Helping Clients’ Children Understand Student Loans

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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. 

 

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