Seeking Opportunity in Student Loans

Increasing complexity and student loan debt levels present a unique business opportunity for CPAs. By James Sullivan, CPA, PFS and Melissa Towell | Digital Exclusive - 2017

When it comes to debt and Illinois, the picture is generally pretty poor, but students from Illinois colleges and universities are actually doing comparatively well. According to the U.S. Department of Education, Illinois students ranked 37 out of the 50 states in terms of their 9.4 percent default rate. This compares to New Mexico with the highest default rate (18.9 percent) and Massachusetts with the lowest (6.1 percent).

Of course, every stat and study must be taken with a grain of salt. The study looked only at those student debtors within three years of beginning repayment, failing to include students who delayed repayment beyond the three-year period and may have since gone into default.

The real cost of student debt, at any rate, is a long term drag on wealth accumulation for young people. Nationally, student loan debt has surged to previously unimagined amounts and threatens to be the “next great debt crisis”. Student loan debt is the fastest growing type of debt and now exceeds the total amount of credit card debt.

So, the pride of earning a degree from one of Illinois’ colleges and universities often is now accompanied by a load of debt. An individual can be so saddled with student debt that they have trouble repaying what they owe. Many graduates have even moved back home with mom and dad while they attempt to pay back their loans.

In an April 2017 blog written by economists at the Federal Reserve Bank of New York, the authors concluded:

“In addition, our analysis shows that for any given level of educational attainment, those with student debt are less likely to own a home in their early thirties than those who completed their education without taking on as much—or any—debt. To the extent that the statistical associations we uncovered reflect a causal impact of debt on homeownership, they have important implications for the housing market and future spending behavior. Homeownership represents an important means of wealth accumulation, with housing equity being the principal form of wealth for most households. So, changes in the way we finance higher education, with an increased reliance on student debt, may have important implications for the housing market and the distribution of wealth.”

That said, it’s highly likely that many of your clients or prospective clients have children with large amounts of student debt. And this is where you come in.

The Role for CPAs

CPAs skilled at organizing financial information and wrestling with the most complex set of laws, regulations, and filing requirements in the world—the Internal Revenue Code (this may only be a slight exaggeration)—have an important role to play in combating the student loan debt crisis.

Most borrowers simply don’t realize the complexity of federal student loans, having:

• Over 50 repayment strategies       
• Complex rules regarding repayment strategy eligibility and implementation
• Financial hardship assistance
• A variety of default options
• Garnishment appeal procedures
• Debt consolidation choices
• Cancellation and forgiveness options
• And several pitfalls that, if not avoided, can block the borrower from more generous repayment strategies

Meaning, any student loan borrower can be in need of counseling and guidance. The number of potential clients for this type of practice is already huge and growing. You may be surprised by how many of your older clients have children or grandchildren overburdened with student loan debt. Your assistance may help a few of your client’s children afford to move out of their parent’s house! For that same young person, this may be their first opportunity to learn the value of financial planning, especially the careful use of debt.

What’s more, the counseling process can be straightforward if you know what information to ask for and have the right set of tools to use.

If the borrower has federal student loans, the best document to request is their confidential National Student Loan Data File (NSLD). This file provides the greatest amount of detail, and is a critical component when offering a truly comprehensive counseling session. It includes the balance, interest rate, school attended, origination dates, repayment status, past repayment status, and loan servicer information.

You’ll also want to know the debtor’s adjusted gross income and family size.

While there are several software programs available to help in the assessment process, eFiscal is the online tool we’re most familiar with. The eFiscal program contains a patent pending logic engine to identify all student loan solutions. The software narrows down the student loan options through a series of questions that, when paired with the analysis of the NSLD file and the debtor’s income and family size, provides output of unique student loan solutions along with a step by step guide that includes important forms and resources.

A good software tool allows the CPA to get up to speed quickly. Of course, there are always technical details to learn, but that’s what we’re best at as CPAs—learning the technical details of a complex financial subject and using that knowledge to assist our clients.

How much may be charged for this service depends on several factors. For example, the debtor may have outstanding credit card debt and auto loan payments to consider while working for an overall solution to their financial situation. Many borrowers run up their credit card debt as they attempt to keep current on their monthly student loan payments. Good counselors will attempt to find a universal solution to all the debt incurred. Finding only a partial solution is usually only a temporary fix.  

Also keep in mind that a successful engagement can save the debtor hundreds of dollars in student loan repayments each month. The value proposition is obvious comparing a relatively small fee to the amount saved. The debtor can inadvertently lose the ability to take advantage of valuable repayment strategies by responding to media ads to consolidate and refinance their federal student loans through private lenders.

According to a recent report from the Bank of America Merrill Lynch, 67 percent of millennials (those born during the last fifteen to twenty years of the last century) find that financial stress makes them less productive at work. Part of that stress is dealing with their student loans.

With an overwhelming need and the right tools, CPAs can take advantage of a growing practice development opportunity by delivering a valuable service to Illinois students and families. At the same time, they can use student loan consulting to attract millennials as future financial planning clients.

James Sullivan, CPA/PFS is a board member of Consumer Debt Counselors, Inc., a not-for-profit debt counseling agency. He is a graduate of the University of Illinois at Urbana School of Accountancy.  Melissa Towell is a student loan counselor.