Why Co-signing a Loan is the Best Way to Help Your Kids Borrow for College

stocksnap_97ol3qozwu

I know, you love your child and want the best college for them.  They worked so hard but are a little – or a lot – short of affording their dream school.  Don’t fall into the parent trap of borrowing heavily for college at the expense of your retirement.  You can help them without hurting yourself.  Here’s how to find the middle ground.

Start by framing the discussion like this: college loans should be the last resort, not the first option.  First, look to savings to reduce future debt.  Even if you start late in high school, it’s ok because bills will continue to arrive four or more years down the road. Saving a dollar today beats borrowing one tomorrow. Here’s an article on college affordability and a podcast.

Next, look for free money: gifts from relatives, grants and scholarships that do not have to be repaid.  Here’s an overview of need vs. merit based aid, and a drill-down on grants.

Finally, determine if you or the student can contribute earnings while the student is in-school racking up those bills.   When savings plus free money plus current income exceeds the cost, no loans are necessary.   Be sure to account for all four (or more) years the student will be a college student, if there is a gap between expected cost and available resources, then it’s time to consider loans.  For most students, the Federal Loan program is by far the best option when you consider the interest rate and repayment terms.  One problem: the amount that can be borrowed is capped.

Let’s assume that the student takes a government loan but a gap still remains between the cost of college and the sources of money. Now all eyes turn to you (or perhaps grandparents or other relatives) for help.

The BEST ADVICE:

  • Co-sign a loan and make sure it has a co-signer release. Many private loans now have a feature to permit you to be dropped from the loan once your child establishes their own good credit.   With this type of college borrowing, you effectively lend your established credit profile to your child so they can be approved for a loan at a time they would not qualify on their own.   Once a good repayment record on the loan is established, the student should contact the loan provider to release you, the co-signer, from future obligations to pay.  Co-signer release is a terrific feature because it permits you to help your child borrow when they need your help. And for you to be released from that obligation when they get on their financial feet.

If there’s no way around it and you have to be the designated borrower, you should:

  1. Shop around. Many parents with good credit can receive substantially lower interest rates on private loans from banks, finance companies or state agencies than the Federal PLUS program.
  2. Be VERY wary of the Federal PLUS Loan. Parents with marginal or bad credit may be eligible for a Federal PLUS loan, but be wary.  The credit analysis used to approve a PLUS loan is minimal and the amount that can be borrowed is very high (the full cost of attendance).  Sounds good?  It’s not.  It is a toxic stew. The government regularly makes large loans to people who will be unable to make the payments.  This is a ticking time bomb waiting to explode.   Also, some parents falsely surmise that they will transfer their PLUS loan to the student in the future.  That is not possible under the terms of the PLUS loan. It is a Parent loan, not a student loan.
  3. NOT borrow from your retirement accounts to pay for your child’s college. It sure sounds good to “repay yourself” the interest that accrues on a loan rather than paying a bank, but it is a terrible idea. Why?  Every dollar you withdraw from your retirement account is one less that can earn interest, dividends or appreciate to grow your retirement savings – and at a time when your retirement is fast approaching.  Just as young families are instructed to start saving early to benefit from compounding, older savers should avoid touching the nest egg because you (we) are running out of time to grow the account. This is no time to stretch.

If you’re a data hound and seek some data about parent (and grandparent) borrowing, check out the Consumer Finance Protection Bureau’s recently released “Snapshot of Older Consumers and Student Loan Debt.”

Like many data analysis, this one can be used to support both sides of an argument.   Here, (a) older (age 60+) borrowers are under stress and (b) older borrowers are doing ok.     The CFPB report compares the 10 year period 2005-2015.  The data in parenthesis is 2005 data as cited in the report:

Older borrowers are under stress:

  • Consumers age 60+ is fastest growing segment of the student loan market
    • They owe $66.7 billion
    • There are 2.8 million older borrowers, (up from 700,000)
    • They owe on average $23,500, (up from $12,100)
  • Delinquencies are up from 7.4% (2005) to 12.5% (2015)
    • 37% of borrowers over 64 are in default
    • 40,000 have Social Security benefits offset (8,700 in 2005)

Older borrowers are doing ok:

  • 73% is borrowed for children or grandchildren – indicating a choice to help rather than being burdened by their own debt.
  • Fewer than 31% of older borrowers owed federal loans (867,000 of 2.8 million)
    • Fewer than 7.5% held PLUS Loans (210,000 holders)
  • Of 2.8 million borrowers, only 1,100 lodged loan complaints with the CFPB

What does this all mean?

