If I’ve said it once, I’ve said it a hundred times, “The answer to every student loan question is ‘it depends’”. Even so, financial advisors need ready answers for these most frequently asked student loan questions. Here are 5 key answers financial advisors need to know when working with a client who has student loans.
5. If something happens to me, will my family be burdened by my student loans?
Advisor: No. We can make sure that your family will be OK.
Federal student loans are dischargeable upon the death or total and permanent disability of the borrower. Death and disability discharges are not taxable as income under current law.
Private student loans may have to be repaid by the estate of a deceased borrower. Few private loans include disability discharge provisions. Financial advisors should recommend that life and disability insurance coverage be increased to offset private student loan debts so that they do not burden a borrower’s family.
4. I’ve been making payments for a long time—why don’t I see my balance going down?
Advisor: Good question. Let’s begin by calculating how much interest accrues on your loans each month. Then I’ll walk you through which portion of your monthly payment lowers your principal balance.
Borrowers are rarely experts in interest accrual and may be shocked to learn that only a fraction of their monthly payment is attributed to principal reduction, particularly early in a repayment term. I find it helpful to walk clients through a sample amortization schedule.
3. I’ve heard about loan forgiveness—is there any way to get some of this debt cancelled?
Advisor: Maybe. First, I’ll need to consider some specifics about your student loans, your employment, and your expected income over time. Then, I’ll run some projections to see whether you might benefit.
2. I know it’s important to start saving for retirement, but shouldn’t I pay off my student loans first?
Advisor: Probably not. Most student loan borrowers will be better off if they begin saving for retirement right away. Our goal will be to establish the right balance between reducing your debt and saving for your future.
Pre-tax retirement savings that reduce AGI create a double benefit for some student loan borrowers. Lower AGIs yield lower required loan payments for borrowers in income-driven repayment plans and maximize the benefits of loan forgiveness.
1. Why are my student loan interest rates so high?
Advisor: Federal student loan interest rates aren’t as bad as it might seem. Mortgages and auto loans are secured by property and so will naturally have lower rates. Some student loan borrowers can reduce interest rates through private refinancing, but that comes with significant downsides. Part of my analysis will include a consideration of the pros and cons of refinancing in your particular situation.
Federal student loan interest rates are set by congress. Most of the federal student loans advisors see these days will have rates in the 3 to 8 percent range, depending on the loan types and borrowing dates.