Do you have access to NYT? Did you read the article?
I’m out of gift links, but if you don’t have a subscription, you can usually read 3 articles free per month. I’d highly recommend you read it. The parents in this article are making their payments…and their loan balance is growing. That’s interest capitalization, and it’s seen in payday loans, but not car loans, credit card debt, or mortgage debt.
Here’s a gift link, I didn’t realize your OP wasn’t a gift link:
Yes, I read the article. Interest capitalization happens with many other types of loans too.
For the record, I disagree with the federal government offering parent plus loans to anyone who hasn’t filed bankruptcy.
I disagree with the federal government allowing parent plus loans up to the full COA, with no income test required (meaning someone who earns $20K or $50K or whatever per year, can take out $80K (or whatever the COA is) in these loans per year.
I loathe schools that package these loans and still consider themselves meet full need schools (looking at you Georgetown). But, no one cares what I think about these things.
The DOE did make these loans more difficult to get a decade or so ago, and this is what happened (from the article):
But restricting access to PLUS loans also has consequences. When the Obama administration tightened the credit check criteria in 2011, for example, loan denials increased. And certain institutions whose students rely more heavily on the loans, including historically Black colleges and universities, were particularly hard hit. The backlash was swift — and the rules were loosened a few years later.
Regardless, I agree with the general CC recommendation that if parent loans are necessary, the college isn’t affordable. There is no reason the couple’s D had to attend NYU, as an example. Do I feel empathy for them and for the situation they are in? Of course.
I’m confused.
Every day- literally every day-- people discover that they are underwater on their mortgages, or that their adjustable rate mortgage went UP, not down, or that they now owe MORE for the vacation they put on their credit card than it actually cost to go on vacation. People who buy a $500 TV but end up paying $1200 for that TV by the time they are done… and oh by the way, the TV uses obsolete technology so now they need ANOTHER TV. People buy annuities which- based on their age and financial situation- only benefit the person who sold them the annuity. People listen to the cute ads on TV “Do you have a structured settlement? Get cash now!” and they actually sell their structured settlement-- typically because they were victims of an accident or medical malpractice and the settlement was set up to provide them with an income for life. But no- they sell for cash, and they a year later they are broke.
How many lottery winners end up declaring bankruptcy?
Does it matter that they are members of a union or not? How is that relevant? People make dumb financial decisions all the time. There are guardrails in place for many products (someone with 50K in investable assets typically cannot put it in a hedge fund or other vehicle only open to “qualified investors”) but at some point adults need to ACTUALLY read the documents they are signing.
I would have to go way off topic to address the other types of loans that you describe in your post, but no, these are not comparable at all to how parent plus loans are structured.
I did pull a few CDSs from schools that do disclose this information re: school revenue sources, non-redacted, to the general public on their websites. It’s not an accident that the three schools that I pulled (two private, one public, three different regions in the US), all receive about the same amount in PPL revenue as revenue from student work-study programs.
That was a decision made by people in positions of power to enable colleges-all colleges-to persistently raise COA over the past one and a half to two decades.
And I have seen multiple posters, all of whom seem employed by colleges and universities in the administrative offices, based on the content of their posts, who defend their need for access to more money from anywhere, from anyone but them.
It’s fine and dandy to pay cafeteria workers more, or renovate a dorm built in the 1970s, or buy lab equipment. Until the people in positions of power over where college and university revenue is sourced admit that this system- of relying as much on PPL revenue as students work study- is a problem and take active steps to reduce and eliminate their reliance on this revenue source, well, the complaints that they make about other social problems that result from this lack of action and unwillingness to take responsibility for their own role in this mess will go unaddressed. The federal government can’t fix that on its own.
I work for a multi-national company (and have worked in others for my entire career-- 35+ years) so I will respectfully take myself out of the pool of folks who you are calling out as having a vested interest in the current state of affairs re: college costs, government assistance, etc.
So I’m approaching college costs (and did so with my own kids) with a corporate lens AND a strong background in personal finance (required, non-credit courses when I got an MBA decades ago). Simply put- there are some people who you cannot save. You just cannot. They revel in their financial illiteracy. And no amount of regulation, transparency, guardrails, limits, etc. will change that.
