According to the Federal Reserve, the fastest growing group of student debtors is not in their 20s, they are parents and other family members approaching retirement. For these folks who signed up for a loan when Social Security was a decade away and still in good health, reality has come crashing down on them.
Family income has declined while tuition has increased over the last twenty years. Dreams of a big post-graduation paycheck are now less about a fabulous lifestyle and more about being able to pay back an average of almost $27,000 in debt for every four year college graduate. If that student continues on to grad school, then the amount owed could easily increase to over $50,000 depending on the choice of studies. If a student does not get that high paying salary, then the parents are now on the hook. Of the over 2 million parents over the age of 60 who have co-signed for federal student loans, 13 percent are already delinquent.
In many cases, parents end up in this position because they “over borrow” on their children’s education. This is just one of the many reasons why student debt in the U.S. total is now over $1 Trillion. That is more than even credit card debt. Right now, it is too easy for parents to get drawn into low-interest and easy to get loans; federal and private. Many federal programs such as the Parent PLUS loans allow co-signers to borrow up to the full amount of a college education all at once. It is particularly easy to do since the only requirement for a PLUS loan is that the parents have no black marks on their credit report.
As long as the students and parents remain current on debt payments, regardless if how large that amount may grow; they can qualify for additional debt that can crush them just a few years down the road. What makes this especially bad for parents and students is that 20 percent of borrowers with PLUS loans are qualified for the need-based Pell Grant program which does not require repayment and was designed specifically for those lower income families who would have no opportunity to send their children to college without going into debt.
Once the loans are cut, parents really have few options. Some make the mistake of dipping into their savings, 401Ks or IRAs in order to stay current on payments. This method merely pushes the problem down the road; if the money is taken out before retirement, additional taxes will have to be paid on every dollar. Even if it is taken out after retirement, this is money that was previously earmarked for medical car, utility bills and food. If the parents are on a fixed income, relying primarily on social security, they have little to no opportunity to replace this money. Parent co-signers also need to understand that their social security check can be garnished for these loans, just like a paycheck. Thankfully with good credit, Parent PLUS loans can be refinanced either by the parent, or by the child and removing their parent.
Bankruptcy is not an option either. The current laws exclude federal and private student loan debt from being discharged under any bankruptcy court. There is some discussion in Congress now to change this, but there is very little support for it. Many Senators and Representatives see too many similarities with the amount of student debt to the Housing Crisis that crashed in 2008.
One unusual option that some parents have discovered is a life insurance policy on their graduate children. This does not cover unemployment or a medical condition that prevents them from working, but it will eliminate the student debt with the death of their child rather than make an already difficult family crisis even more painful.
Consolidation of student loans may be the only other option available to many older co-signers. In spite of the potential pitfalls, federal loans still remain a better option than most private loans. There are a number of different methods to consolidate federal loans with lower rates, extended payment plans and eventual forgiveness of the student loan debt possible that many private loan institutions are either unable or unwilling to consider. Some federal loans also allow for discharge of a student debt in cases of permanent disability.
Students and parents need to talk about all of these options before even applying to college. If this is no longer an option, then both need to make some difficult decisions about what they need to do in terms of future employment and their ability to repay their student debt. This is not a conversation to have after the caps have been thrown into the air. Student Debt Relief can assist borrowers at every stage in the process.