Students aren’t the only ones crushed by loan debt
Parents fill the gap when kids can’t borrow more
College debt is building and, increasingly, parents are on the hook.
Where do you turn when you’ve maxed out on federal student loans? Ask Mom and Dad to take out some parent loans, too.
The average cumulative federal student loan debt that parents borrow even exceeds what’s being taken on by students, according to new research.
On average, parents owed $32,596 for their cumulative loans taken out under the Federal Parent PLUS program at college graduation in 2015-16.
On average, college grads with bachelor’s degrees owed $29,669 in student loans in 2015-16, according to Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com.
To be sure, a much smaller percentage of parents borrow than students. About 69 percent of students took out student loans in 2015-16, compared with about 14.4 percent of parents, Kantrowitz said.
The high cost of college – and the inability of some families to save much money – has caused nearly half of college grads with student loans to take out the maximum amount of loans allowed under the federal student loan
program.
“The parents are picking up the overflow when the student reaches the student loan limits,” Kantrowitz said.
In many cases, the student could even agree to repay the Parent PLUS loans.
“Some parents will have side agreements with the student where the student agrees to make the payments,” Kantrowitz said.
Need to borrow is even greater
For students who attend highercost private colleges and out-of-state schools, the need to borrow can become even greater.
“They have to get the money from somewhere,” Kantrowitz said. “Debt may be the only option, especially if you’re going to a more expensive college.”
Parents take on more student loan debt for a variety of reasons. Some college students are attending expensive, prestigious schools to study specific fields. Some parents saved far less than they needed for college, financial aid isn’t as easy to get as some families expect, and big scholarships are limited. When student borrowing hits the limit, more parents start filling out the paperwork for private student loans or the federal Parent PLUS loans.
Parent borrowing on PLUS loans is up 19.2 percent from $27,352 in 2011-12. And it’s up 40 percent from $23,279 nearly 10 years ago, according to research by Kantrowitz.
Kantrowitz, who reviewed recently released federal government data, was a bit surprised to see student loan borrowing for undergrads basically flatline from around 2011 to 2016.
But it was less surprising when he realized that students were maxing out on the limits. “Parent Plus borrowing is in some ways a pressure release valve,” Kantrowitz said.
Average cumulative debt at graduation for bachelor’s degree recipients increased by only 1 percent from 2011 to 2016. But that’s up 26.5 percent from $23,228 in 2007-08.
Here are points to consider for parents looking at a Parent PLUS loan:
How much can I borrow?
The maximum limit for a Parent PLUS loan is the cost of attendance (determined by the school) minus any other financial aid received. So the PLUS loans can fill the gap for many costly schools if there is no other savings or parents aren’t able to cover some costs out of their current income.
The maximum that a dependent student can take out for a federal Stafford loan is $5,500 for a freshman with the amount going up to $6,500 in the second year and $7,500 in the third year and beyond.
What’s the rate?
Parents who borrow to help out their college-age children can expect to pay 7.6 percent, up from 7 percent, for the federal parent PLUS loans. The same rate applies to the Federal Grad PLUS loans. These are fixed rates for the life of the loan.
As of July 1, the fixed interest rate on federal student loans increased to 5.045 percent, up from 4.45 percent for undergraduate Stafford loans. The rate goes up to 6.595 percent, up from 6 percent for Stafford loans for graduate school.
What if you have a great credit history?
Some lenders may offer a more competitive rate on private student loans offered to parents who have a credit score of 780 or higher, Kantrowitz said.
Does every parent qualify?
The good news is a parent can get the federal PLUS loan even with a lower credit score. But you need to expect a credit check.
A PLUS loan will be rejected if a parent has an adverse credit history. Other adverse events include a bankruptcy discharge, wage garnishment, tax lien or foreclosure during the five previous years.