Advising Mistakes with Student Loans

Private Student Loan Refinancing - The downsides. Let's start with the obvious: Financial advisors are in the business of advising clients about all things surrounding their money such as: planning for retirement, saving, investing, achieving a specific financial goal, protection through insurance and other products, etc. They spend massive amounts of time acquiring education, certifications, continuing education credits, securities licenses, and conducting ongoing research about products and services appropriate for their clients

So given all of the student, time, money, and research, why are the student loans of clients treated as an afterthought or like any other consumer debt such as credit cards?

Student debt prevents focus on investments?

In many cases student debt will be one of the major financial obstacles facing the client and restricting them from investing.  But it doesn't necessarily have to be so. 

Many clients will be emotionally distraught because they see no end in sight and  believe this debt will follow them to their old age or later! This debt is one of the most insidious, particularly if the client is like about half of the base of student loan borrowers who paid from advanced degrees in law and health related services.  If you are fully aware of the range of options available to these consumers, there may be solutions that you can offer. 

Conventional debt reduction thinking may not apply

Traditionally we have been taught that one should pay off debts as quickly as possible to save the cost of interest. Another strategy has been refinancing. The former isn't viable because the debt and payment are simply too high and creating cash flow challenges. So it would appear that relief might be possible through refinancing. Lately, there are many companies pitching student loan reviews for private refinancing including Discover Financial Services and Wells Fargo. Make note of these basic mistakes to avoid when considering private refinancing.

Mistakes with private refinancing

Private loans can potentially reduce the interest rate of student loans with the following caveats. 

  • Replacing federal loans with private loan financing eliminates important protections. The first is the ability to defer and file for hardships in the case of medical problems or job loss.  The second is the elimination of loan forgiveness options. The are critical points that the advisor must caution clients about. Leaving an existing income-driven repayment plan for private refinancing could have adverse effects if public service forgiveness is a goal. For more details on private loan refinancing, see our CSLP course module on this topic.
  • The concept of a private refinance may be attractive because of promotional rates offered but the client must first qualify. Private lenders offer the lowest rates to borrowers with the lowest risk. This means strong credit scores and low debt to income ratios. Finally, many private loans come with variable interest rates.

According to LendEDU, the average credit score of borrowers refinancing student loans was 764. And 58% of refinancing applications were denied. Many required co-signers (over 1/3). For those who were approved the average interest rate was 5.56%.

Before advising clients to refinance, discuss these points and fully understand their goals. Communicate the risks and factor those in with their decisions. Other options are available to provide relief from payments and the future loan forgiveness.

 

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