To me, it’s clear.

  1. Parents should establish a college savings program for their family that is appropriate for their financial situation.
  2. Students should seek financial aid by filing the required forms.
  3. Parents and students should realistically assess how much current income each can contribute to defray costs while the student is in school.
  4. Students should be primarily responsible for taking loans for college. The federal loan program is the best solution for most of them.
  5. If parents are enlisted to help their students with loans, they should contribute by co-signing a loan with a co-signer release.
  6. If parents need to be the sole obligor to borrower for their child’s education, they should shop around, be wary of the federal PLUS program and not borrow from their retirement account.

I can’t help but think of the airline oxygen mask analogy.   There is a reason we’re instructed to put on our oxygen mask before taking care of a child.   Incapacitated parents are of no help to kids.  The same is true for parent borrowing for college.  If you feel compelled to help borrower for a child or grandchild’s education, be sure not to imperil your future well-being.  Co-signing a loan helps the next generation achieve their dream of a college education without imperiling your dream of comfortable twilight years.

‘Tis the season for College Savings: 3 Painless Holiday Tips

screen-shot-2016-12-04-at-1-21-26-pm

The year-end affords the opportunity to reflect and optimistically plan ahead. Use these three holiday hints to get started and by this time next year, you’ll be proud of your accomplishments. (…and don’t forget to clue in grandparents and other relatives to get a bigger bang for your buck!):

  • Check the couch for loose change – 2017 style:   I was riding the elevator with a woman who was reading Plan and Finance Your Family’s College Dreams and she offered one of the best tips I’ve heard:
    couch-money
    …find more than loose change in your checking account

    Check the automatic payments connected to your checking account and cancel those you don’t regularly use or need.   She found more than $75 per month – loose change in the couch, 2017 style.  Next year, her re-allocated spending will fill up a 529 college savings plan with nearly $1,000. It’s repurposed “found money” that has no impact on her current spending or life style. Brilliant. How much can you find?

  • Make the Gift of College a Holiday Present: 2016 was a breakthrough year for innovation to make savings in 529 Plans easier. According to the College Savings Foundation, 90% of parents said that online and other gifting options would make college savings easier – and their holiday wish has been fulfilled. These innovations come in many variations so finding options that work well for your family should be easy. The College Savings Foundation outlines the various opportunities, which include:
    • Online gifting and/or gift certificates and coupons that can be printed and presented as gifts – with the gifted amount automatically deposited into a 529 account.
    • Emailed invitations offering gift givers access to make a gift directly into a 529 account.
    • Customized web pages with family or beneficiary (student) specific information.
    • GiftofCollege cards available at Toys’R’Us and Babies’R”Us or from some employers allows gifts to be made into any 529 Plan offered in the country.
  • Use Credit Card “Cash-Back” Rewards to Fill up 529 Plans. Find a credit card linked directly to 529 Plans or be disciplined about depositing Cash Back Rewards from other cards into a college savings account. The great things about these programs is that they allow you to fill your 529 coffers as you go through your normal day: no behavioral changes are necessary. Just be sure to not roll-up big credit card bills that you can’t pay in full each month to avoid paying big interest that will easily wipe-out the amount you can save.
    • Credit Cards linked to College Savings. There are several credit cards that permit users to accumulate cash back rewards to be deposited into 529 account. Some of these programs include:
    • CollegeCounts 529 Rewards Visa Card offers 1.529% back for those with a 529 Account offered by Union Bank in Alabama’s 529 Program and the Illinois Bright Horizons.
    • Fidelity Rewards Visa Signature Card offers 2% cash back to certain Fidelity accounts including Fidelity managed 529 Plans.
    • The Upromise MasterCard offers a range of cash-back benefits depending on the products purchased and the merchant from which they were purchased.
    • Other Cash Back Cards. Even if your credit card is not directly linked to a 529 Plan, you could easily take some or all of those cash rewards and deposit them into a 529 Plan. Every bit helps!
    • Learn more: “Using a credit card to save for college” from New York Times Money Adviser.

