One of the great or perhaps unfortunate things about my commute is that I get to tune in for some full-length NPR programming. I especially love Tom Ashbrook’s show On Point. In fact, he seems to be inspiring a lot of blog posts lately. Anyway, I was listening to a recent segment on a growing segment of student loans that is becoming more worrisome. Specifically, parents who are taking out loans to pay for their children’s higher education. I won’t get into the entire program and you can listen to it here, but here are some startling statistics.
- 3.3 million parents have Parent PLUS loans
- Those loans total over 75 billion dollars (and rising)
- The default rate on these loans (default meaning you haven’t paid in a year) is at about 11%. This is a higher percentage than during the mortgage crisis.
- The percentage of parents carrying these loans into their 60s and 70s is increasing rapidly.
- More and more parents are having their tax refunds and social security garnished because they are in default.
Certainly the student loan situation we have is a crisis and this is a growing sub-problem.
As Tom Ashbrook was taking calls there were a number of parents who stated that they had tens of thousands, if not hundreds of thousands of dollars in student loan debt for their kids.
There was a common refrain from the parents: I wanted to send my kid to the best school possible, which would often cost more. We didn’t have the money to send them to that college so we needed to take out loans so that they could afford it. I didn’t want to say no to my children and disappoint them.
Now I am not saying that this is the norm and certainly most parents who have Parent PLUS loans don’t have six figures in debt, but as a college professor I often hear this refrain from students who want to go to their dream schools or that they need to go out-of-state to school or a private school.
You might guess that as I listened to the various callers I wanted to TEAR MY HAIR OUT! I couldn’t understand why so many parents had gone deep into debt to send their students to schools that, frankly, they didn’t need to go too in order to accomplish their long-term goals, which is getting a college education.
One of my long-term goals has been to help students understand the ramifications of student loan debt on future choices. And it seems we need to do the same for parents. If you listen to the On Point program Michele Singletary, who writes The Color of Money column for the Washington Post, was fantastic. She had a lot of sage advice for parents and I just wanted to add some of my own regarding parents, student loans, and college choices.
10 Items Parents Should Think About Before Taking Out Student Loans
First, parents need to talk to their kids about their college choices. Statistics demonstrate that people who have a college education are more upwardly mobile. That is certainly true and I am a huge believer in some sort of higher education for everyone, even if that is a trade school or certificate program post high school. But does it matter WHERE they go to school? Answer: NO! Very few degree programs require you go to the elite schools. For some professions (e.g. Law School) it might matter, but not a run of the mill bachelor’s degree.
In other words, parents need to talk to their kids about where they can AFFORD to go to school. Just as there is no such thing as a perfect house the same is with a college education. Parents shouldn’t just allow their children to go to any school they want too. Most likely they cannot afford it.
Second, consider community colleges as a starting point. We have this stigma in America that community college students are some how beneath normal college students. Now certainly that might be the case for some, but the vast majority of community college students I run into are actually better students. They value their education more. Community colleges are often 1/2 of the tuition costs for the first-two years of a degree. And most community college general education curriculum will transfer over to a state university and/or select private schools where students can go and focus on their degrees. Community colleges are MUCH more affordable and most likely won’t require huge loans for parents.
Third, students need to go to a college they can afford. So this is not only talking to children about their college choices, but also sitting down with kids and saying that maybe you can’t afford to go there. Yes, I know we want our kids to have the best. But they are still kids. Do they really know what is best for them? I mean you are the parents correct? There is no reason that a parent should have to take out six figures in student loan debt so their kid can go to an out of state or private school when they can go to a good in-state university and community college locally. I mean c’mon we have to say no sometime.
Fourth, here is a dirty little secret of higher education for students and parents. Here is the secret: a college degree opens all kinds of doors, but it typically isn’t enough. Students need to be engaged in high impact practices when they go to school. Those practices include internships, college research, study abroad, involvement on campus, and others. In other words, it is not where you go to school that makes a difference but what you DO when you are there. That is what makes a difference.
Fifth, most college students should have part-time jobs going to school. About 80% of all college students have some sort of part-time job. Most of my students do. And students who have part-time jobs generally have higher GPAs. Now the number of hours worked does matter students who work more than 20 hours a week there GPA goes down, but that 20 hour threshold makes it appear that students will do better. So I know many parents want their kids to focus on school, but part-time work helps focus students AND can defray the costs of attending and lessen the need for your student loans.
Sixth, maybe students should consider a different profession. A college education is a great thing, but a four-year degree is not for everyone. Plenty of students can make a wonderful living working in trades like electrician, systems analyst, HVAC technician, carpentry, medical fields. There are a whole host (including a lot of tech jobs) that don’t require a four-year degree. Maybe that student needs a certification program or to go to a community college for two years. I want all students to have a college degree, but it should be when they are ready and for the right reasons. Working in those industries are FANTASTIC and we should celebrate people who go into those industries, just as much who get college degrees.
Seventh, parent plus loans has the HIGHEST interest rates of all the federal loan programs. Typically, the interest rates on student loans can be anywhere from 3-6.8%. However, parent PLUS loans average typically, 6% and over. That might not sound like a lot, but can make a huge different in affordability of loan payments.
Eighth, these loans are NON-BANKRUPTABLE. All federal student loans cannot be discharged through bankruptcy unless you can prove to have a disability where you cannot work. If you fall behind on your loans and they are in default the federal government has the right to take your tax refunds and garnish your social security. You want to have less debt as you grow older not more.
Ninth, ask yourself can you realistically afford these loans? In a recent Wall Street Journal article, Josh Mitchell noted that 1/3 of the parent PLUS loan borrowers have credit scores that subprime. That means that their credit isn’t very good. Most likely, parents who have a subprime credit status have a difficult time getting a mortgage, car loan, and the like. However, there is no background credit check for these loans. In essence, colleges are letting people who cannot afford these loans to begin with to borrow the money and sentence them to debt servitude. That has got to stop. Parents shouldn’t sentence themselves to this kind of debt slavery so their kids can go to schools they cannot afford.
Finally, parents who take out student loans DELAY a lot of their own needs. I think parents should help out their kids for higher education costs. So if you can afford to save for their college education please do and it should be a priority. However, when most parents are taking out loans they are reaching their peak earning years. Considering we have a savings crisis in this country and there is no help coming, most likely, from the government or other people this is a time people should be ramping up savings. Paying student loans for your kids doesn’t allow you the ability to do so. You have to put that money to help them out. Controlling expenses the closer you get to retirement is even more important as you figure out what expenses you will have.
The Bottom Line: I know we want to help our children with their college education. I certainly want to do so as well if I have the privilege of having children. But that doesn’t mean they get everything. It doesn’t mean it comes at the expense of your financial future, particularly if they are going to a college they can’t afford. Just because at 18 students are technically adults doesn’t mean they don’t need to be parented. I have this conversation with students every semester. Parents should (and many do) do the same. College education is great. However, people should go to a college they can afford, not necessarily some dream school that they can’t afford. Go to the school that financially makes sense and make the most of your time there. That is what will make for a successful college education.