The student debt crisis now affects approximately 44 million people and the total dollar amount has doubled since 2009. A missing piece of this discussion is the amount of parents affected by student debt. Parent student loans are becoming a growing concern. According to a CFPB report, the average state has approximately 2.2 billion dollars of student loan debt held by borrowers over the age 60. This statistic is alarming!
I often talk about millennials and their problems repaying their student loan debt but parents are another group that has been affected by this crisis. Parent Student Loan borrowing is increasing! Student debt among baby boomers has guadrupled since 2005. According to the survey by the Federal Reserve Bank of New York, the number of student loan borrowers over the age of 60 has grown to 2.8 million.
In January, 2017, the Consumer Financial Protection provided a report titled, “Snapshot of older consumers and student loan debt”, which gave insights into how student loan debt is increasing in the Baby Boomers segment of the population. Why is this happening? According to the research at the CFPB, here are a few important facts:
- Baby Boomer debt has quadrupled since 2005
- 73% of older parents student debt is related to their children or grandchildren
- 57% of private student loan co-signers are over 55 years old
- 40% of Federal Loan borrowers age 65 and older are in default. These older borrower run the risk of Social Security garnishment.
- Parent Plus loans do not offer the same repayment options as Federal Student loans
No matter what the cause, older Americans are carrying student debt into retirement at an alarming rate. In the Consumer Financial Protection Bureau study, it listed the amount of student debt carried by people over the age of 60 by state. California and New York lead the pack by far with their total debt over 2 billion more than any other states.
Parent’s Lack of Knowledge
As a parent, I understand the importance of selecting a college for a child but they need to understand the financial outcome of this decision. For many children, it is their launch pad to adulthood and their financial future. It is one of the most expensive decisions that a child and parent will make in their lifetime. During the college selection, many families have great intentions and expectations that sometimes do not come to fruition. The lack of financial literacy and complexity about student loans can become an issue that is not planned for by many families. In fact, many families do not realize that there will be a college funding shortfall until the actual award letter is received.
An issue with federal student loans that is often misunderstood is once a student has reached their annual Federal Direct loan limit any other student debt will be tied to the parent. This could be directly through a Parent Plus Loan which is the legal responsibility of the parent or a private student loan where a parent will be a co-signer.
Some parents do not understand what it means when they co-sign a loan for their child’s college education. As a co-signer, these loans will appear on the co-signer’s credit report and affect their financing capacity. In addition, if the student should default then it will affect the parent’s credit score and they are legally bound to assist in the repayment. This is why it is important to do some proper planning and focus on the outcome when these financial decisions are being made.
The Parent PLUS loans are a little easier to understand since the name implies the ownership. As stated in the name, these loans are legally the responsibility of the parent who has taken the loan. Many family’s plans may include expectations for the student to repay these Parent Plus loans but often the best plans do not always happen.
The Parent Plus loans are federal loans but have a higher interest rate and since they are parent loans they do not offer the same repayment options that the student loan plans offer. This is not often explained or understood by many parents when the debt is incurred.
Better Planning Required
As college costs continue to rise, more families need to finance a larger portion of that expense. The college financial offices only provide financial aid information one year at a time. This makes it hard for families to plan and see the total net cost of attaining a college degree. This is one of the reason we developed EFC PLUS software. It helps students and parents calculate the net cost of each college and help families structure their debt with a four year planning model.
Many students and families get emotionally tied to a college without fully planning for their total net cost. To avoid a lifetime of debt, a formal plan should be developed to properly understand the future repayment cost of that degree. Lacking of planning can already be seen in the debt incurred by millennials who are struggling to repay student loans. The next domino effect of this poor planning is the debt issues of older Americans who are nearing retirement and struggling to cover the loans from their children and grandchildren college education.
Don’t put yourself into the position where you are living on Social Security and having to repay student loan debt. Social Security can be garnished if you default on your loans and if you are still working the government can withhold your pay. There is a Social Security garnishment limit but it currently falls below the poverty line. This is just another reason to start planning how you will pay for college.
I wrote this article to help both students and parent make better decisions so that they can understand the financial consequence of the college financial decisions. Unlike other major financial decisions, such as a mortgage or car, the consumer can find transparency in the monthly cost of their buying decision. Financing a college education is a very complex and an expensive decision where a third party does not review the numbers before you make your decision. It is an investment that does not have a physical asset to reclaim, like a home or car yet the access to the college loans are easily available.
I recommend families do more homework before making their college funding and student loan borrowing decision. Improper student debt planning may burden both the student’s and parents’ financial future. Parents and students need to recognize the financial outcome of each decision they make.