Advisors Should Be Talking About Student Loan Debt

Tom Lauricella: I'm Tom Lauricella from Morningstar, and I'm happy to welcome Phuong Luong of Just Wealth Financial Planning to discuss student loans and how advisors can better help clients navigate this growing problem for many folks.

Phuong, thanks for being here today.

Phuong Luong: Thanks for having me, Tom. This is great, and it's a really important topic, so I'm really happy to be talking about it.

Lauricella: Great. So one of the things that we've discussed is that, for many financial advisors, student loans may be a new issue. They may not even be thinking to ask their clients about it. There's this perception that folks who are wealthy enough to be going to a financial planner, aren't going to have an issue with student loan debt, but that's not really necessarily the case, is it? Where do you see student loans cropping up more and more?

Luong: Yeah, Tom. That's exactly right. I hear that often, you know that, "Oh, wealthy people, they don't have student loans, right? They just pay for college directly." The issue of student loan debt is affecting more and more folks across the income spectrum and also across the wealth spectrum. So most often where I see this happening is-- number one: clients of mine who actually have means to pay for a financial planner are either partnering, or getting married, or thinking of combining finances with a partner who has student loans, who maybe didn't come from money, or did have wealth but also just happened to have student loans because, again, it's affecting everybody.

The second growing population of people with student loans are older people, people in their 40s, 50s, 60s, 70s. People are retiring with student debt, and it's happening across the country. Again, across income and wealth spectrums.

Lauricella: So this is something that advisors probably should start beginning to ask clients about, even I would suspect.

Luong: Yes, very much so. And clients who are millennials, right, especially, financial planners who work with millennial clients, this is an issue that they know is a huge problem and have more expertise. But even that, financial planners who work with millennials, they still can get help, and there's help available elsewhere as well, outside of the financial planning world.

Lauricella: Let's talk about the road map for advisors. An advisor sitting down with a client, they've discovered that they have student loan debt issue to navigate--what's the first step?

Luong: The first step might seem obvious, but any advisor knows: Understand your client's goals. The reason we have to start there is that it might not be so obvious, right? You'd think, "Oh, this person with student loan debt, obviously they'd want to pay off their debt." You can't always assume that, because it could vary. Depending on the client, they might want their debt to be paid off immediately. They might want to prioritize it above all other goals, like buying a house, paying for a wedding, starting a family. Or they might want to stretch out the debt if they have other goals for it, right? They might want to pay it off in five years, 10 years. Some clients of mine that I've worked with before--they foresee having the debt for over 10 years if they're not able to pay the minimum payment during a standard repayment plan.

And so you really need to ask, "Where is your priority?" Especially if they have other debt that's not student loan debt. And also, "What's the timeline that you'd want to pay this off?" Some clients, they also want to defer the debt if they have other debts or other goals that they need to focus on or that they want to focus on first before making any payments. And so it's really important to understand first where the client wants to be. And that's something that advisors are very well-practiced at doing anyway. So just bring that on, too--student debt issues for your clients.

Lauricella: All right. The first question there is, Are we paying this down? Are we altering it? Are we putting something else in line ahead of it? Are we saving money? What's the priority?

Luong: Right. And sometimes clients don't know exactly what the options are. So just listen to their stories, listen to their questions, listen to what they care about, and they might not even mention the student loans, right? And so that's another issue, too. So the second step after understanding what their goals are, is actually understanding what the loans are. And so you'd have to look to at least two different places for that. And the first place is the credit report.

So the credit report is pretty simple to get. You can get a free one at annualcreditreport.com. That's the official place to get it. It's free. And you can get three different credit reports from three different credit bureaus. And typically when I've helped clients get their credit report from a credit bureau, typically, you're going to see two types of student loans. You're going to see federal student loans, which is the most common type of student loan, and you'll also see private student loans.

And then there's a second place to go, which I outline my article: It's the studentaid.gov website for the U.S. Department of Education. And you download something called your financial details for your student loans. You upload it to any sort of tool that allows you to view it in a very easy and accessible way, because when you download that tool, it's a text file. So it's very difficult to read. You'd have to put it through a different processor that I link to in the article. And then you can actually see the details for the federal student loans, because it also matters what type of student loans they are. They can each come with different interest rates, depending on when the loan was dispersed over time. Typically, when a student graduates, they have multiple student loans. I've seen anywhere between five to 15 different student loans on a client's report.

