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If you were told that someone would offer you $750 for indebting each of your clients’ children, you would think they had lost their mind. But this is how student lenders operate.
Student lenders have set their sights on the next round of borrowers. They’re paying very hefty commissions to reel in the children of upper-income families. The offers are being made through lead-generator services that consolidate disparate groups of borrowers into bulk buys for insurance, loans products, mortgages, and so forth. Credit card issuers operate the same way, paying commissions ranging from $100 to 50,000 airline miles to get a new piece of plastic into someone’s wallet. It’s a big industry, generating billions in revenue annually.
The lead generators that consolidate customers for the credit industry have taken an interest in working with financial advisors. We were blown away by their latest offer. These lead generators told us they will pay you, the financial advisor, $750 for each of your clients’ children that takes out a student loan through their network of lenders – $750 for putting an 18-year old in debt.
Once we recovered from our initial shock, we processed the ramifications. Can they really make money with that high a fee? Would a financial advisor do that to their clients? Is this even legal? What about the fiduciary obligation to the client? We quickly had a change of focus and thought, “If the student lenders put a $750 valuation on putting a kid into debt, what is it worth to the family, to keep the kid out of debt?”
Let’s look at the other side of this “trade” and assess the value that you can provide to your clients by keeping their kids out of debt.
Where is the value in college?
It is in the improvement in future earnings. Good students who study the right major make a lot more than students who don’t optimize the value of college. Starting salaries for graduates in engineering, finance, health care, and the like are two and a half times higher than the kid who gets a “soft degree.” And the wage disparity increases over the course of a career – by about 1 to 2% annually. We are very strong proponents for kids going to college and getting a degree linked to earning potential, because we know empirically the value it delivers to the individual and to society as a whole.
Does it make sense to get students into a four-year college and on a degree track at all costs, including debt?
No, absolutely not.
Here’s why – the ability for the graduate to build wealth is severely constrained if they leave college with student debt. The graduate who opens an investment account (with you, we’re hoping) at age 25 and then buys a home before they’re 30 is so far ahead of the kid who is paying $300 or more per month on student loans until the age of 40 and beyond. When the National Home Builders Association says that their industry is negatively impacted because of student debt, it’s not just the builder who is missing out. At the other end of the age spectrum, 5% of the people who started taking Social Security payments in 2019 were still paying student loans. For most students, debt for college is avoidable. They don’t know how dangerous that debt is because they haven’t taken a single finance course.
People will pay $750 commissions to have their child financially encumbered
We have nothing against business and commerce. This is not a level playing field, though – one side of the trade is completely uninformed. An 18-year old kid who has not taken a finance or accounting course as yet has no idea what they are getting into. A large part of the savings and loan crisis was created out of predatory lending – this is no different.
Inform your clients that the opportunities to take out student loans will be present throughout the students’ time in college. The admissions office keeps their school in business by inducing prospective students to borrow. When the family receives their invoice for the junior years’ tuition, and it’s gone up by 30% over the prior year, that sting will be ”offset” by the lending offers made to them. In the senior year, the student will be told how much more employable they will be if they get a masters’ degree. The annual tuition for a MS is usually double that of a bachelors’ degree. To ensure that more students can stick around college and work on their masters’ degree, the $32,500 limit on federal borrowing doesn’t apply once you enter a MS program. This is why so many graduate students have student loan burdens in excess of $100,000. More than 100 people owe more than $1,000,000 in student debt.
As the COVID-19 pandemic plays out, many households are financially constrained, or at a minimum, worried about their finances. That makes it all too easy to borrow money for college. In fact, it’s so easy that you don’t even need a plan for repayment. You just need to sign.
Encourage your clients to forego student loans. There are better ways for a student to get through college. We’re always making the case that public state colleges are the best value. And two-year colleges enable a child to get their first two years out of the way at less than $2,500 per year. In a recent article, we detailed several ways that a family can significantly reduce college costs in a recessionary environment.
How fiduciary principles apply to college planning
Actuarial work for student lenders for almost 10 years has shown us exactly what the risk factors are in college planning, and who is at risk of making costly mistakes. Our goal is to provide you with the information that enables you to add significant value to your clients’ college plans, while helping them to avoid unnecessary risks. No one thinks of risk factors when they talk about college, but they absolutely should. Student debt is one of the biggest risk factors and the lead generation industry just quantified that value to them.
