Commonwealth Independent Advisor

How to Talk to Your Clients About Student Loan Debt

Posted by Olivia Zaiya, JD, CFP

September 13, 2017 at 1:30 PM

talk to your clients about student loan debt

About 70 percent of students take out loans to fund their college education. The average class of 2016 graduate has $37,172 in student loan debt—that’s up 6 percent from last year. For millennial clients and cosigners alike, student loan debt is at the forefront of their minds. Luckily, there are planning solutions to help reduce the student loan debt for your clients.

Let’s take a look at the basics to help you talk to your clients about student loan debt.

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Taking on Less Debt

When you talk to your clients about student loan debt, what is one of the first topics you should cover? You guessed it—taking on less debt. Here are a few options for doing so: 

  • Scholarships and grants can greatly reduce college costs, and they don’t need to be repaid.
  • Merit-based scholarships, offered through schools or by individuals and foundations, are generally awarded based on academic achievement, special interests, or the student’s background.
  • U.S. Department of Education federal grants are available to those students who plan to become teachers, to veterans, and to individuals who demonstrate financial need.

Researching Available Loans

You should also encourage your clients to research the different types of student loans that may be available, including the following:

Interest-free loans. These loans are available from the college itself, although not all colleges offer them.

Federal Perkins loans. Offered by individual schools, Perkins loans are available only to students with financial need. An undergraduate can borrow up to $5,500 per year ($8,500 per year for graduate and professional studies), generally at a low rate with no loan fees.

Direct subsidized loans. Available to students with financial need, subsidized loans do not accrue interest while the student is enrolled in school at least half-time or during a grace period after graduation. These loans carry a low rate but do have a loan fee.

Unsubsidized loans. These loans do not require financial need and are available to students who are enrolled at least half-time. Be sure your clients are aware that these loans begin to accrue interest immediately and that interest is capitalized (i.e., gets added to the principal).

PLUS loans. As compared to the other options, these loans generally carry a higher rate, plus a large loan fee. Interest on PLUS loans accrues immediately and capitalizes.

  • Direct PLUS loan: Available to graduate students enrolled at least half-time up to the cost of attendance
  • Parent PLUS loan: Available to the parents of a dependent undergraduate student enrolled at least half-time (made in the parent’s name)

Private loans. Offered by banking institutions, private loans are a viable option if the interest rate is favorable, but they don’t offer the repayment options available for federal loans.

Managing Debt

You may find that your millennial clients and clients whose children are just graduating from college may be most interested in managing student loan debt. To help meet this need, introduce the following repayment options offered to federal loan borrowers:

Standard repayment plan. This option offers fixed payments for up to 10 years, depending on the total loan amount. Since it has the shortest term, it accrues the least interest.

Graduated repayment plan. Since this plan includes gradually increasing payments for up to 10 years, it is well suited for those just starting their careers.

Extended repayment plan. Offering either fixed or graduated payments for up to 25 years, this option results in a lower monthly payment but more interest over the life of the loan.

Income-based repayment plan. This option is designed for those who have a partial financial hardship; in general, this means that the borrower’s federal student loan debt is higher than his or her annual discretionary income or represents a significant portion of his or her annual income. Payments will be lower than for the standard repayment plan, but more interest will accrue over the life of the loan.

  • This plan generally has a term of up to 25 years, and the maximum payment is 15 percent of discretionary income. (This payment will change with changes in income.)
  • For new borrowers who take out their first loan on or after July 1, 2014, the term is 20 years, and the maximum payment is limited to 10 percent of discretionary income.
  • If there is an outstanding balance after 25 years (or 20 for new borrowers) of payments, that balance will be forgiven; however, the borrower will have to pay income tax on the forgiven amount.

Pay-as-you-earn plan. This option features maximum monthly payments that are 10 percent of discretionary income, and the repayment term is 20 years. To qualify, the borrower must have a partial financial hardship, have received a direct loan disbursement on or after October 1, 2011, and have no outstanding balance on a Direct loan or Federal Family Education loan on or after October 1, 2007. The balance is forgiven after the repayment term, and the amount forgiven is taxed as income.

Revised pay-as-you-earn plan. This plan has monthly payments of 10 percent of discretionary income, but the term varies based on the borrower’s level of education. The term is 20 years if all loans being repayed under the plan were received for undergraduate study and 25 years if any loans being repayed under the plan were received for graduate or professional study. There is no hardship requirement for this plan. The balance is forgiven after the repayment term, and the amount forgiven is taxed as income.

Income-contingent repayment plan. With this plan, repayment is based on income, even if the borrower doesn’t qualify for a partial financial hardship. The monthly payment depends on income and family size, and the term is 25 years. The balance is forgiven after the repayment term, and the amount forgiven is taxed as income.

More Repayment Options

Ungrouping. You may have clients who have taken out more than one loan through the Department of Education. If they want to pay off these loans faster by regularly making more than the minimum payment, advise them to call the Department Education to have the loans “ungrouped.” That way, extra payments will be applied to the loan with the highest interest rate, instead of being applied to all loans evenly.

Auto-pay. Would your clients be interested in reducing their interest rate by 0.25 percent? If so, encourage them to enroll in auto-pay for their Department of Education loans.

Consolidation. Offered through the Department of Education, consolidation is used to extend a federal loan’s repayment terms and combines several loans into one bill. Consolidation can have a loan term up to 30 years, resulting in lower monthly payments, but it does increase the total amount that a borrower will pay over the life of the loan. Consolidation can also re-characterize loans to qualify for certain repayment plans or forgiveness programs.

Refinancing. Private companies now offer borrowers the ability to refinance both private and federal student loans at lower rates. One important point here is that refinancing may eliminate some of the options available with federal loans, such as income-based repayment plans, forgiveness programs, forbearance, or deferment.

Who Qualifies for Loan Forgiveness?

For qualified borrowers, federal loans offer loan forgiveness and cancellation.

Public service loan forgiveness. This option is available to individuals who work in a qualifying public service job. If the borrower makes 120 qualifying payments, the remaining balance may be forgiven. Plus, the amount forgiven is not considered income for tax purposes.

Teacher loan forgiveness. Borrowers who teach full-time at a qualifying school for five consecutive years are eligible for teacher loan forgiveness; they can have as much as $17,500 in subsidized or unsubsidized loans forgiven.

Teachers may also qualify for a discharge of Perkins loans if they have taught at a qualifying public or nonprofit elementary or secondary school. The amount canceled is not considered income for tax purposes.

Education Planning Matters

Many of your clients will look to you for help when it comes to meeting the costs of a higher education. By putting the time into education planning now, your clients will be well prepared when the tuition bill arrives!

What other payment options do you discuss with your clients? Are your millennial clients concerned with managing student loan debt? Please share your thoughts with us below.

Editor's Note: This post was originally published in October 2015, but we've updated it to bring you more relevant and timely information.

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Topics: Education Planning

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