miller said advisers are starting to pay attention to how much clients need help. Some advisers get training, while others do the research themselves.

“The problem with the latter is that student loans are immensely complicated,” he said. “They probably have a very basic understanding of how student loans work. That's why I caution people before seeking out student loan advice.”

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