Parents who take out loans to help their kids pay growing student tuitions may end up in financial straits, with debts growing quickly with each student.
If parents don’t plan for college expenses, they can face decreased disposable income and having to skimp on retirement savings in order to pay home mortgages and student loan debts, experts said in interviews with IowaWatch.
“As parents pay for their house and pay, or help pay, for their kid’s college, if they sign loans for one or two or however many kids, it could delay their retirement,” said Carol Jensen, author of “College Financial Aid: Highlighting the Small Print of Student Loans.”
Families often turn to private loans that parents co-sign or to federal parent PLUS loans taken out in a parent’s name when grants, scholarships and federal student loans aren’t enough to cover college costs.
“Parents are the only ones left to pick up the tab. I don’t know if parents realize that their role is going to be, or is leaning towards being, a bigger piece of the pie,” Jensen said.
Jensen, of West Union, Iowa, said she has had a front row see to see “how the system works and how it can work.” She helped her three kids through school, teaches at local colleges and is vice president at Luana Savings Bank. In researching for the book, she interviewed financial aid counselors from colleges in 12 mid-western states.
When comparing private loans and the federal parent PLUS loans, Jensen said the PLUS loans are generally easier to get. Borrowers don’t have to prove income, employment or the ability to pay back the loan, which can be taken out for the full cost of attendance minus other aid. However, the borrowing parent must have a clean credit history.
Sara Harrington, assistant director of student financial aid at the University of Iowa, said roughly 40 to 45 percent of parents with University of Iowa students request PLUS loans. But Parent PLUS loan debts don’t turn up on reports of a graduating class’ average or total debt.
The Federal government released national Parent PLUS Loan default rates for the first time in March, which showed the rate has tripled in recent years reaching 5.1 percent for borrowers that entered repayment in fiscal year 2010.
The PLUS loans have variable interest rates, which fluctuate over time and can reach up to 10.5 percent. Because the loans are in parents’ names and cannot be transferred to the student, it is the parent, not the student that faces repercussions if the loans go into default.
Parents, who opt to co-sign a private loan with their student or who take out a private loan in their own name, can sometimes get better rates if they are credit-worthy or willing to put up their homes collateral. But finding those loans can be difficult.
“One counselor said that understanding all the options for private loans is as difficult as trying to decipher cellphone plans. I think that’s a good analogy,” Jensen said.
College financial aid offices are often limited to talking about federal programs and can’t offer advice on private loans, meaning families that choose to pursue private loans are left to navigate the system on their own.
“It’s a struggle for the counselors. It’s a struggle for the students. It’s a struggle for the parents to understand that they will not get help from the financial aid office. They don’t know where to go, what to do and really they are on their own,” Jensen said.
Harrington, of the University of Iowa Office of Financial Aid, said the office helps with federal loans, but tells families to search online for private lenders and check with state student assistance agencies to see if their state has a loan program.
“We’ll tell parents ‘Here’s the bare minimum your family needs to pay and here’s the maximum you can get from these sources.’ We will give them some information and help them calculate what monthly payments would be, but we don’t advise parents as heavily as students,” Harrington said.
She said parents willing to take out loans “take a lot of the burden off of students.”
“Twenty or thirty years ago, people could go to school by working full time over the summer, but that’s not true anymore. The Pell Grants haven’t kept up with costs; federal student loans haven’t kept up. There’s a gap and some families are finding that students alone can’t cover that gap,” she said.
However, parents who are taking out loans to help their kids pay for college need to keep in mind long term costs, especially if they plan on helping more than one student through school, said Erick Danielson, supervisor of the Iowa College Access Network, which helps parents and students plan for college and navigate financial aid.
“Salary-wise, parents might be able to help pay, but parents need to know that if they have a second student in the family, are they going to be able to afford taking out $50,000 for this student and then another $50,000 for the next student,” he said.
Some families are getting into too much debt, said Danielson, whose organization meets with parents and students to discuss college-financing options and walk them through federal regulations.
Parents need to talk with students early on to discuss how much parents plan to contribute to the student’s education, how much students will need to contribute and what colleges the family can afford, he said.
“Sometimes parents feel that they want to send their son or daughter wherever they want to go. In some ways that is admirable, but sometimes you have to say, ‘Do you know how much of a financial burden you are putting on yourself and your family,’” he said.
Jensen said her big message to parents is students shouldn’t borrow more than half of what they can expect to earn in their first year after graduation. This is different from the advice of most financial aid experts, who say students can borrow twice that much, up to the full amount they expect to earn their first year in a job.
“If they want their students to be financially independent, parents need to step up and not let that student borrow more. You turn over every rock, you take money out of savings, you sell things, you work two jobs, you work three jobs; you do whatever you need to do to make sure you aren’t borrowing more than that student can reasonably expect to pay,” she said.
Potential changes to a key financial aid form could give students and parents more time to discuss finances and search for loans.
Federal financial aid, as well as many scholarships and grants, are awarded based on the information families turn in on the Free Application for Federal Student Aid (FASFA). Currently, the FASFA requires tax information from the prior year, meaning high school students and parents can’t fill out the form until January of the student’s senior year. Colleges have to wait until receiving the FASFA to send out award letters with information about how much financial aid — scholarships, grants and federal student loans — the student qualifies for.
Check out other IowaWatch stories on student debt
But a proposed change to allow students and parents to fill out the FASFA using prior-prior year information, information from two years ago, would allow high school students to fill out the forms during the fall
“The financial process is condensed over the end of their senior year. If they could start the process earlier, the results will come back quicker,” Danielson said.
The change has been discussed during efforts to reauthorize the Higher Education Act, which governs federal student aid. The act has been reauthorized nine times since it was signed into law in 1965, and the most recent reauthorization from 2008 expired in 2013.
“It is just one more thing that would help students and families make more informed decisions about where the student ends up going to college,” Danielson said.
Jensen said she hoped earlier conversations and planning on the part of students and parents can prepare families for the expenses of college and reduce the number of students and parents facing large debts after graduation.
“What I hope doesn’t happen is that families think that, ‘Oh, college is too much,’ because a college degree has proven to be a good investment. I do want parents to see that the costs of college really have changed and that it is really too much for students to take on alone,” she said.This IowaWatch story also was published in The Gazette (Cedar Rapids, IA), The Telegraph Herald (Dubuque), Iowa City Press-Citizen, The Courier (Waterloo-Cedar Falls) and Des Moines Register under IowaWatch’s mission of making its stories available for republication. Please support our nonprofit journalism with a tax deductible donation at this link.