How to Talk to Your Clients About Student Loan Debt

Michael Baum is an advanced planning consultant at Commonwealth®, member FINRA/SIPC, the nation's largest privately held Registered Investment Adviser–independent broker/dealer. He started at the firm in 2008 and joined the Advanced Planning team in 2017. His specialties include charitable, tax, education, and social security planning. Mike holds a BS in business administration from the University of Connecticut School of Business, the CFP® designation, and FINRA Series 7 and 66 registrations.

Michael Baum, CFP®

10.28.20 in Wealth Planning & Investing

Wealth Management

Student loan debt rose to $1.51 trillion last year, according to the Federal Reserve Bank of New York. For many clients, dealing with their share of this burden is a major planning concern.

Fortunately, many programs exist to help student borrowers with repayment. If you have clients who are managing student loans or have a family member who is doing so, they might welcome talking about the student loan relief solutions reviewed below. In particular, it’s important to remind clients that the relief provisions offered by the Coronavirus Aid, Relief, and Economic Security (CARES) Act are set to expire on December 31, 2020.

Assistance Under the CARES Act

Thanks to the CARES Act, interest and required payments on federal student loans owned by the U.S. Department of Education (DOE) are currently suspended, without penalty, through December 31, 2020. On January 1, 2021, interest will start accruing again and borrowers will be responsible for making monthly payments. Auto-debit payments will automatically resume, if they were set up before payment suspension. If the required payments aren’t made, federal loan servicers may report delinquency for payment periods beginning January 1, 2021.

Once these changes go into effect, the following solutions could help struggling borrowers get back on track or find a more effective repayment plan.

Income-Driven Repayment Plans

The DOE offers several income-driven student loan relief plans that are intended to set an affordable monthly payment based on income and family size. If clients are already on a payment plan but their financial situation has changed, they can update their information to see if they qualify for a new, lower payment amount. The income-driven plans are:

  • Income-based repayment (IBR) plan. Borrowers pay 10 percent of their discretionary income if they’re new borrowers on or after July 1, 2014, and 15 percent if they’re not new borrowers.

  • Income-contingent repayment (ICR) plan. Borrowers pay the lesser of 20 percent of their discretionary income or the amount of a fixed payment over 12 years, adjusted according to their income.

  • Pay as you earn (PAYE) and revised pay as you earn (REPAYE) plans. Generally, undergraduate borrowers who qualify will pay 10 percent of their discretionary income toward their student loans each month, and, after 20 years of on-time payments, the remaining balance may be forgiven (payments may be forgiven after 10 years for those in certain public interest jobs and after 25 years for graduate school borrowers).

Deferment, Forbearance, and Cancellation

At times, clients may be struggling to repay their student loans. In these cases, it may be appropriate for them to contact the lender and apply for a deferment, forbearance, or cancellation of their loan.

Clients should be aware, however, that these programs are not automatic. They’ll need to fill out the appropriate application from their lender, attach documentation, and follow up on the application process. Also, it’s important clients understand that interest accrues for most borrowers on a general forbearance.

  • With a deferment, the lender grants a temporary payment reprieve, based on a specific condition, such as unemployment, temporary disability, military service, or full-time enrollment in graduate school. For federal loans, the government pays the interest that accrues during the deferment period, so the loan balance doesn’t increase. A deferment usually lasts six months, and the total number of deferments that can be taken over the life of the loan is limited.

  • With a forbearance, the lender has discretion to grant permission to reduce or cease loan payments for a certain period of time, though interest will continue to accrue, even on federal loans. Economic hardship is a common reason for forbearance. A forbearance usually lasts six months, and the total number permitted over the loan’s term is limited.

  • With a cancellation, a loan is permanently erased. Qualifying is not easy, however. Cancellations may be allowed due to the death or permanent total disability of the borrower, or if the borrower teaches in certain geographic areas. Typically, student loans can’t be discharged in bankruptcy.

Loan Consolidation

With loan consolidation, several student loans are combined into one loan, sometimes at a lower interest rate. One advantage is paying the loan by writing one check each month. An application is necessary, and different lenders have different rules about which loans qualify for consolidation. Generally, borrowers can choose an extended repayment and/or a graduated repayment plan, in addition to a standard repayment plan.

Student Loan Forgiveness Programs

In addition to the repayment assistance programs described above, the federal government offers student loan forgiveness programs. Although the benefits can be substantial, clients should understand the potential long-term costs associated with changing their career path. Two primary programs are:

  • Public Service Loan Forgiveness (PSLF). The PSLF program forgives the remaining balance on direct loans after the borrower has made 120 qualifying payments (10 years’ worth) while working full-time for a qualifying employer. You can use this help tool to assess eligibility.

  • Teacher Loan Forgiveness (TLF). Borrowers must teach full-time for five complete and consecutive academic years in a low-income school or educational service agency and meet other qualifications. The TLF program offers forgiveness of up to $17,500 on direct subsidized and unsubsidized loans and subsidized and unsubsidized federal Stafford loans. Other loans may be eligible for forgiveness as well.

Refinancing Option

Refinancing may be a good option to help some borrowers manage student loan debt. But to do so, they must already have a private loan or be willing to convert their federal loan to a private loan (and lose some of the benefits that go along with federal loans). A federal loan can’t be refinanced as a new federal loan with a lower interest rate. Here are key considerations to discuss with clients:

Cons:

  • Borrowers lose the option for student loan forgiveness. 

  • Private student loans don’t offer income-driven repayment plans.

  • Deferments on private student loans are not as generous as on federal loans.

  • Variable interest rates could increase. 

  • There’s no grace period for starting payments after leaving school.

Pros:

  • Interest rates can be reduced, creating substantial savings.

  • Less interest means loans can be paid off faster.

  • Loan management is easier if multiple loans are combined.

  • Monthly payments can be reduced.

  • A cosigner can be released from the new loan. 

An Opportunity to Help

Student loan debt is a major obstacle to financial security for many clients. When you help them analyze their financial situation and plan a course of action to manage their debt, you’ll be clearing a path for them toward a secure future.

Editor's note: This post, originally published in September 2017, has been updated to bring you more relevant and timely information.

This material is for educational purposes only and is not intended to provide specific advice.

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