Each of these will allow you to increase savings without changing any of your current spending or giving habits. Find one or more that work well for your family. Recruit grandparents, relatives and friends to help and you’ll accumulate a nice nest egg that will no doubt reduce the amount that might need to be borrowed for college later. A dollar saved today is better than one borrowed tomorrow!

Send your success stories and other tips to info@Inviteeducation.com as you plan, save and succeed in 2017.

Happy Holidays!

John Hupalo is the Founder of Invite Education and co-author of the recently released book: Plan and Finance Your Family’s College Dreams: A Parent’s Step-by-Step Guide from Pre-K to Senior Year

A Mixed Bag of Tricks & Treats in the College Board’s 2016 “Trends” Reports

halloween-pumpkin

College data nerds love late October.  Why?  The College Board releases its annual Trends in College Pricing and Trends in Student Aid   These reports, much like Sallie Mae’s How America Pays for College, are chock full of  data and analysis to understand important trends in how American families plan and pay for college.   At the very least, be sure to read the Highlights and Introductions in each report.

As in years past, it’s a mixed bag of results with sprinklings of good news, bad news and news that can be used to support seemingly contradictory arguments.

Good news from the reports:

  • College loan borrowing declined for the fifth consecutive year.
    • Undergraduates and their families borrowed 18% less than 5 years ago.
    • For undergraduates, federal and non-federal loans constituted 36% of funds used to supplement student and family resources – the lowest amount in 20 years
    • Only 10% of undergraduates leave college with more than $40,000 of debt
  • Total grant aid now exceeds $125 billion having increased almost 90% from 1995-2005 and then another 79% in the next decade.
  • Institutional grant aid has almost doubled over the past 10 years from $29.1 billion in 2005 -06 to $54.7 billion in 2015-16.
    • Grant aid accounts for the highest level of funds used by undergraduates to supplement their own resources over the past 20 years.

Bad news from the reports:

  • Pell Grant expenditures for the nation’s neediest student continued to decline from $39.1 billion at the peak in 2010 to $28.2 billion in 2015 (but is still more than 80% greater than pre-financial crisis spending).
    • The number of Pell Grant recipients declined for the fourth consecutive year (but the percentage of undergrad recipients is up to 33% from 25% a decade earlier.
  • Public funding (state and local appropriations) peaked in 2007-08 at $85.2 billion and declined 9% to $77.6 billion for 2014-15.
    • We’re spending less on public education than 30 years ago: funding per FTE student is 11% lower than it was 30 years ago
    • Declining state revenues per student are resulting in the rising prices at state schools.

Mixed news from the reports: could be better or could be worse

  • Tuition and fees continue to outpace inflation — rising from 2.2% to 3.6%, but the rate of increase is less than previous years
  • The favorable trend of net price declines from 2008-2010 reversed. Net prices paid are now increasing again, but – and it’s a big but – the net price paid at 4 year private and 2 year public schools in 2016-17 is still less than what was paid in 2006-07.
  • Total federal grants to undergraduates nearly doubled from 2005-2015 to $41.7 billion in 2015-16, but $10 billion less than the peak in 2010-11.

Facts from the reports that we’ll all be using in the coming year:

  • Total federal aid to undergraduate and graduate students: $240.9 billion
  • Total non-federal borrowing: $11 billion
  • More than 70% of full-time students receive some grant aid.
  • In-state college costs vary widely (from $5,060 to $15,650) depending on the state of residence
  • Undergraduates received an average of $14,460 per FTE student in financial aid
  • Default rates are highest for borrowers with balances less than $5,000 and decline as balances increase
  • 14 million students took $18 billion in tax credits and tax deductions. Nearly 25% of these recipients had incomes between $100,000 and $180,000.
  • The federal work-study program is relatively small: 632k students earned $982 million

Here’s what struck me when considering the reports and their context.

  1. The College Board does a painstaking job of presenting apples-apples analysis for consistency, but be careful when comparing these data to data in other reports – particularly data related to cost of colleges (i.e. know if it’s 2 or 4 year, in-state or out, all-costs or just tuition and fees, etc).
  2. With a glass half-full approach, the data on loans is most encouraging to me: total amount borrowed is down considerably and most students are not over borrowing. The obvious conclusion: future college graduates will feel less strain than their predecessors.  A less obvious question:  is borrowing down because students are choosing less expensive schools, are they receiving more aid or is it a combination?
  3. The financial crisis is now nearing its 10th Anniversary.  We’ve seen how the market (students, parents, governmental entities and colleges/universities) reacted and now how it is normalizing.  In the teeth of the crisis and the subsequent recession, tuition and fees increased significantly when compared to inflation but families actually paid less because the federal government stepped up and provide more grant aid and tax credits.  That trend has reversed as increases in aid no longer exceed increases in college costs — hopefully families will not fall into the trap of therefore increasing the amounts they borrow to reach for a school they cannot truly afford.

With data showing both advancements and set-backs in the college financing market, I continue to strongly believe that:

What do you think?

______________________________________________________________

John Hupalo is the Founder of Invite Education and co-author of the recently released book: Plan and Finance Your Family’s College Dreams: A Parent’s Step-by-Step Guide from Pre-K to Senior Year

John Hupalo on college planning solutions with “The Opening Bell” WGN Chicago

wgn-logo-2

Families putting together college plans are looking at different avenues to find success.  John joined The Opening Bell to share some insight from the book “Plan and Finance Your Family’s College Dreams“, helping families get through the planning process.

  • Starting early on savings will reduce the need to borrow in the future.  There’s 529 programs in place with creative ways to hit savings goals over time. Consistent long term savings combined with any gifts can really grow.
  • College value is different for every family. Be realistic, rather than pessimistic or optimistic.  The planning process has many little steps involved to determine the right fit school considering everything going on in a young person’s life.
  • During election season, we hear ideas about “free” college and student loan debt forgiveness being made more widely available.  At the end of the day, college choices come down to individual decisions based on personal goals and needs. Real solutions are not easily found through claims made during elections.

Check out the full recording beginning @ 19:43 on WGNRadio.com

 

Invite Education co-founder Peter Mazareas talking college affordability on Plan Stronger Radio

soundboard-med

Peter Mazareas joined Plan Stronger Radio with host David Holland to cover the topic of college affordability, a major issue faced by many families, especially this time of year.

Peter covers some critical topics by sharing his wisdom and expertise, especially important for families approaching this challenge:

  • College planning is recognized equally with retirement planning given the size and scope of the process.
  • How can families simplify college planning given all the financial variables?
  • What can be done to increase college options and reduce debt dependency?
  • What are some smart strategies that can help with college savings?
  • How the new book “Plan and Finance Your Family’s College Dreams” helps families every step of the way from early planning to graduation.

Three Simple Ideas to Start Fixing the Student Loan Mess

washington-d-1624419_1280

I’m back from a few days in Washington, DC.   Despite working on Capitol Hill for two years, I’m still struck by the disconnect that seems to exist between our real world and their political world.   These ecosystems need to collide if we’re going to seriously begin addressing the real world student loan debt crisis.  Here are three simple ideas that would help borrowers immediately and could be the basis for a long-term solution to the spiraling college debt problem:

  • Stop categorizing federal loans as “aid” on Financial Aid Award Letters
  • Stop charging students and parents origination fees to obtain federal loans
  • Start requiring the Direct Loan Program to report Annual Percentage Rate (APR) calculations

We know the statistics: there is $1.3 trillion of student loan debt outstanding. We’ve heard the sound bites: college loans hamstring graduates who have taken on piles of debt and are underemployed.  So what’s the answer? Previously I’ve offered my thoughts about college affordability and ways for students to avoid excessive debt. However, there are some factors that are simply out of their control and need to be fixed in Washington. And soon.

In the political world, current efforts are largely focused on relieving over-leveraged borrowers of repayment stress with loan forgiveness programs and income-based repayment plans. Great, but these programs address the problem after it has occurred and leave the root causes untouched.   We need to fix the problem at the source. In this case, before a loan is made.

