I’m not a big fan of horror movies or books. As an amateur historian and a professional reader of the daily news, I find real life—past and present—to be horrific enough. Case in point, I just read Shahien Nasirpour’s Bloomberg story “Trump May Give Students Debt Relief That Obama Refused” about “tens of thousands of former students” of a college that went under, whom the Department of Education failed to notify that they qualified to have their student debt forgiven. Now it looks like the new administration may be willing to settle the resulting lawsuit, canceling remaining the students’ debt and refunding past debt payments.
Unfortunately, that’s not the scary/happy part. We all know that we have a student loan problem in this country, but prompted by that article, my curiosity was piqued—so I did some online research to find out just how bad it is. Big mistake. Since I’m probably not sleeping tonight, I thought I’d use the extra time to tell you what I’ve found. (See Free College Tuition Plans Sprout in States as Feds Could Cut Aid.)
Because we hear so much these days about how independent advisors need to devise strategies to attract the 83.1 Millennials (ages 18 to 35)—and as advisory clients tend to be college graduates (Bill Gates and Paul Allen notwithstanding)—I thought you might be interested to hear about how bad this college debt thing is.
A quick Google click led me to the unlikely named studentloanhero.com, which tells us the most recent student loan data:
- There are 44.2 million Americans holding aggregate student loan debt of $1.31 trillion (up from $241 million in 2003).
- The average class of 2016 graduate has $37,172 in student loan debt
- That average graduate is paying $351 a month, or $4,210 a year.
- The student loan delinquency rate is 11.2%.
That’s like having a mortgage on a house, straight out of college. But, of course, they don’t have a house, which means they have rent to pay on top of that. And a car, etc. As one recent graduate was quoted in Money Magazine: “Going to college has ruined my life.
The good news is that college funding—including finding alternative financing for students such as grants and scholarships—has become an extremely popular client service for financial advisors. The bad news is that it’s too late to save an entire generation of clients, at least at the advisor level. Which means it’s up to the federal government.
It's also good news that, as the Nasirpour story indicates, the Trump administration may be in the process of reversing Obama’s position on one student loan suit—and by extension, just might be inclined to take action to solve the much larger, generation-wide problem.
In the meantime, independent advisors would do well to come up with a plan B in case the U.S. Cavalry doesn’t show up. While the monthly payments on those student loans aren’t all that high, they will be significant when you’re starting your career and trying to support a family. In fact, at $300 to $400 per month, they are ironically right about the savings level that most advisors would recommend for someone that age.
That means traditional savings—and traditional advisory fees—are probably not going to be within Millennials’ budgets for some years. The key, then, will be to attract them as clients, and keep them until those loans are paid off or forgiven, and still keep your firm’s doors open on what will likely be significantly lower cash flow per client.
That means technology. Whether using automated financial planning and asset management systems through your custodian or BD, or using a third-party system such as First Ascent Asset Management (see my March 2, 2017 blog, First Ascent: A Glimpse Into the Future of Advisor Portfolio Management), over the next 10 to 20 years, independent advisors will need to find ways to keep their overhead low while maintaining high service levels.
And pray that Washington will take action and solve this problem before it becomes a real horror story.
See these other recent articles by Bob Clark: