Student loan debt has emerged as one of the most significant economic challenges for millions of Americans, 43 million of whom owe $1.2 trillion in student loans. That amount tops credit card debt and any other type of household debt except mortgages.
The average loan outstanding is $27,000 and many struggle to repay what they owe. One out of four graduates in 2009 defaulted on their loans within five years of graduation, a percentage likely to rise in the near future, according to a recent report from the New York Federal Reserve Bank.
So it should come as no surprise that helping clients’ children manage their student debt is becoming increasingly important for financial planners. They can help college graduates avoid delinquency and default while developing a broader financial plan, and build on their relationship with those graduates’ parents or grandparents who are already clients. At the same time planners can expand their client list to include members of the Gen Y (born between 1965 and 1980) and Gen X (born after 1980) generations.
Here are five of the most common recommendations planners have for those dealing with student debt
#1: Know What You Owe, and Your Repayment Options
First off, “know what you owe” in terms of your loans, advises Katie Brewer, president of Garland, Texas-based Your Richest Life, a member of the XY Planning Network, which focuses on Gen X and Gen Y members.
Then, she advises students and their parents to “know the differences in your payment plans and options about repayment.” She suggests that graduates gather their student loan statements and create a spreadsheet, and visit the National Student Loan Data System if they don’t have that information.
“Take ownership of your debt,” says Douglas Boneparth, VP of Life and Wealth Planning in New York. “Know what your loans are, who’s servicing them, what’s the obligation, interest rate, phone number to call. It’s your responsibility.”
#2: Explore Student Loan Repayment Plans
There are seven types of repayment plans for federal student loans: standard, graduated and extended repayment plans as well as plans that limit payments based on income. These include income-based (IBR), pay as you earn, income contingent and income sensitive repayment plans.
IBR limits payments to 15% of monthly discretionary income; the limit for pay as you earn is 10%. After 20 or 25 years of regular payments the remaining balance of most of these income-linked repayment plans is forgiven unless the graduate works in government or in the nonprofit sector. Then loans may be forgiven after only 10 years of regular payments under the Public Service Loan Forgiveness Program.
As of year-end 2014 almost 12% of student loan borrowers were enrolled in the IBR plan—up from just 6% in the third quarter of 2013, according to the U.S. Dept. of Education.
Graduates may be able defer payments or stop them temporarily under a program known as forbearance, but interest may continue to accrue, depending on the particular plan chosen and the lender.
Graduates are not automatically enrolled in any of these plans. They need to know the details, including eligibility, and file their paperwork on time. And if, for example, they don’t know how long they’ll stay in the government or nonprofit sector to qualify for forgiveness, they should file for that program anyway because otherwise they certainly won’t qualify, says Sophia Bera, president of Gen Y Planning in Minneapolis.