Transparency and disclosure are all the rage – and rightfully so. But, the federal government comes up woefully short in providing adequate disclosure in two critical areas for the Direct Loan Program:

  • Marketing loans via colleges
  • The total cost to borrowers

Did you know that the federal government:

  1. Permits colleges to categorize federal student loans as “aid” on Financial Aid Award Letters.
  2. Charges borrowers fees but does not disclose an Annual Percentage Rate (APR) for their loan?

In effect, the largest student loan lender — with over a 90% market share — permits itself to market student loans as financial aid through colleges and universities without disclosing the APR. I bet the Consumer Financial Protection Bureau would have a field day with a private lender engaged in these business practices.

Loans as “Aid”

Remember the old story of the wolf in sheep’s clothing? I do whenever I think about a high school senior first encountering a student loan “awarded” via the financial aid process.   Or worse, a parent relieved that their child’s dream college is within reach because they’ve been “awarded” a PLUS loan. A PLUS loan is packaged as “aid” but it comes with big up-front fees and encourages parents to borrow up to the full cost of attendance as long as they don’t have adverse credit — a very low level of scrutiny. Intentional or not, the disingenuous miscategorization of loans as aid no doubt confuses borrowers and leads to some very bad decisions regarding college affordability.

APR not required for a lender with a 91% market share 

According to the College Board, for Academic Year 2013-14, approximately $113 billion of student loans were made. Approximately $9.7 billion of these loans were made by non-federal lenders, mostly banks, credit unions, finance companies and some state based entities.   Few, if any, charge fees to originate the loans, and all are carefully watched to ensure consumers are treated fairly and receive proper disclosures including APR calculations.

Then we have the other lender, the federal government, which made more than $103 billion in student loans.   This monopolistic market share resulted from a long political struggle to replace private lenders participating in the government’s guaranteed student loan program with a nationalized student loan program under the auspices of the Department of Education.

No matter your opinion of the Direct Loan Program, can anyone make an argument to justify:

  1. Why government charges fees to obtain loans when private lenders do not?
  2. Why the Department of Education is not required to disclose an APR?

The Good News – Thanks to the DoE

Kudos to the Department of Education for recognizing the first problem addressed here – student loans nicely wrapped in the sheep’s clothing of a Financial Aid Award Letter.   Beginning in Academic Year 2013-14, the DoE introduced its Federal Aid Shopping Sheet, which asks colleges to CLEARLY show the:

  • Cost of attending the college
  • Amount of grants and scholarships awarded to the student
  • Net Price that the family will pay.

The standardized form then delineates what options the family has to pay those net costs:

  • Work options
  • Federal loan options
  • Other options including non-federal loans

Thousands of colleges have agreed to use the Federal Aid Shopping Sheet but thousands do not. Some likely add to the confusion by providing students with both the institution’s Financial Aid Award Letter and the Federal Aid Shopping Sheet.

Here’s a federal regulation I would support: require all Title IV eligible colleges to use the same form of a Financial Aid Award Letter with simple and clear disclosures so families can easily compare the cost, aid packages and options for filling the gap.   Don’t re-invent the wheel: the Shopping Sheet seems to fit the bill very nicely.

A Final Thought

To end where I started: our political leaders, no matter how well intentioned, seem stuck on a very unproductive treadmill of churning out sound bites about the student loan mess.   They’re spending too much political capital addressing the symptoms of the problem rather than actually fixing it at the root.  It’s time to replace political sound bites with real world actions to help families avoid excessive student debt.  My suggestions:

  1. Require all Title IV eligible schools to use the Federal Student Aid Shopping Sheet
  2. Stop charging students and parents fees to obtain federal loans – the private student lenders do not charge fees
  3. Provide APRs to federal borrowers

What do you think?

 

_________________________________________________________________

John Hupalo is the Founder of Invite Education and co-author of the recently released book: Plan and Finance Your Family’s College Dreams: A Parent’s Step-by-Step Guide from Pre-K to Senior Year

Invite Education Featured on “Money Matters” @KPFTHouston

houston

It’s “Back-to-school” season and parents are looking for answers when dealing with the high cost of college.  Join Chris Insley of the “Money Matters” show on @KPFTHouston interviewing Invite Education CEO John Hupalo to discuss the new book Plan and Finance Your Family’s College Dreams.  Early savings strategies, student lending, choosing a major, considering career opportunities and other key topics are up for discussion and solutions.