I see folks IRL on the brink of declaring personal bankruptcy proudly give their 17 year old kid a brand new jeep for a birthday gift. How and why? I’m stumped. I mean- I get it. Even with lousy credit, someone who is determined to borrow and take out a loan they cannot afford is going to do it. But the why? I have no clue.
I see folks paying ridiculous amounts for low deductible home owners insurance (and filing claims like crazy) but who don’t have life insurance (arguably, the single biggest financial risk a family will have- the death of the breadwinner). I could go on and on but you get the point.
You seem irritated that some people take out loans they cannot afford to repay. Never mind the tens of thousands of responsible borrowers who use PPL’s like any other financial tool- useful for some, useless to others, unaffordable for many. I’ve got people in my own family who used PPL’s with great success- anticipating a job change (doing a graduate degree at night which would almost double their income) and paid the loans off early with ease. Or another lifestyle change (downsizing the family home after the last kid graduates from HS) which makes paying off the PPL for an older child quick and easy.
So sure- some people are financial idiots and do things they shouldn’t, and sign their names without reading the documentation and have no clue how interest rates work. No argument from me on that.
Equating work study and PPL is a curious comparison. Not sure why you feel it’s a relevant datapoint?
Work study and parent plus loans have nothing to do with each other. Federal work-study requires financial need, PPL does not. A student earns income from work-study, while PPL is debt that the parents are responsible for. (said by someone not with a vested interest in any of this either)
I apparently am in the group that wants to enrich myself on the backs of union people, who apparently are ignorant (surprise to me, and I was a production supervisor in a union plant at one time). I guess my huge salary ($60k at the end of my years long Director career) made me feel empowered to hurt people financially. Seriously? Neither I nor my peers, who work tirelessly to try to help people from all walks of life figure out how to pay for school, want to bankrupt families. I was always honest with students and families, and I had more than a few students choose other options after speaking with me. I am not the only financial aid professional who operates this way. The vast majority in our profession try hard to help people understand how loans work. We also see how without the ability to borrow, only the few will be able to afford college. Please refrain from continuing to bash higher education workers. It’s not productive for the conversation.
It is very productive to point out that students, parents, and families need to consider that they alone are looking out for their own financial best interests, long term and short term.
That’s not bashing anyone. It’s pointing out that the problems in higher ed revenue or with the student loan crisis are not all a matter of families not paying enough in taxes or to schools directly.
It would only be seen by one perspective to suggest that budgeting better and considering the sources of higher ed revenue and the impact of those sources on others outside of higher ed to be bashing…interesting characterization. I see it as a responsibility and impact issue. We can agree to disagree on that if you want. I’m not debating- I started a this thread to point this out and ask a few questions about these products. I received partial answers, and I do appreciate that.
Federal loans are at simple interest, not compounded. The only compounding takes place when loans are consolidated and any unpaid interest is added to principal. One can avoid that by paying the interest as it accrues.
The loans are as regulated as any government loans. The servicers are also regulated and supervised (audited). Most Plus loans have an interest rate below 10%. Payday lenders often have APRs in the 175% range so saying PPLs are the same as payday lenders is not exactly accurate. Even credit cards these days are at 29%, and are definitely compound interest, so a 10% rate on an unsecured loans is a pretty good rate.
Look, you don’t have to take a PPL if you don’t want to. Your children can’t take one since they are PARENT Plus loans, and the other loans you are referring to like Sallie Mae and Discovery are regulated and the terms will be explained to you with the Truth in Lending box on the loan just like on any consumer loan. If you don’t like the terms or the repayment schedule, don’t take out the loan.
I didn’t take PPLs or private loans for my kids. My kids took the Direct loans (not the max) and one took a Perkins loan. One chose a very affordable school and the other was at a private school but with scholarships that were close to the COA. Both would have preferred to go to college in California but we couldn’t afford it.
