We assume the recommendations given by financial advisors is accurate, ethical and responsible. In this post, we discuss areas where advisors may be providing damaging recommendations to clients with student debt. Consumers rely on tax and financial advisors for help on a wide range of topics including savings, business planning, investments, retirement planning, and managing their taxes.
Are Financial Advisors Providing Inadequate or Erroneous Advice?
When it comes to student debt, most financial professionals are ill-equipped to provide sufficient advice to their clients repaying student loans. Here are 3 examples of common advice given to clients that is flat-out wrong.
Mistake # 1
Pay more than the minimum – Most financial professional encourage their clients to pay off their debt as quickly as possible. This advice has been the traditional recommendation for consumer debt for generations, and for good reason. Making additional payments on debt, reduces the principal and total amount of debt paid over the term of a loan.
Student loans are very different than other types of consumer debt. Their repayment options allow for discharge of debt after making a certain number of payments. In fact nearly 1 out of every 3 borrowers repaying their student loans are in one of these repayment plans.
Paying more than the minimum could reduce the amount of debt discharged but perhaps more important, it could lead to the borrower no longer qualifying for their current repayment plan. Interestingly, the costs of overpaying required student debt payments can be significant.
Advisors giving this blanketed advice without understanding their clients detailed circumstances or all of their options can be creating massive liability for themselves.
Mistake # 2
Misunderstanding the standard 10 year term – While many financial professionals have little knowledge about student loan repayment, others have just enough to be dangerous.
Many financial advisors think a simple internet search gives them enough knowledge to guide a client on their repayment options. Take for example the “standard 10 year payment” and its application for public service loan forgiveness. A common error advisors make is that a borrower who experiences an increase in income can change to a 10 year repayment plan if their payments based on income get to a certain level.
The logic is that the payments made under an income driven repayment plan coupled with a few years of a 10 year amortized repayment schedule would meet the 120 monthly payments for loan forgiveness when working in the public sector.
The mistake here is that “standard 10 year payment” has a different definition than what most financial professionals assume as a 10 year amortized payment. The standard 10 year payment is actually the payment it would take to pay the loans off in full over 120 payment from the time the borrower entered into repayment. This simple difference in definition has led many borrowers to be given incorrect advice about their future loan payments, and value of public service loan forgiveness.
Moreover this advice can undoubtably lead to liability when a client later finds out that an advisor’s recommendations were based upon and incorrect assumption about the loan terms.
Mistake # 3
Not knowing the different loan types – For many financial professionals the subject of consumer debt is broken into mortgages, credit cards, medical bills and student loans. However, what most advisors fail to realize is that under the category of student debt there are number of different loan types that dictate the repayment options available to their clients.
There are private loans, federal loans and under the federal loan type there are, FFEL loans, Perkins Loans, HRSA Loans, Direct Loans, Stafford Loans, PLUS loans, Parent Loans, Subsidized and Unsubsidized loans. When you provide advice about student loan repayment, it should take into consideration the types of loans a borrower has, when they took out the loans, and the available repayment options.
Advisor due diligence dictates that one should know the loan types held by a client, and the differences between loan types. Making recommendations without knowing these basic facts is starting out on the wrong foot and a potential E&O claim by the client.
Financial advisors are more frequently being asked questions about student loans and loan repayment. While many do the best that they can to guide their clients through repayment, these advisors are creating a large liability for themselves and their firms by doing so.
If an advisor was tasked with providing advice about social security benefits or required minimum distributions from retirement accounts, a compliance officer would ensure that the representative was trained and had access to the tools to provide sufficient advice in that topic.
Every company requires their representatives to take Anti Money Laundering courses to reduce firm risk. That is because the risk of making a mistake is too severe not to guarantee the representative is not misleading their clients.
It’s high time the financial services industry start taking the liability of student loan advice with the same care as they do Anti Money Laundering, and retirement planning.
To learn how the CSLP program can help advisors avoid these and other mistakes, click here.
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