Student debt crisis does not require a big government solution. Here’s my full Letter to the Editor of the Wall Street Journal

man-people-space-desk-medium

Kudos to WSJ for maintaining focus on the student debt crisis and offering its pages to voice various views.  On Wednesday, August 10th, the Journal  printed my Letter to the Editor — see the full letter below.

My view in short: families empowered with better information, tools and services AND the emotional demeanor to choose less expensive schools over “brand-name” schools can avoid excessive student debt.  The educational outcome is likely to be excellent and their return on investment substantially better because they did not choose a higher cost, debt laden path.

What do you think?

To the Editor:

My career has been focused on helping families plan and pay for college: 20+ years as student loan investment banker, former CFO of First Marblehead Corporation (NYSE:FMD), school board member, education entrepreneur and, recently, the co-author of “Plan and Finance Your Family’s College Dreams.”

Sheila Bair hits a few of the high notes of the college financing crisis. The root problem: everyone’s to blame. The Congress has tinkered around the edges of a student loan program established in 1965 when it provided many students with low cost loans with caps that nearly covered 100% of education costs. The current Administration’s political response is to find ways to forgive student loans. Colleges have zero incentive to control costs. Some for-profit schools are bogus. Taxpayers appear oblivious to the fact that we pay for every defaulted and forgiven federal loan. Borrowers seemingly prefer the status of victim of greedy lenders and corrupt schools to educated consumer that no one forces to sign a loan note.

College affordability is within the grasp of all families starting with the acceptance of personal responsibility for the contracts signed.   Loans should be the last resort, not the first alternative, to pay for college – no matter what the government or the schools say. Families should first use savings, financial aid, scholarships, current income and other “free money.”  Then project the total amount of debt that might be needed. If it exceeds the projected first year salary after college, the school is not affordable. Finding a less expensive school, working for a year, living at home or taking any number of other actions is far preferable to being the next headlined poster child in the college financing crisis.   This is a solvable problem that does not require a big government solution.

 

Interview: Invite Education CEO John Hupalo featured on “The Experience Pros” talk radio

Screen Shot 2016-08-12 at 10.13.59 AM

Invite Education CEO John Hupalo was featured on the Experience Pros  radio show talking about his new Book “Plan and Finance your Family’s College Dreams” and how parents are dealing with higher education costs today.

During the 9 minute interview, hosts Angel and Eric raise key questions that families are dealing with when it comes to paying for college, bringing up topics affecting many today, like savings plans, gap year and more.  Since college is not getting any less expense, parents are concerned.  Some highlights from the interview.

John: “94% of parents believe college costs will impact ability to pay for retirement.  College costs are increasing at a rate above inflation.  Parents are starting to scratch their heads and say “Is the cost really worth what’s on the other side?” Hopefully a graduate without too much debt in their pocket.”

How do we make this affordable if we didn’t start saving when they were toddlers?

John: “Not many families started early enough.  529 plans prevalent today were just barely getting off the ground 20 years ago.  Some families with children in high school woke up today without enough in their savings account, and they ask what do I do?   We say, take a deep breath, it will be ok.  There are opportunities to receive scholarships, need based aid, and merit based aid from the school. It’s a mistake to rule out any particular college before actually going through the financial aid process and getting a financial aid package back from the school.  They may be pleasantly surprised. Even for juniors or seniors in high school, by the time they graduate from college, that might be 5 or 6 years down the road, so saving a dollar today to offset some of those costs tomorrow is a good plan. Every dollar you can put towards actual reduction in that cost of school is a dollar less that has to be borrowed, and that’s a good thing.”

Is “gap year” a good idea?