To be honest, I have no idea how Parent Plus Loans work and I am just grateful not to have to take one out. From what I’m gathering on this thread, parents can borrow extraordinary sums of money to pay their child’s tuition even if the parent doesn’t have realistic means to pay the loan back. And that unlike the credit checks required for other types of loans, there are none required for these educational loans? If that’s true, I do think that such lending should require counseling or perhaps parent plus loans should be more tightly regulated .
While I am sure that financial illiteracy is part of the problem for some families, I don’t think most people in over their heads in debt are reveling in their financial illiteracy. Nor do I think that the main problem is parents who can’t be saved from themselves because they willfully overspend and splurge thoughtlessly. Perhaps some do. Still I bet that at least sometimes, what appears to outsiders to be merely foolish borrowing stems from overworked parents with no previous borrowing experience and even less bandwidth or time to research how the loans work. It also seems likely that some parents are just desperate to help their kids attend college and unaware of their other options so they take the only option that seems viable (borrowing).
In my experience, for some parents, day to day survival takes all their bandwidth and time. Particularly in single parent households, it can be really difficult to juggle tasks that professional households take for granted or think are obvious/simple. Heck I just spent a crazy number of hours this week on the phone trying to figure out why our insurance wasn’t covering some diagnostic tests, more hours on hold with the bank over a problem with one of my children’s student checking account plus a good amount of time dealing with an unexpected charge on another kid’s tuition bill. Luckily I have a flexible enough job that I can take time during business hours to 1) research what went wrong, 2) self advocate with the institutions, and 3) begin to straighten out these financial issues before my checking account went into a death spiral. But it is incredibly easy for me to imagine why someone would sign a loan offered by a college without being able to investigate the terms fully. And given I am quite well-educated, it doesn’t seem at all shocking to me that some parents are overwhelmed when faced with trying to figure out how to help their children pay their tuition.
I think a lot of people get into financial messes due to circumstances, not careless overspending. They live paycheck to paycheck, and can never get ahead. Medical bills, divorce, periods of job loss - and folks aren’t talking openly about what is going on in their financial situation. I have a friend (with an absolute jerk of an ex) who was getting pretty frantic with Covid and unemployment. I was privy to her situation, most were not. She never attended college, her ex was controlling financially (my friend wasn’t on their bank accounts, never had her own credit card, got an alliance). Her dad was married 4 times when she was growing up. I think her 19 year old decided not to go the college route, which makes it easier since her ex wants her to go into real estate like himself (he owns his own business making it harder to access his finances). My friend did look into the costs and it was concerning. She rents in a tiny 3 bedroom house that must cost close to $3000 a month (her other child is 18, non verbal autistic, who needs 24/7 care). She lives paycheck to paycheck, nothing saved for retirement.
So our high schools actually went into this deeply. You can also call the colleges and the financial aid departments can help explain the different loans. No one should ever be surprised that the parents are taking on certain loans. People might not “understand” it but there are people to ask at every college. I just think lots of parents are not realistic when it comes to loans.
Parents also have to have the financial talk with their kids very early on. Not in senior year when acceptances come in. We on CC commonly hear from parents “we will make it work”. No they won’t. Families need to have a plan going in. Both our kids knew our finances. We just didn’t have some magically tree that produced money at will. Our daughter went to her number 2 with great merit since her number 1 just would of been too expensive and we had kid 2 coming up 2 years later.
Because of the merit at two different schools we ended up with excess 529 money that she can now use for graduate school. We used a lot of current income to pay for college.
Families need to plan.
I agree, but I also believe that the narrative that ‘everyone should fill out the FAFSA’ and the false equivalencies peddled by student loan companies and financial aid office staff needs stronger regulation, more akin to the regulations that consumer banks and brokerages have to follow.
This lackadaisical approach to regulating this industry is, imo, why we have a student loan crisis, why it is so difficult for families to figure out their COA before their child has committed to a particular school, and why COA is increasing every year, with no end in sight.
I hate that I have to pay into a system that propagates this because, sometime in the last twenty years, administrators and government officials apparently sat in a smoke-filled room and figured out that PPLs were a necessary invention for their annual revenue sources.
