Federal college loan program can trap parents in debt

Kate Schweizer and her husband didn’t want their two daughters, just 13 months apart, to start their adulthood with college debt, so they borrowed a lot of the money themselves. Beginning in 2005, the couple took out a new batch of federal loans each academic year, eventually racking up about $ 220,000 in debt.

Today they owe $ 500,000.

“Even though the tuition fees seemed insane, I convinced myself that it would all make sense and pay off in the end,” said Schweizer, 65. “I had hoped that since my husband had a solid union job, we would – we should – be able to afford it. “

But as they borrowed each year, their monthly payments started to climb, reaching $ 1,500. “We have tried several times to renegotiate the interest or the balance, or the payments, part of it, on several occasions,” she said. “It was ‘No, thanks – put it on tolerance or trouble with 8.5% interest’ over and over again.”

The Schweizers have taken out Parent PLUS loans, which are guaranteed by the federal government and have become popular with parents who want to borrow to help pay for their children’s education. Although the Schweizers, who live in the New York metropolitan area, are more in debt than most, many parents have turned to such loans as tuition has skyrocketed relative to wage growth, according to the researchers.

Parent PLUS loans now represent almost a quarter of new federal loans for undergraduates. And while they still only represent 6% of the current $ 1.57 trillion in federal student debt, and may allow families with more limited means to attend the college of their choice, they can be problematic because they allow families to borrow regardless of their repayment capacity.

It’s also easier to accumulate heavier debt, as the only limit on parent PLUS loans is the total cost of attendance, minus any other help given. They generally carry higher interest rates than student loans and come with less collateral if a family’s financial situation deteriorates. Only a basic credit check – looking for “unwanted” events – is required to get one.

“The Parent PLUS loan does not come with an attempt to understand parents’ ability to repay,” said Rachel Fishman, associate director of research for the New America Higher Education Program, a research and policy group at non-profit.. “When the federal government says you can borrow this loan and an institution says you can borrow this loan, it suggests that the federal government has done due diligence. They do not have.”

The Ministry of Education views these loans – like all student loans – as “instruments of social insurance policy and not as traditional debt”, which is why they are not subject to traditional underwriting standards. said a spokesperson.

At the end of last year, there were 3.6 million loan recipients with nearly $ 101 billion in Parent PLUS loans, an increase of about 40% from the $ 72.2 billion ( adjusted for inflation) at the end of 2014. In particular, they can be risky for many black parents, experts say, who have taken more of these loans in recent years but tend to have less. wealth.

In 2016, 58% of students whose parents took out Parent PLUS loans were White, 19% were Black, and 15% were Hispanic or Latino, according to Fishman’s analysis of federal data. Four years earlier, 15% were black and 12% Hispanic or Latino. Three-quarters of black borrowers had adjusted gross income of $ 75,000 or less in 2016, compared to just 38% of whites.

The typical parent borrows $ 24,416 in PLUS loans, according to an analysis of federal data from the College Scorecard, which looked at 2017-18 and 2018-19 graduates. But many are borrowing much more – although the pandemic year was an exception – especially at private colleges which are much more expensive.

Interest on such loans can be ruthless, said Adam Looney, professor of finance and executive director of the Marriner S. Eccles Institute for Economics and Quantitative Analysis at the University of Utah. If borrowers default or consolidate their loans – or if they receive a forbearance or postponement, putting payments on hold – the accrued interest is capitalized, meaning it is added to the principal balance, he said. he stated, pushing the payments higher. This is what happened to the loans of the Schweizer, which were consolidated more than once and withheld for long periods.

“Things are getting really out of hand for borrowers facing repeated economic or financial ups and downs, especially when they have high interest loans like PLUS loans,” Looney said.

“For a financially secure, high-income parent who makes automatic payments,” he added, “loans work well. But if something bad happens, it’s a disaster.

Parent PLUS loans also offer less protection than other student loans. If borrowers cannot afford to pay, they usually only have access to the most expensive income-based repayment plan, which requires borrowers to pay 20% of their discretionary income for 25 years; all that is left is forgiven. Like other student debt, PLUS loans are not automatically canceled by bankruptcy, but require a separate process with more stringent legal hurdles. The consequences of default are serious: the government can confiscate tax refunds and seize wages and Social Security.

While data on default rates for Parent PLUS loans is limited, it is far lower than for loans taken out by undergraduates – but still worrisome, the student loan researchers said. To keep debts manageable, parents shouldn’t borrow more than they earn in a year – for all children, said Mark Kantrowitz, a financial aid expert.

“A significant portion of parents borrow more,” he added.

Some higher education researchers say that it might be helpful to limit parental borrowing, but that this needs to be done in parallel with providing more scholarships and other support for low- and middle-income students to that they are not excluded or pushed into predatory loans elsewhere. . They also say that institutions that encourage or even induce parents to borrow must be held accountable for the results of the loans.

Currently, “there is no repercussion if the parent cannot pay and defaults in the future,” New America’s Fishman said. “It’s free money for the institution.

But restricting access to PLUS loans also has consequences. When the Obama administration tightened credit check criteria in 2011, for example, loan refusals increased. And some institutions whose students are more dependent on loans, including historically black colleges and universities, have been particularly hard hit. The backlash was quick – and the rules were relaxed a few years later.

The Schweizers were living on a solid middle-class income when their eldest daughter started at New York University. They lived in a 900 square foot house, drove used cars, and went on vacation 15 years after their honeymoon. William Schweizer, 60, works as an operations engineer for air conditioning systems in large office buildings and is the main breadwinner.

When the couple took out their federally guaranteed loans, they made too much money to receive aid that does not need to be repaid, said Kate Schweizer. But the private college was out of reach without a heavy loan, so they borrowed.

Their eldest daughter graduated with honors at the end of 2008, after three and a half years, for which her parents borrowed approximately $ 114,000. They took out $ 107,000 for their youngest daughter, who graduated from Manhattanville College in 2010. Today, their daughters have additional debt, mostly for graduate school, but are enrolled in income-driven repayment plans.

In addition to the loans, there were car repairs, dental care and other unforeseen costs that would derail the couple’s budget. Their credit card balances increased while their daughters were in college. Eventually, they filed for bankruptcy in March 2010, just before their youngest daughter graduated, and their debts were discharged in 2012. They began the foreclosure process the following year and moved into a rental.

Today, their standard monthly payment would be around $ 5,000, according to a July letter from their loan officer. The income-based plan would bring it down to around $ 2,200, according to a calculator, and it would be paid off when the Schweizers were 85 and 90. After Kate Schweizer said they couldn’t afford to pay that much, they were allowed to put their loans back on hold.

The “scolders” who say they have borrowed too much are right, said Kate Schweizer. “But now what do I do?” “

This article originally appeared in The New York Times.

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