Lauricella: So, the second step there, tracking down loans--as we said, it may seem obvious, but it's not necessarily as straightforward as some folks might think.

Luong: Right. And that actually typically is the greatest barrier, just gathering the information. It can cause a lot of anxiety for folks. For clients, I mean. And it can stop them from taking action. And at the same time--this is something I didn't mention, but you're making me think of it--there are letters that clients receive, right? So make sure to ask, "Have you received any recent communication from your lenders, from your servicers?" And sometimes those letters will also have important information on the status of the student loans or if something needed action--that either needs to be taken immediately or that perhaps the deadline has passed and now other action needs to be taken.

Lauricella: And as we were discussing before we did this video, the COVID pandemic has affected this in terms of required payments being postponed. So it might be easy for folks, for clients, to lose track of what they have out there.

Luong: Definitely. And I see this often. And so people are also moving, Tom, people are moving for jobs, or they've lost a job, they're moving elsewhere, closer to family. And so it's important to make sure that your address stays updated, right, so that you're in touch and in communication with your loan servicers. Sometimes people have multiple that are administering their federal student loans. And also, I've seen it even before the pandemic, when students are, or borrowers, I should say, are on a specific type of repayment plan where they have to update their income every single year--sometimes people forget to do that. And so if you forget to update your information, you can get moved into the default payment, which can jump up your monthly payments. Right? And so I fear, and I worry, that this might happen come the end of the year. I think it's the end of December when the current pause is set to end. And so once that happens, and if people forget to reinstate auto payments, or to make sure the bank account that they're linking to is still the correct one, or that they have enough money in that account--I worry that people will be surprised when their payment jumps back up and becomes due again.

Lauricella: Wow. OK, so that's something important for advisors to talk to clients about. So once you have this information, it's a question of taking action. And one of the things that we highlight in the article is that a forgiveness, loan forgiveness, or reducing payments is available to a wider spectrum of borrowers than many people might assume. They might think, well, I'm making six figures. My client is making six figures. They're not eligible, but in fact they might be. How does this process work? And how can advisors look into it?

Luong: The main type of forgiveness program is called Public Service Loan Forgiveness. There's a lot of material written out there about it. I link to a very reputable site in the article. And so it's important to realize that it's not just based on a flat rate of income, for example, there's no cutoff for income, but it's more about the relationship between your income to your student loans. If you have high-income, I'd say six figures, but your student loans are also six figures, you're in a better position to be able to perhaps qualify for that forgiveness.

Now another key piece of that, the reason it's about a relationship between income to your debt balance, is because in order to have public service loan forgiveness be actually advantageous to you, you have to be eligible for something called an "income-driven repayment." And that's something that you can easily do by going to studentaid.gov, and you can see if you qualify for that and talking to your servicers as well. And with any type of income-driven repayment, there are multiple types, right? At least four or five, right? It actually does change every year, the type of payments, and the rules related to the type of payment plan. It can change the payment that you have to make, the minimum payment pretty drastically, depending on the type you choose. But it depends on a formula based on where you're living, based on your family size, based on your adjusted gross income. But there are calculators available online that I link to in the article where you can estimate what those payments are. But again, always you can call your servicer.

Now calling your servicer doesn't always give you the best information. I have experienced that, and some clients have experienced that. Different servicer representatives, the rules change all the time. Sometimes they give them misinformation as well. And so it's really important that advisors, if they're not well versed in this area, that they talk to professionals who are, and there are professionals who specialize in student loans that I share in the resources at the end of the road map.

Lauricella: That seems to be the final point that we have here, which is that advisors are not alone in having to tackle this.

Luong: Absolutely. When I started becoming a financial planner, there were much fewer resources. And now there are so many. There are people that specialize in student loan tax help. There are people who specialize in student loan law--so there are attorneys who specialize in this. There are credit experts that specialize in people who are defaulted, and there are general student loan planners as well that you can consult with or that you can refer clients to. And so there's a world of help out there. And the reason is, like we said in the beginning, this is affecting so many people across the income spectrum and across the wealth spectrum.

Lauricella: Fantastic. Phuong, thanks very much for joining us to talk about this important topic today.

Luong: Thank you so much, Tom, for giving light onto this.

Lauricella: I'm Tom Lauricella. Thank you for being here.