College financing represents a little-acknowledged revenue stream for financial planners.
Since more than 40 million Americans currently carry college debt and there are more than 30 million households with children under 18, it's a growing and needed area of expertise. By using a variety of tools, planners can help clients manage and refinance these debts, which, in turn builds longer-term client relationships.
Student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008, according to the Fed. The central bank also estimates that the category, which tops $1.2 trillion, has an annual growth rate of between 11% and 12%.
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Advisors, who apply debt-management and cash-flow projection skills to the repayment of the myriad of loans students and their families carry, can save those people tens of thousands of dollars.
Fred Amrein, whose Wynnewood, Penn.-based firm, Amrein Financial, focuses on college financial planning, is one of the leaders in this area of specialized advice. He says that one of his clients was able to save $90,000 through loan forgiveness. Knowing which loans are eligible for forgiveness, and which are not, can net a lower total payout for clients and is one of the main selling points financial planners can offer.
Amrein’s fee-only practice, just outside of Philadelphia, not only helps clients find colleges with scholarship aid but also offers software called EFC Plus that helps families and other planners analyze financial aid offers. EFC, or Expected Family Contribution, is a term used in the college application process to determine an applicant's eligibility for need-based federal student aid.
Amrein shies away from refinancing sites. The sites, while offering lower rates, essentially put lenders into a new promissory note, which can be complicated and be less flexible than federal loans.
“People focus on the lowest payment,” Amrein says of the online offerings, “but they have to read the note and inventory their debt and all of their repayment options. Not many planners do this.”
But planners can offer their clients perspective and strategies in evaluating repayment options. Do those clients expect to see their incomes rise and enable them to repay their loans more quickly? Will they qualify for federal loan forgiveness if they’re in a public-service profession like teaching or health care? How can they take advantage of federal income-based repayment options? These are questions a professional can answer.
Unlike Amrein, regularly refers his clients to online sites. McFadden’s Fresno, California-based planning firm, Panoramic Financial Advice, helps mostly young doctors with repayment plans. When he refers them to the sites, he insists they get “at least two to three quotes.
“They can save from 1 to 1.5 percentage points on a loan,” McFadden says of sites such as CommonBond, Earnest and SoFi. “We help our clients with a customized payment plan, although we don’t encourage them to use the online refinancing sites for federal loans.”
Planners can provide guidance even while directing clients to third parties. “We ourselves aren't refinancing any loans,” McFadden says, “just figuring out how our clients should best payback their loans and then directing them to the websites, with some hand-holding, to search for refinancing options.”
The cyber-lenders may offer better rates on some loans, but clients may still face higher payments if they refinance fixed-rate loans into variable-rate ones. This is especially true if their credit score drops or they lose a job. And it may not make sense to eschew federal repayment options to refinance into a private loan – even if the rate and monthly payments are lower.
McFadden warns that once a client leaves the federal program by choosing private financing, the flexibility of repayment options is lost, as is the likelihood that certain kinds of loans may be forgiven.
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Part of the advisory process is to ensure clients are finding the best refinancing and repayment options on their own, and that they know the total cost of their loans.
Catherine Hawley, a planner in Monterrey, California, describes loan counseling as a “collaborative process” that helps clients achieve all their financial goals.
The benefits of loan management easily translate into comprehensive financial planning, Hawley says. One client was able to buy a home after saving $30,000 in loan interest payments. Many others can trim their monthly payments by simply switching to variable from fixed rates.
Offering college debt services can be a new profit center for planners willing to learn the subject. Amrein charges from $250 to $400 for a debt package. McFadden bills a $299 flat fee for a loan repayment analysis, or $200 an hour and $49 for a monthly retainer for ongoing services. Hawley charges $240 an hour.
One way to learn more about this specialty is to review the options in the federal program by studying the US Department of Education website. Then peruse the various online services (see below) and review their refinancing terms. Reviewing a client’s credit worthiness through current credit reports is also a must.
At a minimum, offering college loan advice can help advisors engage with their clients and guide them to reach their retirement objectives.
Some online refinancing services include:
Citizens Bank: Rates range from 2.8% to 7.9%.
CommonBond: Offers phone support. Rates range from 2.1% to 7.5%.
DRB: Rates range from 2.1% to 3.5% with programs focused on professional/graduate loan repayment.
Earnest: The portal offers a dashboard for monitoring loans and offers rates from 2.1% to 3.5% APR.
LendKey: Also refinances home loans. Student refinancing rates range from 2.1% to 3.5%.
SoFi: A broad-based portal that goes beyond student debt, rates range from 2.1% to 7.5%.
Note: All rate spreads at time of publication and are subject to change. Go directly to the sites for current rates, which vary depending upon the loan program, credit rating and terms.