The huge load of student debt outstanding gets most attention, particularly debt incurred by students at for-profit schools who never complete a degree or who earn one but can’t find releveant employment.
An article at Bloomberg last month highlights a smaller but important problem: $71 billion in parent debt, much of which is at higher interest rates and has less flexible terms than student loans.
As with student loans, lenders will offer parents large loans without any attempt to verify ability to pay. The statistics for things like loan averages and default rates for individual schools aren’t available. Reporting is due to improve, according to the article.
Even if parents are able to meet the payments on these loans, they may struggle financially and not be able to save for retirement at the rate they need to.
It seems like unsophisticated families are most at risk. The article describes a mother who came to the US from the Philippines and took out 120K in loans to get her daughter through DePaul. With deferrals and a 7.9% interest rate, her debt is up to $179K. Should she have run the numbers before signing up? Sure… But, what kind of ethical banker would put a person in this situation?
The runaway cost of tuition and student debt should be a front and center topic in this presidential race. I’m concerned that this will be the next bubble to burst. We are heading towards producing an entire generation of young adults unable to participate in our economy. Why? Because of their (unforgivable) debt burden. Therefore, this affects each and every one of us more than most U.S. citizens realize. I’m trying spearhead a movement to educate both parents and students regarding “smart” career choices, preparedness, and planning. Thank you for highlighting this article, very disturbing indeed.
Interesting, too, that these aren’t all cheesy for-profits or obscure non-profits. Those seem to be the main culprits in student loan abuse. The school in Bloomberg’s example, DePaul, is a fine university that awards legitimate degrees. But the mom has no direct income from that degree, so her means to repay should have been evaluated on her own numbers. But, doing so apparently isn’t a requirement.
Should the university have a responsibility to check parent financial status before encouraging such loans? Or do the lending laws need to be tightened up to prevent banks from making loans like the one in the example?
Many parents use Parent PLUS loans responsibly. Unfortunately, many do not. At some point, there must be some personal accountability - I would hate to see the option removed for those who do borrow responsibly, in order to protect those who don’t from themselves.
I recall a high school counselor asking me about her own kids. She had one in college and another was a junior in high school. She had tens of thousands in Parent PLUS loans from kid #1, and she wondered how she was going to be able to take on the additional debt for #2. I told her that #2 could start at a CC - and we have a very good local university where #2 could go to school while living at home. Her kid would probably qualify for automatic merit at the U, for at least a few thousand a year - or more, if #2 did well at CC & transferred. But no, because #2 deserved better. Well, folks … this is the crux of the issue.
It would be nice if Parent loans were approved using a methodology similar to mortgage approval, where your other debts are taken into account. Unfortunately, as long as you have been paying your bills on time, no recent bankruptcy, etc you can get as much money as you need up to the amount of unmet need.
thecareerdragon, my D majored in an area you would most likely tell students to avoid. She is 26, has a great job, and makes twice as much money as I make. People need to make smart FINANCIAL choices. And yes, there is an issue with how much education costs - I don’t disagree.
Plus Loan qualification should at least consider income. Those loans can prey on low-income families who naively think that their future college-educated child will be able to pay back the loans for them. They often don’t have an adequate assessment that many post-college jobs don’t pay THAT much, and that their child will be hit hard with taxes and other expenses…things that their low income family haven’t experienced. To a low-income family of 4, a single person earning $35k-50k a year probably sounds like a lot.
@SouthFloridaMom9, some schools are being forced to accept some responsibility for the loans they encourage and rely on. For-profit schools who have high default rates will find themselves ineligible for government loan programs. Normally, repayment would be the lender’s problem. When you buy a car or a house, the seller cares only that the bank will approve your loan - it’s the bank’s problem if you end up in trouble. With no rigor in the loan approval process, it becomes tempting for schools to enroll the student and cash the check without any scrutiny of their own.
I think policy should be changed. The government should only “guarantee” loans up to the amount of the highest cost public university in the state. Every kid needs access to an education and families should be able to use responsible borrowing to achieve that goal. BUT, why should the government guarantee this debt (with lenient credit review) for the additional costs of private schooling. This “gap” should be funded by traditional credit vehicles. This would hold private schools accountable for their high prices—find kids who can pay the difference or fund the scholarship to make up the difference.
The answer is not to create a fiduciary duty (generally speaking, the strictest duty of care in the law btw) where there traditionally is none - i.e. flowing from lender to borrower (huh? what about shareholders and taxpayers guaranteeing the loan?) and instead bring some rational thinking back to the whole process.
If my BB&T branch would not give me $100K to go to Corinthian College (for profit) should the taxpayer be back-stopping that kind of loan?
PS: Did you take out “fiduciary” from your original post? Perhaps you are altering your point and my response is thus moot. If so my apologies.
There is a case in the bankruptcy court right now where a father borrowed money every year from 2002 for 3 kids to go to college. He lost his job in 2003 and is now claiming a permanent inability to get a good job because he’s 65. Well, he knew he had no job in 2003, 2004, 2005 and he knew how old he was, but he continued to borrow. Not poor, not uneducated, but his princesses wanted to go to colleges where they wanted to go, and how was he going to say no?
Chris Brown (half hour program, as part of Dave Ramsey) had a caller that was a young H/W with baby on the way. Over $111,000 in student loan debt - that took my breath away, esp as they have lowish income. W was wanting to stay home with baby (are they freaking nuts?) but she has to figure out some kind of income stream, H working extra jobs etc.
The word is out, but there are still people borrowing money they can’t afford to borrow.
Parents HAVE to learn to say no!!! Its hard, I get it. We make a very good income however, we didnt when we were in a 20s and 30s, so there were no 529’s or college savings accounts. My kids knew that we had to be strategic with the applications, and apply where there was merit money because of course we had no financial need. We had to take out a plus loan for our first, but we can more than afford to repay the loan.
Me too, when I hear those stories. It really hamstrings people in their early adult lives.
I’m in favor of balance. I don’t like protecting people from themselves, people have the right to make stupid decisions. That being said, don’t make it the taxpayer’s problem either.
For-profit colleges - their demand needs to dry up.
As a country we have to agree to support our state university and community college systems. We have to help motivated students navigate getting an effective higher education, for as cheaply as possible - if they WANT to, and they demonstrate that desire.
I see motivated students at my son’s community college and local university where he dual enrolls.
Why do these discussions never seem to include something akin to social responsibility from these institutions, in controlling costs? It shouldn’t just be about better loans, lower loan payments, better rates, etc. It should be about lower costs.