Obviously, I am in no position to do anything about this. I have a child going to college next year, and I will have to pay into this system that was created by others and victimizes people like the subjects of this article.
Families planning is not enough. The scope and the magnitude of this debt crisis as well as causes of it are somewhat akin to the mortgage backed securities crisis in 2007, and taxes didn’t fix that- more regulation did.
You could choose not to participate in this predatory system by not sending your child to college. But you probably want your child to get a degree in order to get ahead in life. Just like the parents who can’t afford school without loans. They are only trying to help their kids get ahead. If we remove the ability to borrow because some borrow more than perhaps they should, we remove the ability for a whole group of people to move ahead.
And once again, I strongly reject the picture you paint of financial aid professionals.
Well… Many many families that never thought they would get financial aid and didn’t want to apply actually do. Lots of misconceptions out there.
My own situation many moons ago was financial aid but my mother had to cosign for medical school loans. Regardless, they were “MY” loans but I had no other avenue and yes I worked. My loans were definitely deffered and deffered and forbearance was a normal thing since I had no choice. But… After getting out of residency and somehow buying a house that appreciated greatly in a very short time, I paid back with equity $350,000 of my and my wife’s loans.
So, it can be done. It should be done. At least now from what I understand that interest won’t accumulate to no end. That is what did us in. Making payments but getting no where was like swimming in a pool but staying in exactly the same place. If when we made our payments it reduced the principal we would of been fine. I totally understand your post.
But the reality is many people tend to live above their means. Little Susie just has to go to school “X”. She will have a history degree and will basically never pay off $200,000 degree for that privilege. We see this on CC daily. It’s really sad. I went to community college to save money for a year. I worked.
Again, having the financial talk early junior year or even earlier sets expectations. No one should have to dip into retirement or second mortgage to pay for college.
What do you mean by you have to ‘pay into this system’? You DO NOT have to take out parent plus loans for your child to attend college, in fact, most parents do not take out any PPL. Give your child a budget, and stick to it.
If you want suggestions on affordable colleges for your child, you might start a new thread. Some CC posters have a great deal of knowledge about finding affordable colleges.
This ^^^^
We also had a budget (whatever our in-state flagship was). Loans for us or the kids were not an option in our house.
I don’t know why you think student loans aren’t regulated. Direct loans to students and PPL are highly regulated. Ask @kelsmom how many binders of regulations she had to deal with from the Dept of Educ. They are also regulated by the CFPB, the loan servicers have a regulatory agency (state and fed) too.
If by ‘paying into this system’ you mean paying taxes, then yes you do have to pay for student loans, the army, credits on electric cars, roads, elementary schools, public radio, air traffic controllers… I don’t think student loans, or particularly Parent plus loans, is a money maker for the government but it does hope to break even. As far as I know, there there are only two ways out of parent plus loans. The first is bankruptcy, but it is very hard to get the loans waved in bankruptcy and only a few have been able to do it. The second is death, and that’s harsh too.
What do you want the government to do? They could get rid of all loan programs and then people would need to go to private lenders like Sallie Mae and Discover (which are also regulated just like all consumer lenders) or just not go to college. I don’t think that would change anything for those not taking PPL loans but students not getting Direct Loans would keep a lot of kids out of college. If students had to meet lending criteria for Direct loans, very few would as few have income that exceed their living expenses. If parents had to qualify for PPL, again few would meet the requirement and those could get private loans, so why bother with the PPL program at all? IMO, there should be limits on the PPL, just like there are limits on the Direct loan.
We all looked for ways for our kids to go to college. I set the budget for my kids and then tried to find ways for them to go to college on that budget. First we picked affordable colleges. I told my kids no PPLs for me and really preferred they not take the Direct loans. After the first year, they did need the Direct loans but they understood the terms and only took what they needed.
Two families that took PPLs were Mike Pense when he was governor of Indiana and Martin O’Malley when he was governor of Maryland. May have been the right choices for their families but not for mine. I don’t think either family was ignorant of what they were signing when they took the loans.