Putting this knowledge into practice with a client is reasonably straightforward. With our programs, you can calculate the full education cost for a client’s child. You can also estimate their child’s future earnings. Our College Business Plan calculates the costs and earnings, and you can run scenarios with your clients to develop a plan that will keep the student out of debt. Like most business plans, the earnings are determined by the marketplace, and you can’t easily change that figure. Therefore, you move to the cost side of the ledger to develop a plan that is fiscally viable. When you’ve run the numbers as we have so many times, you’ll understand why the local state college makes good business sense.
If we were to do a post mortem on bad college planning (and we have), we would highlight the most common mistakes that we’ve seen. A full 43 million people have student debt, and if those were our kids, here’s what we would have done differently:
- We wouldn’t have let half of them go to a four-year college. “Hey Bud, you’ve got Bs and Cs. The six-year graduation rate (yes, six years) for students like you is barely above 50%. How about you start out at a two-year college and if you do really well, you can transfer to a four-year school.”
- There’s no way we would have let any of our kids borrow money to go to a private school – not a chance. You’ve got good four-year public colleges and their tuitions are usually 50% to 75% lower in cost than private colleges.
- A portion of the state taxes we pay go to fund higher education. We would not allow ourselves to pay twice – once in taxes, a second time for out-of-state tuition. Out-of-state tuitions run two- to three-times what in state tuitions cost.
Leveraging your skill set for the benefit of your clients
Reducing college ROI to the simplest analysis, a parent is sending their child to college to increase their future income. Of course there are other reasons, but they are on the margin compared to the importance of preparing a young person for todays’ competitive labor market. The bottom-line rationale for allocating a considerable amount of capital and four or more years of a child’s immediate future is to enhance their lifetime earnings.
Your clients look to you for the expertise and guidance that will help them meet their goals. Clients want financial security through retirement for themselves and a prosperous future for their kids. College-to-career planning is a huge blind and an area of great concern. This is why college financial planning is an excellent opportunity for your advisory business. Furthermore, given that college now costs five to six figures, it literally falls under the fiduciary obligation of an advisor. And that obligation is compounded now that we all know that aggressive student lending practices have returned.
Up to the task and capitalizing on the opportunity
The portfolio of services you offer clients can include retirement planning, insurance products, business succession, and other services you may broker out, such as estate planning. College financial planning will be a core function of advisors in the coming years. Here’s why:
- College is capital intensive. Families spend anywhere from $40,000 to $150,000 per child on a bachelors’ degree. How does a family determine the value of a $40k degree from a public college or $150k spent at a private school? Are they paying for a label on a diploma, and if so, is that label worth $150k? With our programs, you can do the ROI calculation.
- A college plan directly impacts family finances now and for the entire career of the next generation. Investing in college can be more significant than purchasing a home. Especially when a client has two or more kids. Yes, the upfront costs of a degree are significant. The long-term financial consequences of the degree vary tremendously. A soft degree might lead to a job with a starting salary of $25k with 1.5% annual wage growth. Conversely, a technical degree commonly starts at $55k and has wage growth of 3% annually. Pencil that out with a family over 40 years and they will be profoundly interested in your guidance.
- Given the cost-intensive nature of college planning and the fact that building a fiscally responsible college plan requires financial skills and planning acumen, this certainly is an obligation of the advisor to offer assistance to families.
- The family should be reminded that every dollar that goes to higher education is money out of the retirement plan. We’re not advocating skipping college; we’re making the case for fiscally responsible college planning and how it all ties into wealth and retirement planning.
With so much at stake for your clients – college financial planning directly affects their retirement plans and their children’s futures. To learn more about the college planning programs we offer for financial advisors, please visit Educate To Career where you’ll find most programs are free, including our guide to help you enter the field of college financial planning.
This article has been submitted by Educate To Career (ETC) co-founders, Paul Hill and Michael Havis. ETC is a nonprofit, specializing in providing college planning programs and data to over 1,000,000 families, financial advisors, and campus career centers each year. We are the leading vendor of actuarial analysis of college outcomes data to student lenders. Our charter is to help young people get an affordable education, leading to a real job, with no student debt.
Read more articles by Paul Hill and Michael Havis
