Student Loan Restart Can Challenge Even the Mass Affluent

Financial advisers can help ease pain for clients who experienced “lifestyle creep” during the federal student loan payment pause.

By Ed Prince

It’s October: time for leaves to change color, for trick-or-treaters to ring doorbells — and for federal student loan repayments to restart. For many who have enjoyed the reprieve from making those payments since March 2020, it will be painful.

Financial advisors can help their clients ease the hardship and avoid potentially ruinous defaults, according to Ashley Weeks, a wealth strategist with TD Wealth.

Weeks says some of his older clients are affected because they borrowed through the ParentPLUS program, which allows parents to take out federal loans to help their children pay for college. Others “have children that they are trying to assist in getting their footing in life and looking at ways that they can assist them, and advice that they can give,” says Weeks, who spoke to Rethinking65 about ways to help with the restart.

Although his focus is mass-affluent clients, those with incomes from $100,000 to $1 million, the “more vulnerable” in that category may be facing difficulty — including the threat of reduced credit scores — just as those in lower income brackets, Weeks says.

Those in the mid and upper tiers of the mass affluent also face decisions, namely, “With the discretionary income I have, do I now allocate that to paying down this student loan debt that is now costing me money to maintain? Do I allocate that capital, to retirement, and to savings or do I allocate it to lifestyle?” Weeks says.

“That’s a consideration that a lot of people haven’t had to even think about since March of 2020. “So those are kind of the high-level observations and conversations that we’ve had with clients,” he says.

Some high-paid professionals, such as doctors and lawyers, have hundreds of thousands of dollars of student loans that are typically serviced with after-tax dollars — a “tremendous drag” to deal with while still having to save something for retirement, Weeks says.

“So, it runs the gamut from hundreds of thousands of dollars to people with just $20,000 to $30,000 of student debt. … If you have a more moderate income, that’s still quite a lot of money to require paying off the debt.” Weeks says.

Credit bureaus out of the loop during grace period

However, the federal government is allowing a one-year grace period, from Oct. 1, 2023 through September 2024, during which missed payments will not be reported to credit bureaus, he says.

He notes that the federal student loan program has more flexibility than commercial loans, offering features such as repayment plans geared toward income levels, and the possibility of loan forgiveness in some circumstances.

So, what should advisers tell clients with federal student loans?

Additional Reading: Avoiding College Loan Traps

“My suggestion to most clients is that the fundamentals of financial planning never really changed, regardless of what happens externally. We tell everyone that, number one, you want to avoid economic chaos when life happens,” Weeks says.

The first step is to establish and maintain an emergency fund that has a three-month cushion of expenses and is separate from the client’s day-to-day operating account.

“It’s pretty basic, but a lot of clients forego that and look to step two or three down the road,” Weeks says. Taking the step will help cover any emergencies and not throw the client into additional consumer debt that could snowball.”

Secondly, avoid defaulting on the student loan and any other debt. “Make sure you’re making at least that minimum payment every single month, and that will be the footing that any additional planning will be based off of,” Weeks says. “And after that point, there’s certainly some decisions to be made.”

Beware of ‘lifestyle creep’

Weeks notes that people with student loans may have unwittingly increased their discretionary spending during the repayment pause and may need an advisor’s help to readjust.

“In some instances, there’s been a little bit of lifestyle inflation — lifestyle creep — during the period that student loans have been suspended,” he says. “And it’s interesting to note that some clients don’t even realize how much they are spending every month, certainly, when you look at things like automatic subscription services and going out to eat.”

One helpful step is encouraging clients to create a budget. The first budget shouldn’t be a target, but simply take account of current spending levels.

“And then the next step is looking at okay, what can we possibly pare down so that we free up additional monies to service the student loan payments?” he says.

Individuals who are covered by a workplace retirement plan like a 401(k), should participate to receive the full employer match, he says. “Then after that, it’s dividing the additional payments between lifestyle, saving for retirement and paying off whatever debt is out there, including the student loans.”

Weeks notes that the Secure 2.0 Act, the new federal retirement savings legislation, includes a provision that could be a boon for those with federal student loans. Starting in 2024, an employer sponsoring a 401(k) plan can treat student loan payments made by an employee as if they were contributions to the retirement plan, for the purpose of calculating matching contributions.

“So, a really nice benefit,” Weeks says. “It will be interesting to see how many employers pick this up and opt into it.”

The student loan restart is a two-step process. In September, interest resumed, and in October, student loan repayments begin.

Loan servicers have not had to do a whole lot for the last three and a half years and have had their budgets cut, Weeks says. As a result, customer service, such as answering phone calls, may be slower, he warns.

“So that will probably be a period of growing pains while all of these systems begin firing up. I would say allocate ample time for making payments and automate the payments if you can,” he says. [For more guidance on restarting payments, visit the U.S. Department of Education’s Federal Student Aid website.]

Rising rates price out refinancing

In the past, some people with federal student loans have refinanced with lower-interest private loans. Doing so had downsides, as the federal loan program offers more flexibility with income-adjusted repayment plans and loan forgiveness programs for some, such as those in public service jobs.

But now rising interest rates are eliminating the prospect of saving money on the private market, Weeks says.

“In the past, you could potentially get lower interest rates, but with the interest rate environment, it seems like the opportunity for refinancing student debts for a much lower interest rate has probably passed,” he says. “If you’re looking at getting out from under the federal system due to servicing issues, you might not be any better off and might potentially be worse off by going with a private lender.”

In a four-decade career in journalism, Ed Prince has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News Tribune.

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