For decades, financial advisers took a straightforward approach to helping clients manage their student loan debt. Sticking to a repayment schedule with a mix of careful planning and disciplined saving set young professionals on the right track.
Today, all bets are off. Since March 2020, borrowers have benefited from a pause for federal student loan payments. The CARES Act didn’t just suspend repayments; it also ended collections efforts on many defaulted federal student loans and temporarily set interest rates on most of these loans to zero.
Initially set for six months, the relief keeps getting extended as the pandemic drags on. It’s supposed to expire on May 1, 2022, but it’s quite possible that President Joe Biden will extend it.
“There’s so much uncertainty,” said Jay Karamourtopoulos, a Boston-based certified financial planner. “Some people don’t want to pay if they don’t have to. They’re convinced there will be some kind of reduction in their student loan or their debt will be cancelled. Others want to pay it down in any case,” regardless of the government’s continued actions.
For advisers, the challenge is strategizing with borrowers when facing an unpredictable future. The government might cancel some types of student loan debt entirely. Some politicians favor modifying the student loan system and introducing a new, income-driven repayment plan while lifting certain people out of default.
Whatever happens next, advisers are focusing on what clients are able to control. They urge borrowers, especially young professionals who have recently moved, to confirm that their loan servicer has their correct contact information.
Depending on the client’s preferred response to managing their student loan, Karamourtopoulos might model a few repayment-plan options. He will review the pros and cons of each option and let the client pick how to proceed.
All the swirling unknowns put advisers in a position of predicting outcomes that can vary widely. “I’ve seen student loan forgiveness proposals at $10,000 or maybe $50,000,” said L.J. Jones, an adviser in Pacifica, Calif. “Even with the higher number, borrowers will still owe a lot of money. They can have $150,000 in total student loan debt.”
Young attorneys, physicians and other professionals are sometimes saddled with debt from both their undergrad and graduate school tuition. As much as they hope for a new loan system that provides permanent relief, they cannot count on it.
“They’re left with a feeling of restriction and inflexibility,” Jones said. “They feel they can’t leave their firm because of the loans they face. It can be a really substantial financial burden.”
He cites the example of attorneys earning $200,000 a year at a law firm. With rising housing costs (whether renting or buying) along with owning a car and covering other inflation-driven expenses, keeping up with loan payments can sting.
“There’s a tension to make those payments and have the lifestyle you want to have,” he said. “Once the Covid freeze ends and any grace period ends,” it’s hard to know the long-term repercussions for borrowers.
For clients with a high income and high credit scores, Jones might explore privately refinancing their student loans. The downside: withdrawing from the federal student loan program can mean losing future opportunities for relief and loan forgiveness.
To play both sides, Jones might suggest maintaining $10,000 in the federal loan system while refinancing the remaining debt privately. But this depends on many variables and a client’s attitude about managing debt.
“It’s a lot of complexity,” he said. “There are so many types of repayment programs, including income-driven plans. A big factor is how much other debt they have,” such as a home mortgage or car loan.
Another consideration is the volume of loans that an individual can amass — and keeping them organized. Some people can have more than a dozen separate loans, representing every semester of schooling. Each one might have its own provisions and quirks, with some subsidized by the government while others are not. “The sheer number of loans can be overwhelming,” Jones said.
Administrative hassles alone can pose problems. For example, borrowers who were making automatic payments on their federal student loans from a checking account may need to set up auto-debit again with their bank whenever the suspension period ends.
Of course, there’s only so much advisers can do if clients lack the ability to repay loans. Even if the government announces a more affordable, income-driven program, it’s unlikely to address many borrowers’ worries about resuming at least some repayment.
That’s why advisers tend to focus on clients’ cash flow and their saving and spending habits. Struggling under too much debt that’s hard to repay or renegotiate can lead to personal bankruptcy. And even bankruptcy may not free borrowers from their obligations.