Written By Travis Hornsby, CFA®, CFP®
I’ve heard about student loan fraud in the news and seen how clients get the short end of the stick when servicers don’t follow through, and I’m not the only one.
Jantz Hoffman has seen how borrowers are impacted when loan servicers drop the ball, and it isn’t good. I asked him to share his thoughts on student loan fraud, problems with servicers and the future of student loan policy.
Hoffman and I met at a conference where there were several other fiduciary flat-fee financial planners.
He has his own investment advisory firm and is the founder of the Certified Student Loan Professional (CSLP®) designation. The certification is managed by the Society of Certified Senior Advisors (CSA), a nonprofit organization that oversees the educational component and designation process.
What is CSLP and how did it start?
Hoffman has been working in financial services since 2002 and began advising student loan borrowers in 2010. As he saw what was going on in the student loan marketplace and the bureaucracy that existed at the time, it was clear to him that help was needed.
“I was working as a consultant for a number of broker-dealer firms … but it was challenging because most of those financial advisors had little to no knowledge about student debt at all,” said Hoffman.
“I had actually created training material for the advisors because they were making promises to clients that simply weren't true and giving them wrong advice because they didn’t understand the recommendations that I was explaining to them within the plan that they were delivering to clients.”
Eventually, the training Hoffman created began to form the basis for what the CSLP designation is today. One way to distinguish real student loan experts from fake ones is to consult someone with the CSLP designation.
Defrauding the government with student loans
I asked Hoffman about a U.S. Government Accountability Office article that came out recently. It found that student loan borrowers were falsifying the documents pertaining to their income-driven repayment (IDR) plans by overstating their family size. Because student loan payments are calculated, in part, by the size of your household, overstating your family size could result in a lower student loan payment.
Hoffman said, “There were a handful of individuals that said they had 99 people who were in their family — in their house.”
But what do they gain from this?
They get out of making student loan payments, but they're accruing interest that increases their loan balance significantly over time. “They’d have to do this for 20 or 25 years to get any value from it, and they’ll likely owe taxes on the amount that's forgiven if they make it that far,” said Hoffman.
Depending on the size of the loan at the time of forgiveness, the loan forgiveness tax bomb could be huge. The fraudsters will probably end up right back in the same spot with a lot of debt to pay.
“There's not a lot of value to be gained from that, and a lot of risk with the potential for five years in prison for lying on the forms,” said Hoffman.
Student loan loopholes
To get the most out of federal repayment plans, borrowers can take advantage of some tax strategies, however.
Married filing separately
We talk about filing taxes separately when you’re married to drive your student loan payment down, but couples usually end up paying more than if you file jointly.
By amending past tax returns, couples can still take advantage of any refunds they might have gotten. This is considered controversial by some people who think it’s gaming the system.
Hoffman pointed out that it’s overlapping programs like this that create a gray area as to what is income and how are payments calculated.
“As advisors, we have to help our clients understand the differences and the nuances to help them make the determination and decisions that are best for their long-term finances. And that could take into account something like this,” said Hoffman.
While it is a gray area, there’s nothing blatantly dishonest about it.
“It depends somewhat on how comfortable your accountant or CPA is with the strategy.”
PAYE/REPAYE loophole
Couples who are pursuing Public Service Loan Forgiveness can decrease their monthly payments by setting up one of them on Pay As You Earn (PAYE) and the other on Revised Pay As You Earn (REPAYE).
This strategy works because the REPAYE payment amount is calculated using the income of both spouses. “The payment is then split proportionate to the two spouses’ debts, and there's no requirement that both spouses are on that particular plan,” said Hoffman.
If the two spouses have significantly different income levels, this could help to lower the monthly payment of the higher-earning spouse. The other spouse would pick a different plan that doesn’t take into account their spouse’s high income and qualify for a lower payment.
Problems with student loan servicers
Student loans are complex. Borrowers have trouble knowing whether they should pay off their loans, look for a private refinance or go on an IDR plan to pay the least amount possible while they pursue forgiveness.
You can’t rely on student loan servicers to help you decide because they give bad advice all the time. So many plans exist, and the government keeps adding new ones, making it even more difficult to know which is the best option.
“The problem is that it's been reformed a number of times over the years, and every time they do it, they just make it more complex by creating different versions of the same plan with different eligibility,” said Hoffman. “It's getting to the point where it's laughable.”
The Department of Education has a website full of information, but the material is challenging to understand. They expect the average person to be able to decipher it on their own.
Hoffman sees problems the clients face every day, and it’s costing people tens of thousands of dollars.
“I had a client this week where we were changing from income-based repayments, and it should be a very simple process, right?” he said.
After going through the process, Hoffman and his client had to call in because the servicer didn’t follow through on the request. “We call in again and again, and ultimately the representative just says they generated the bill but forgot to send it out.”
What will happen with student loans over the long term?
Student loan debt is at a crisis level. There have been talks about putting a cap on the amount students can borrow, but nothing is in place yet.
With a cap on student loan borrowing, high-priced professional programs wouldn’t get the private loans they need because banks wouldn’t underwrite them. I think we’ll see a change in student loans going forward, but it’s unclear whether we’ll see that even in the next decade.
Hoffman agrees some reforms need to happen: “One of the challenges for undergraduate borrowers is the borrowing limits, where freshmen can only borrow $5,500 a year — what does that cover in today’s education costs?”
The limit forces freshmen to try to get a loan from a private lender, or it pushes a Parent PLUS loan that saddles parents with debt for their adult children.
But by having virtually unlimited borrowing, schools can keep increasing tuition without much consequence.
Clearly, the government has a role to play in the student loan industry. The question is what their role is going to be going forward.
How to get in touch with Jantz Hoffman
If you’re a financial advisor interested in incorporating student loan repayment into your business, Hoffman is a great connection to make.
Borrowers can also benefit from his knowledge. Hoffman is a tax advisor and Certified Financial Planner. You can learn more at the nonprofit CSLAinstitute.org and CSLA Financial, which is the website for his advisory firm.
