During a recent student loan repayment webinar I was asked the question “can I trust my financial advisor with my student loans?”
This is a really important question that I thought would be worthwhile to address in a post. It’s a question that will come up again and again, as a higher percentage of Americans have student loan debt into their 30s and beyond.
I’ll cut to the chase: one of the biggest reasons I tell people they should not trust their financial advisor with their student loans is because of incentives the advisor has. Let’s say you work with a registered investment advisor, such as a Certified Financial Planner, or CFP. Many CFPs make money by operating under a model where they charge an annual fee based on the amount of assets you invest with them.
For example, let’s say you invest $100k with a CFP operating under this model. They would charge approximately $1,000 a year. Now, your invested assets almost always will increase more than 1%, so it won’t be that noticeable.
These financial advisors have an incentive for you to invest. Many won’t even talk to you unless you reach their minimum threshold of assets to invest, such as $100k, $250k, or more. If the choice is between paying down debt or investing, they have an incentive to tell you to invest.
These advisors operate under a fiduciary responsibility to put your investing interests ahead of their own. Unfortunately their incentive is to push you towards investing instead of paying down debt. I’m not a fan of the percentage-of-assets model for reasons such as these, as well as the fact that there are alternatives to this in the form of a flat fee model.
A smaller number of CFPs and other advisors operate under a flat fee model. This model works just like it sounds: you pay a flat fee, and you get advice. Since they do not have an incentive for you to invest instead of pay down debt, they are the advisors you are most likely to get solid student loan advice from. But…student loans are complicated. Many advisors, even fee-based advisors, simply do not understand the ins and outs of student loans to give solid advice. So when can you trust them? We’ll dig into that next.
It’s also worth noting that there are some advisors who are not held to the fidicuary standard. They include salesmen and women whose primary way of making money is selling whole life insurance and annuities. (Run away from their advice – they get paid based on sales). Then there are advisors at brokerage firms who make money selling mutual funds with high fees. These brokerage firm advisors operate under the suitability standard of care, which means they can act in their own best interest over yours when it comes to recommending investment options. I loathe high fee mutual funds (there are many ultra-low-fee or even zero-fee funds available today that you can take advantage of), and the fact that these advisors have an incentive to sell them means you should run from their advice.
When Can you Trust a Financial Advisor with your Student Loans?
I started this post by saying, in general, you shouldn’t trust a financial advisor with your student loans. I will stand by that because a majority of advisors have mis-aligned incentives when it comes to decisions around paying down debt or investing. But the more important thing to keep in mind is the complexities of student loans.
In Student Loan Solution I talk at length about loan forgiveness opportunities. There are many borrowers who have student loan debt that is higher than their income. This is when loan forgiveness makes the most sense. Think of the therapist making $40k a year with $120k of student loan debt, or the public defender making $50k a year with $150k of student loan debt. And it’s not just specific to professions: regardless of your job, when your federal student loan debt is misaligned with your income it can make sense to head down the path of loan forgiveness, whether that be Public Service Loan Forgiveness or Income-Driven Loan Forgiveness.
Whenever I give a student loan presentation I highlight how Public Service Loan Forgiveness, or PSLF, can be a huge financial win for certain individuals. Unfortunately, if you ask the average financial advisor what they know about PSLF, they most likely only know about it because of the high number of initial applicants who got rejected. I would bet most couldn’t even explain why the first round of applicants had such a high rejection rate, or why the acceptance rate will almost certainly drastically improve over time.
I asked Brittan Leiser, founder and CEO of ADVISher, what her thoughts were on whether you can trust a CFP with your student loans. She recommends doing research on a CFP before meeting with them to ensure they specifically mention student loans as an area of expertise. She also recommends making sure they have recent experience working with student loan borrowers.
I take it a step further and think you should feel empowered to ask specific student loan questions to any financial advisor you are considering working with. It will quickly become obvious if they have an expertise in that field.
Before we get to the questions, though, Leiser also recommended doing your homework and understanding your loans, your repayment options, and how they apply to your situation. I couldn’t agree more and this was the driving force behind my book Student Loan Solution. Unfortunately the only way to ensure you are pursuing the best repayment strategy for your personal situation is by learning some of the background information yourself. I truly believe if you read my book you will have more knowledge on student loan debt than the average financial advisor. It will also help you see past any BS answers when you ask them questions about their knowledge of student loans.
Here are some questions you should consider asking a CFP about student loans before working with them:
- How much experience do you have working with clients who have student loan debt?
- What recent experience do you have working with clients who have student loan debt?
- Can you explain the requirements of the various income-driven repayment plans and what makes someone eligible, as well as which are generally better and why? (This may be uncomfortable but if you have a lot of federal student loans it’s important to make sure they understand this – if they don’t you can’t trust them with your student loans)
- What are the pros and cons of refinancing student loans (read this post to understand if their answer makes sense)
- What do you know about Public Service Loan Forgiveness? What ways can someone strategically benefit from this program?
These are just sample questions, so feel free to add others you may have. If you are not convinced they have a deep understanding of student loans and student loan repayment, do not trust them with your student loans.
Ultimately, whether or not you decide to trust a financial advisor with your student loans will be a highly personal choice. Unfortunately I do think that even if you find an adivsor who has spent the time to understand the ins and outs of student loans so they can properly advise clients, you will still be better off also spending time understanding your loans and the repayment options relevant to your situation. At the very least you will feel comfortable with the approach you and your advisor land on.
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