Time to make a plan for student loans

I was recently coaching my 25-year-old cousin in the job seeking and interviewing process. We had been working together for weeks, rewriting the resume, working on cover letters and practicing the interviewing process. He's a sharp and coachable young man, and through one of his personal relationships he was able to get a foot in the door at a national construction company.

It was an incredible opportunity, the interviews went fantastic, and an offer was received. Celebrations all around -- seeing a young person get their first "real job" is so rewarding. He forwarded me the offer email, it was an attractive offer, and of course, in the last paragraph stated the offer was contingent on a background check.

"No big deal, right?" I asked about the background check. "You don't have any legal history, like shoplifting or DUIs right?" "Nope, never been in trouble," was his response. "Great," I responded, "we better pull your credit too just to make sure there are no surprises there -- companies always pull credit with background checks."

I told him to sign up for the free Credit Karma app and call me to discuss the results. When he called his voice sounded like he was going to throw up. "My credit report is bad," he said immediately, "what am I going to do?" "Email me a copy of the report," I replied, "let's take a look."

The credit was bad. Ten tranches of student loans in default. My stomach sank. The issue was going to have to be addressed.

Student loans are a recurring irritant in my practice. Like most financial advice practices, our clients tend to be in their 50s or older. For the first 20 years of my career, I don't recall ever seeing a student loan on the balance sheet of someone over 45. Over the past five to ten years, however, we are regularly encountering lingering student loan balances for families entering pre-retirement and even for parents who have kids in college now. And just to clear up any confusion, I am talking about student loans accumulated from the parent's education decades in the past, not for the kids in college. For this, I blame the government.

With the COVID era payment deferrals, Biden era misleading loan forgiveness political rhetoric and predatory lending related to skyrocketing college costs, the government has enabled a whole generation of Americans to mismanage their student debt, and the impacts can go way beyond the balance sheet as my young cousin discovered.

For all the Americans in a similar situation, and there are many, news this week is bringing clarity. On April 21st the Department of Education issued a clear policy directive: student loan borrowers need to bring their loans into compliance or face collections and consequences. For those with student loans in deferral it's time to be aware, and for those with non-performing loans it's time to get the house in order.

According to information on the Department of Education website, over 25% of outstanding student loans will soon be classified as in default. Over 5 million borrowers have not made a student loan payment in over a year, and 4 million are in a late state of delinquency requiring collection action.

In defense of these borrowers, the Department also states 1.9 million borrowers have been unable to begin repayment due to processing pauses put into effect by the Biden administration. This means even those desiring to pay their loans have been unable to do so because of government ineptitude. What a mess. Time to clean it up.

First the hard news: the government is directing the Office of Federal Student Aid to begin collections activity on May 5th. The collections activity will begin with emails directing borrowers to information on their options, including websites and contact phone numbers. The FSA also plans a comprehensive outreach campaign to raise general awareness and encourage borrowers in default to begin engaging FSA and private loan servicers to bring loans into compliance.

Now the hopeful part: the FSA understands much of the nonperforming borrowers in default are in those circumstances as a result of the government's own mismanagement. The agency is offering online tools to help borrowers develop a plan and is reactivating the process for establishing income-driven repayment plans, giving borrowers options to solve this problem.

For those who have loans in default, the time for ignoring the issue is over. The Department of Education website also clearly states its intention for aggressive collections action including potential wage garnishments. This issue just can't be swept under the rug any longer.

Young adults, and those with young adults in their lives, please take command of these financial products. Blown up credit reports due to student loans can involve implications far in excess of simply not getting approved for car loans and credit cards. Job offers may be impacted and aggressive collections and wage garnishments can be stressful and even financially catastrophic for young families. With some attention and communication student loans can be managed, and eventually even paid off -- which is of course, the best solution.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.