John: “It depends on each student’s circumstance.  For most kids taking a gap year, it’s a great idea…  For some students it’s an opportunity to go out and work a little bit, maybe put a “down payment” on their college education so they don’t have to actually borrow as much.  Other students may not be properly motivated.  If you look at the data, students who do not complete the college course they are significantly more likely to default on their loans.  So they have debt and no degree — there 0-2.  That’s not a circumstance anyone wants their child to be in.  So a gap year could really be an important maturity year and an opportunity to earn some money.”

What about student’s that are dropping out because of debt?  Is debt impacting graduation rates?

John: “I think that’s right.  The answer is better financial education up front.  What parent would say to their high school senior, “Go to the local car dealer and pick out the car of your dreams and then drive away fully financed without terms that you actually understand.” Sometimes that’s what we do with some of our students, pick the college of your dreams, we’ll figure out how to pay for it later.  That just doesn’t work any more.”

 

Choose Words Carefully & Improve Business: A Lesson from the State Treasurer’s Conference

Screen Shot 2016-06-21 at 8.59.18 AM

Conference sessions tend to blur together but not this one:  “New Word Order – It’s Not What You Say, It’s What They Hear.” Gary DeMoss from Invesco Consulting blew the doors off of the Treasury Management Training Symposium with a riveting 50 minute discussion on how financial institutions can obtain substantially better results by paying attention to the language they use with customers and prospects. Screen Shot 2016-06-21 at 8.43.40 AM For the skeptics out there, I don’t know Gary and have no relationship with Invesco so this is not an inside commercial message disguised as a social media tip.   It was simply one of those light bulb moments that I want to share with you. It was that powerful.

So what’s the secret?  Words matter. A lot.

Gary presented the science behind learnings with regard to word and phrase choices that make our customers receptive to our message — or angry.  None of us intentionally intends to infuriate our customers, but we might well be doing so unintentionally.

He handed out a deck of nine cards with words/phrases on the front and back, and asked us to signal the phrase or word we thought best registered with our customers.  Here are the pairs:

  1. Knowledgeable vs Experienced
  2. Minimize my losses vs. Maximize my gains
  3. Works as advertised vs. New and improved
  4. Financial freedom vs. Financial security
  5. Voluntary contributions to my retirement plans vs. Automatic contribution to my retirement plan
  6. Transparent fees vs. Straightforward fees
  7. Long-term strategy vs recovery strategy
  8. Diversified vs Not correlated to the market
  9. Investment Strategies vs. Investment solutions

Not one person in our entire group of more than 150 correctly selected all nine preferred words — in fact, half the group of financial professionals was knocked out after the very first pairing (which was not necessarily the one above — I likely mixed up the cards on the way home).  Only five people were left for the last pairings before they too were tripped up.   Thankfully, Gary said we’re not alone; only a handful of people over many thousands correctly identified all nine.  I’d like to meet at least one them to help me with next year’s NCAA basketball pool!

Here’s what I learned — Gary’s Four Ps when communicating financial language. Apologies if my cryptic notes didn’t capture all of the concepts but there’s enough here for you to consider.  If you need more (and I do), consider  his book “The Language of Trust: Selling Ideas in a World of Skeptics.”   My copy is in the mail.

  1. Positive and hopeful.  Words like “fees” make our customers angry.  Fees are everywhere and they raise the hair on everyone’s neck.  Avoid calling your charges fees at all costs.  In fact, “costs” are more palatable because they  don’t trigger those same negative reactions in consumers. 
  2. Plausible.  Consumers want credible messages in today’s world of the incredible.  “Financial Security” rings truer than “Financial Freedom.”  Financial freedom sounds unattainable for most but security is something customers understand.
  3. Plain English.  Enough with the technical jargon and phrases we financial professionals seem to relish.  The problem:  even the best dressed white collar types miserably flunked man-on-the street interviews asking about basic financial terms.   We may believe we know what our client’s know,  but many (most?) of our clients don’t understand or  misinterpret our language.   “Strategy” is more appealing than “solution.”  Good words include long-term, strategy and diversified.
  4. Personalized.   Customers want to know we’re thinking about them — not ourselves.  Use “You” rather than “I.”  Tell what your product does, not what it is and emphasize the benefits.

I already put this to good use in some material we’re providing to our customers. I hope you find it helpful too.  This session – among a group of generally very good sessions — certainly gave me plenty of food for thought on my way home.