Leave a comment

Helping Clients’ Children Understand Student Loans

Many students entering college might not know enough about the costs of borrowing money for college.

That’s where you come in. Advisers can stand out by helping families graduate to a higher level of knowledge about a young person’s financial future.

You may be aware that when students first apply for federal financial aid, they must complete an entrance counseling session. Specifically, undergraduates borrowing under the Direct Subsidized Loan and Direct Unsubsidized Loan programs, and professional or graduate students applying for the Direct Subsidized Loan, Direct Unsubsidized Loan and Direct Plus Loan programs, must take an online, 20- to 30-minute tutorial that describes what they need to know before borrowing for college.

With student loan defaults surpassing $120 billion in the first quarter of 2016, researchers from Kansas State University’s Personal Financial Planning program undertook a study to examine whether effective student loan entrance counseling leads to higher financial knowledge and, ultimately, greater likelihood of repayment.

The Good News

After a robust statistical analysis (the details of which we will skip), the researchers found student loan counseling can contribute to increased borrower financial knowledge, which in turn increases both the borrower’s confidence and ability to situationally apply that knowledge to make better borrowing decisions. Further, increased confidence and ability lead to better financial management and ultimately to a reduction in expected student loan debt.

Now, The Bad News

One-third of students reported not remembering the entrance counseling and many reported that the entrance counseling was not useful. Financial advisers seeking to become their clients’ CFO or family wealth adviser can use this apparent deficiency to add value to their most important relationships. With the fall semester top of mind for many households, advisers can offer to help their clients’ children manage their balance sheet, and in particular, any liabilities they will face upon graduation. There are some immediate, actionable suggestions advisers can make including:

  • The repayment of federal student loans must not be taken lightly and needs to become the highest budgetary priority when due;
  • The easiest way to ensure payments are made in a timely fashion is through an auto debit program, rather than bill pay or payment by mail; and
  • There are a number of repayment options, some tied to income, that may be more beneficial for recent graduates compared to the standard 10-year repayment option.

Advisers looking to set themselves apart should consider incorporating these services into their business model. Offering assistance will not only help bridge relationships with the next generation, but will let existing clients know how much advisers care about each family member’s well-being and future success.

For more tools and tips, visit our Wealth Management program.

Editor’s Note: A version of this blog post appeared on the Janus Henderson Blog. You can find it here

Matt Sommer

Matt Sommer is Vice President and leads the Defined Contribution and Wealth Advisor Services team at Janus Henderson. In this role, he provides advice and consultation to financial advisers surrounding some of today’s most complex retirement issues. His expertise covers a number of areas including regulatory and legislative trends, practitioner best practices and financial and retirement planning strategies for high-net-worth clients. 

 


1 Comment

Helping Your Clients Face Their College-Financing Fears—Part 1

Higher education is expensive—frighteningly expensive. For most parents, providing for their children’s college education is second only to retirement as their largest investment goal. But even with diligent saving, the first tuition bill may be a shock to your clients, so you may want to keep a jar of smelling salts on your desk just in case.

How can you help your clients face this fear head-on? It’s all about creating a solid plan. With a proper plan in hand, you and your clients will be better prepared to tackle college tuition bills in an organized and financially sound way. Sallie Mae recently published research titled “How America Pays for College 2016,” that reported families are paying less out of pocket for college as they take advantage of scholarships and grants. The report noted that scholarships and grants funded 34 percent of college costs in the 2015-2016 school year, up from 30 percent the prior school year.

Vanguard’s new research, Tackling the tuition bill, provides a practical framework to help you develop a plan with your clients. In this post, I’ll explore the factors that affect financial aid eligibility. (In Part 2 of this series, I’ll provide tips on how to help your clients maximize federal tax perks while also considering how to spend tax-efficiently from assets earmarked for college.)

As you know, household assets and income affect financial aid eligibility, but these sources are not treated equally, based on whether they come from the student or the parents. The graphic below summarizes the key points—income matters more than assets, and student income matters more than parental income.

2017-02-14_vanguard-pic-1

The potential impact of student and parental income and assets on financial aid.

So what does this mean? Obviously, individual circumstances will vary, but here’s a savvy strategy to pitch to your clients:

  • Spend the student’s assets first.Because student assets affect aid eligibility more than parental assets (oddly enough, 529s owned by dependent children are considered parental assets), it can make sense to spend student assets before spending from a 529 plan. Such an approach gives 529 savings more time to compound tax-free. And by spending the more heavily penalized assets early, students increase their aid eligibility in later years, when inflation may boost tuition costs.
  • Tell the grandparents to hold off.Gifts from grandparents and others are considered student income, which has the greatest impact on your student’s financial aid eligibility. As a result, consider tapping those grandparent-owned 529s in the later years of college, when they will no longer be reported or considered in financial aid evaluations.
  • Don’t drain the 529 right away.Parent-owned assets, including 529 plan accounts, have more limited impact on aid eligibility. Unless a client plans to pay for the entire degree with 529 savings, it can make sense to spend from this account strategically over the course of a student’s college career. The account can benefit from continued tax-free growth. A client may also be able to time 529 withdrawals to create opportunities for additional aid or benefits.

I realize there’s a lot for you and your clients to think about; but with a bit of knowledge of the rules and some planning, the tuition bills can be tamed. Look for part 2 of this series, in which I’ll share some tax-savvy tips for tackling tuition.

maria-bruno

Maria Bruno, CFP®
Senior Investment Analyst
Vanguard Investment Strategy Group
Philadelphia, Pa.

Editor’s note: This post originally appeared on the Vanguard Advisor Blog. The author also gives a special thanks to her colleagues Jonathan Kahler and Jenna McNamee for their research contributions.