The overhang of more than $1 trillion student debt is threatening the finances of American households. But advisors can help their clients and their children keep it at bay.

In a sign of how bad things have gotten, 30% of bachelor’s degree recipients graduated with $30,000 or more in debt in 2012, according to the College Board, up from a mere 6% bearing that burden, adjusted for inflation, only eight years earlier.

Given that about 70% of graduates leave college with some amount of debt, parents, students, and fellow advisors can never be too prepared or too educated when it comes to school loans.

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“I see people taking money out of retirement plans, or reducing retirement contributions, or stopping them all together. That’s a big no-no.”

A NECESSARY EVIL
One of the first steps planners should take with clients, is to address the common perception that students and their parents should avoid debt at all costs, says Davon Barrett, a planner with Francis Financial in New York. The alternative college-funding strategies they can use end up being more financially damaging than taking out a loan.

“I see people taking money out of retirement plans, or reducing retirement contributions or stopping them all together,” Barrett says. “That’s a big no-no.”

Let clients know that it is okay to put themselves first, he says. In some cases that may mean telling parents that their child, not they, should be shouldering the cost of college – perhaps difficult to get across to someone who has spent the last 18 years making sacrifices on behalf of the student.

Image: Bloomberg News
Student loan delinquency rates jumped to 11.2% in the final quarter of 2016.

It’s important that clients realize the unintended consequences of their generosity now; their kids may have to support them later.

“No parent wants to be a burden on their child in retirement,” Barrett notes.

On the flipside, borrowing doesn’t have to be done by the student exclusively. If the parent’s financial situation allows for it, they should “absolutely” share in their child’s student loan burden, Barrett says.

To guide clients through the morass, it helps to break down the options for students and parents separately. Students have a choice between federal and private loans, while parents can look into HELOCs and PLUS loans.

Federal loan benefits include fixed income rates and income-driven repayment plans. Private loans tend to be more expensive than federal as private loans have variable interest rates — some greater than 18%, according to the Federal Student Aid website.

With federal student loans, borrowers likely won’t need a cosigner, whereas a private loan could require one.

Borrowers may be eligible to have a portion of their federal loans forgiven if they work in public service. It is unlikely that a private loan lender will have a loan forgiveness program.

As for parents, “HELOCs and PLUS loans have their pros and cons,” Barrett says. “HELOCs are collateralized loans so they tend to have lower interest rates than PLUS loans, which is unsecured debt. That being said, you are putting your home up as collateral, so in extreme cases, your home could be repossessed if you can’t repay the loan.”

ACT EARLY
Once advisors have helped clients differentiate loan options, they should note the changes in the calendar for filing the Free Application for Federal Student Aid. FAFSA is necessary for obtaining a federal student loan and other college funding.

Before 2016, clients could only file a FAFSA as early as January 1 of the year their child started school.

However, many clients aren’t aware that the filing window has moved 90 days earlier to October 1, explains Matt Sommer, a vice president for the retirement strategy group at Janus Henderson. Although this was passed in 2016, Sommer notes that in his experience, many students and parents just don’t realize they have this earlier opportunity to get their FAFSA completed.

The October opening of the filing window means families who have a student matriculating in the fall of 2018 can file their FAFSA starting on Oct. 1, 2017 — even before they send in college applications.

The October filing window “also has implications in terms of being eligible for aid,” Sommer
says.

Getting a FAFSA application in early is the best way to secure the most funds possible for the coming school year, as in some states aid is distributed on a first-come, first-served basis, says David Bergman, Director of Content for College Transitions, an admissions consulting firm, and the co-author of The Enlightened College Applicant: A New Approach to the Search and Admissions Process.

“By submitting your FAFSA early, you have a better chance at netting generous aid offers from prospective colleges and, of equal importance, [clients] and [their] teen will have ample time to comparison shop before [committing] to an undergraduate institution,” Bergman explains.
By waiting too long to file a FAFSA clients and their children run the risk of missing out on state and institutional aid.

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“Those who apply earlier have a better chance of success than those who wait until later in the window,” Bergman says. “Research has demonstrated that students who submit their FAFSA earlier fare far better financially than those who wait.”

PAY BACK TIME
When it comes to repaying loans, advisors can remind clients they don’t have to wait until graduation to begin paying them off. Some advisors might work with clients to create a budget and start making payments even while the student is still in school. This way, the loan balance drops before interest charges kick in.

Advisors can also guide their clients through post college debt forgiveness and options for lowering monthly payments. Seventy-five percent of borrowers were not told about the possibility of lowering their payments for federal loans, even though more than half qualified, according to a 2015 survey from financial technology firm IonTuition.

One thing advisors need to drive home is that when it comes to student loans, especially those that parents have cosigned, it’s okay to “be that nagging parent,” Barrett says. Parents need to tell the child, “Hey, I’m not trying to be an annoyance to you but this is really serious, and [something negative] could happen to both of us if we do not stay on top of that loan.”

Amanda Schiavo

Amanda Schiavo is an associate editor for Financial Planning. Follow her on Twitter at @SchiavoAmanda.