A government college loan program can put parents in debt

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Kate Schweizer and her husband didn’t want their two daughters to start their adult lives in college debt just 13 months apart, so they borrowed much of the money themselves. Starting in 2005, the couple took out a new series of federal loans every academic year and eventually amassed about $ 220,000 in debt.

Today they owe $ 500,000.

“Even if the tuition fees seemed insane to me, I convinced myself that everything makes sense and pays off in the end,” says Schweizer, 65. “I was hoping that we could afford it – we should, since my husband has one had a solid union job. “

But as they borrowed more each year, their monthly payments rose until they hit $ 1,500. “We have tried repeatedly to renegotiate the interest or the balance or the payments, part of it,” she said. “It was over and over again ‘No, thank you – be patient or hard with 8.5% interest’.”

The Swiss took out Eltern-PLUS loans, which are taken over by the federal government and are popular with parents who want to take out loans to finance their children’s education. Although Swiss people who live in metropolitan New York have more debt than most, many parents have turned to such loans as college costs have spiked wage growth, researchers say.

Parent PLUS loans now make up nearly a quarter of new federal student loans. And while they still represent only 6% of the current $ 1.57 trillion national debt and can allow families with limited funds to attend their children in a college of their choice, they can be problematic because they allow families to regardless of their ability to repay.

It is also easier to pile up higher debts, as the only limit on Parental PLUS loans is the total cost of care minus other aids provided. They usually have higher interest rates than student loans and offer less coverage in case a family’s financial situation worsens. Only a basic credit check – looking for “adverse” events – is required to receive one.

“The Parent PLUS loan is not an attempt to understand parents’ ability to repay,” said Rachel Fishman, assistant director of research for the college program at New America, a nonprofit research and policy group. “When the federal government says you can get this loan and an institution says you can get this loan, it makes someone believe that the federal government has done its due diligence. They have not.”

The Ministry of Education sees these loans – like all student loans – as “instruments of social security policy rather than traditional debt,” which is why they are not subject to traditional underwriting norms, a spokesman said.

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 $ 72.2 billion (adjusted for inflation) at the end of 2014. In particular, they can be risky for experts said many black parents had taken out more of these loans in recent years but tended to be less wealthy.

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

According to an analysis of the Federal College Scorecard data that examined 2017-18 and 2018-19 graduates, a typical parent borrows $ 24,416 in PLUS loans. But many borrow significantly more – although the pandemic year was an exception – especially at private universities, which are much more expensive.

The interest on such loans can be unforgiving, said Adam Looney, finance professor and executive director of the Marriner S. Eccles Institute for Economics and Quantitative Analysis at the University of Utah. When borrowers default or consolidate their loans – or if they receive a deferral or deferral that suspends payments – the interest accrued is capitalized, which means it is added to the principal balance, he said, which increases payments. This is what happened to the Swiss loans, which were consolidated more than once and tolerated for a long time.

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

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

Parent PLUS loans also have less protection than other student loans. Generally, when borrowers cannot afford to pay, they only have access to the most expensive income-based repayment plan, which requires borrowers to pay 20% of their disposable income for 25 years; everything else is taken. PLUS loans, like other student debts, are not automatically canceled through bankruptcy, but require a separate procedure with tightened legal hurdles. The consequences of a payment default are serious: the state can collect tax refunds and seize wages and social security.

While the data on default rates for Parent PLUS loans is limited, it is far lower than for student-borrowed loans – but still worrying, researchers said for student loans. In order to keep the debt manageable, parents should not borrow more than they earn in the year – for all children, says Mark Kantrowitz, an expert in financial aid.

“A significant proportion of the parents borrow more money,” he added.

Some college researchers say limiting parenting borrowing might help, but it needs to do so at the same time as providing more scholarships and other assistance to low- and middle-income students so they don’t get disfellowshipped or pushed into predatory loans elsewhere. They also say institutions that encourage or even incite parents to borrow should be held accountable for loan results.

Currently, “there is no impact if the parent fails to pay in the future and defaults,” New America’s Fishman said. “It’s ‘free money’ for the institution.”

But the restriction of access to PLUS credits also has consequences. For example, when the Obama administration tightened the criteria for credit checks in 2011, loan refusals increased. And certain institutions whose students are more reliant on the credit, 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 Swiss lived on a solid middle-class income when their older daughter started at New York University. They lived in a 900-square-foot house, drove used cars, and took their first 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 government-sponsored loans, they were making too much to get help that doesn’t have to be repaid, Kate Schweizer said. But a private college couldn’t be reached without big loans, so they took out loans.

Her older daughter graduated with honors after 3 1/2 years in late 2008, for which her parents borrowed approximately $ 114,000. They raised $ 107,000 for their younger daughter, who graduated from Manhattanville College in 2010. Today, her daughters carry additional debt, mostly for graduate school, but are enrolled in income-based repayment plans.

On top of the loans were car repairs, dental work, and other unexpected expenses that would throw the couple’s budget off track. Her credit card balances rose while her daughters were in college. Finally, they filed for bankruptcy in March 2010, just before their younger daughter graduated, and their debts were settled in 2012. The next year, they began foreclosure proceedings and moved into a rented apartment.

Today, her standard monthly payment would be around $ 5,000, according to a letter from her loan service provider in July. The income-based plan would bring it down to about $ 2,200, as estimated by a calculator, and it would be paid off when the Swiss people turned 85 and 90, respectively. After Kate Schweizer said they couldn’t afford to pay that much, they were allowed to put their loans on hold.

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

This article originally appeared in the New York Times.



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