As the next-gen investor population continues to grow, financial advisors are looking for new and valuable ways to position their firm as a trusted resource. If you work with this younger client demographic, the topic of how to manage student loan debt probably comes up quite often. From refinancing to smart budgeting, there are a variety of strategies clients can use to take control of their loan payments. But in addition, those clients who work in a public service role may be eligible for student loan forgiveness, specifically through the Public Service Loan Forgiveness (PSLF) program.
It’s important to understand the PSLF system and its eligibility requirements, especially as your firm takes on more millennial clients. According to CNBC, the average student loan borrower has $37,172 in debt upon graduation. With a growing number of people facing tens of thousands of dollars in student loan debt, the loan repayment and forgiveness conversation is likely to become even more common. Here’s what you need to know to guide eligible clients toward the path to student loan liberation.
Established in 2007, the PSLF program aims to relieve public service employees of the student loan debt they have remaining after 10 years of making qualifying monthly loan payments. To be eligible for student loan forgiveness through the PSLF program, a person must:
- Work full-time for a government agency or certain type of nonprofit organization
- Have direct loans (or have consolidated other federal loans into a Direct Consolidation Loan)
- Repay loans on an income-driven repayment plan
- Make 120 qualifying payments
Qualifying full-time positions include those held with government organizations at any level (federal, state, local, or tribal), as well as not-for-profit organizations that are tax exempt under Section 501(c)(3). Those serving full-time with AmeriCorps or Peace Corps can take part in the program, too. If your clients are employed by one of these types of organizations, they must also make the required income-based loan payments to qualify for the program. These payments must begin after their six-month post-graduation grace period has passed, and the loans cannot be in deferment or forbearance.
The Path to Loan Forgiveness: Potential Issues and Solutions
Clients who meet these eligibility requirements may find obstacles on the road to student loan forgiveness, so be sure that you make them aware of potential complications and areas for error—and present them with solutions.
Potential errors to watch for. As your clients make payments toward their student loans, they may run into certain issues with student loan providers misreporting loan status information, some of which include:
- Reporting incorrect loan account values to credit bureaus
- Wrongfully putting loans in forbearance and causing processing delays
- Incorrectly marking loans as delinquent or in default
There can be unpleasant ramifications should any of the above occur. For example, if your client’s loan is not reported correctly and unexpectedly disappears from his or her credit report, it will be caught in an audit, and its reemergence on your client’s credit report could affect his or her credit history. Payment history is the largest contributing factor in building a strong credit score. If a client’s student loan is reported incorrectly and marked as delinquent or in default, not only will it negatively affect his or her credit score (which can have ramifications in other areas, such as qualifying for a mortgage), it will also push back the client’s loan forgiveness date.
To further illustrate this point, consider the following example:
Tom works as a public defender and has been making income-based student loan payments for the past eight years. During Labor Day weekend, he goes to the Home Depot to purchase a refrigerator and decides he would like to take advantage of the store’s special financing. But, his application for the in-store credit card is declined. After doing some research, Tom discovers that his student loan has been misreported as delinquent for the past year, which has lowered his credit score. And although he should be only two years away from becoming eligible for student loan forgiveness, due to this error, he is now three years away, as the payments he made over the past 12 months did not meet the PSLF program’s requirements.
This example shows just one of the many ways a simple, unnoticed error can have a significant effect on a client’s financial life. All is not lost, however. Let’s take a look at some of the ways clients can prevent and correct these issues.
Simple solutions and best practices. It’s essential that clients participating in the PSLF program check the status of their loans regularly to avoid suffering from damage to their credit history and delays in their loan forgiveness. To help them do so, you can encourage clients to compare reports from all three credit bureaus (Equifax, Experian, and TransUnion) at the same time. Clients should verify the student loan information on these reports against their loan payment records. If they find an error or discrepancy, they should reach out to the student loan servicer to dispute the error with the credit reporting company. If they are not able to get full resolution, they can file a complaint with the Consumer Financial Protection Bureau.
To keep track of their loan payments, clients can log in to their FedLoan Servicing account, where they can view the qualified loan payments they’ve made. Each year, clients should also submit the PSLF Employment Certification Form to FedLoan Servicing, which will provide them with annual confirmation that they are on the right track toward receiving loan forgiveness. An easy way to do this is through the U.S. Department of Education’s PSLF Help tool.
Overcoming the Student Debt Challenge
For many recent college graduates, student loans present a real and overwhelming challenge. The need to prioritize debt payments means many millennials are unable to save for important goals and milestones they wish to achieve, such as going to graduate school, getting married, and purchasing a home. Often, the graduates’ parents will step in to help their children manage this financial burden—even if it means dipping into their retirement savings. Which is why it’s more important than ever that your clients are aware of the resources available to help them manage student loan debt, such as the PSLF program. By maintaining an understanding of these resources, you can help them shift their focus away from student loans and onto achieving their financial goals.
Do you work with clients whose children are currently in college or who are recent graduates themselves? How often does the topic of student loan management come up in your conversations? Please share your thoughts and experiences with us below.