Student debt seems to be giving way to parent debt. Here’s what to do about it.
“Increases in average student loan debt at graduation have slowed, based on an analysis of recently released federal government data. But, don’t start celebrating just yet. Borrowing has shifted from students to parents, especially at higher-cost colleges, because more students are reaching federal student loan limits.”
–Growth in student loan debt at graduation slows as borrowers hit loan limits, savingforcollege.com
Newly released data highlights a less-talked about corner of the student debt landscape: parent debt.
Before this new data became available, student loan guru Mark Kantrowitz had projected debt for the graduates of the Class of 2016 at $37,173. But the National Postsecondary Student Aid Study (NPSAS) conducted every four years by the National Center for Education Statistics shows that the average debt for 2016 grads was actually much lower: $29,669. An undaunted number cruncher, Kantrowitz projects that student debt will keep rising only slightly, up to $29,884 for the Class of 2019.
Good news, right?
Not necessarily. It turns out that while student debt is flattening out, parent debt is soaring. The new data shows parents who borrowed took out an average of $32,596 in Parent PLUS loans for the Class of 2016. These government-sponsored loans have essentially no limit; you can borrow up to the cost of attendance minus your kid’s other financial aid. Using a proprietary formula, Kantrowitz projects Parent PLUS borrowing to balloon to $37,180 per undergrad by 2019.
Kantrowitz isn’t the only one to note the long-term trend of this shifting debt burden. “Between 2001-02 and 2016-17, the average size of Parent PLUS loans increased by 44%,” the College Board noted last year in its Trends in Student Aid report. “The average size of federal loans to undergraduate students, which are subject to strict borrowing limits, increased by 7%.”
Why? Kantrowitz notes that some families, especially those with students at high-price schools, are coming up against federal student loan limits (40% of students are maxing out their borrowing) to pay tuition. That leaves parents to take out loans—and their kids to borrow expensive private loans—to make up some of the difference.
Here’s what you can do to keep this debt down:
- Call Congress Part of the reason parents are taking on more debt to close the college cost gap is that the lifetime borrowing limit for the most affordable federal student loans ($31,000) hasn’t budged since 2008. The proposed reauthorization of the Higher Education Act would increase that limit to $39,000, but congressional action has been long delayed. Call your representatives and tell them that it’s time for action. While you’re at it, urge them to keep the Consumer Financial Protection Bureau strong. It’s your best defense against an unscrupulous loan servicer when those loans come due.
- Start a 529 as soon as you can These state-sponsored college savings accounts allow you to invest without paying tax on the earnings, provided that you use the money to pay for school. Start one early and contribute regularly. “Every dollar you save is a dollar less you’ll have to borrow,” Kantrowitz said. “If you start saving from birth, about a third of the college savings goal will come from earnings. If you wait until the child enters high school to start saving, less than 10% of the goal will come from earnings, and you’ll need to save six times as much per month to reach the same college savings goal.” Using 529 money to pay for K-12 education is now permitted under federal law, but I suggest waiting until college to use the funds, giving your investments that much longer to grow.
- Have the college talk early Your first college conversation with your teen—preferably coming at the end of eighth grade—is key for making a college plan with your kid that’s both in line their educational ambitions and financially realistic for your family. Mention that 529 you started for him years ago and reassure him that you’ll work together to make college a reality. Start researching schools (including schools known for generous financial aid or low tuition). But: “Don’t make promises you can’t keep,” Kantrowitz said.
- Make smart “base year” moves You can help maximize the financial aid your kid could receive by making certain financial moves before your kid’s high school base year: January of sophomore year through December 31 of junior year. Your federal income tax returns from this year help determine your kid’s financial aid eligibility for freshman year of college. A couple of examples: Use savings to pay down credit-card debt and avoid selling stock or receiving a windfall, such as large bonus or cash gift, until after the base year.
- Leave your retirement savings alone Your kid can borrow for college, but you can’t borrow for retirement. So don’t shift the burden to your kid to support you during your golden years. Keep those investments—especially tax-favored ones—locked up.
- Have your kid max out federal student loans first When it comes to paying for college, borrowing is not unusual. Seven in 10 families do it. Federal student loans are the best kind, so fill out the FAFSA and make sure your kid exhausts those first. They have a low interest rate (5.05% in 2018-19) and flexible repayment terms (such as pegging monthly payments to income). Federal Parent PLUS loans are less appealing. They have higher interest rates (7.6% in 2018-19) and a whopping 4.2% loan origination fee. They also aren’t eligible for income-driven repayment plans, as you can see from the government’s repayment estimator Still, it might help to apply for Parent PLUS loans even if you don’t intend to take any out. Why? If you don’t qualify (for example, because of an adverse credit history), the government raises the limit on what your kid can borrow in those low-interest student loans, from a current lifetime limit of $31,000 to $57,500.
- If you need to borrow as a parent, get the best terms Looking at your family finances and colleges’ financial aid offers, you may decide that Parent PLUS loans seem like the answer. First, check privatestudentloans.guru for private loans (for students or for parents) that may have better terms, especially if you have good credit. Note that the difference in consumer benefits between private parent loans and Federal Parent PLUS loans isn’t as great as the difference between federal and private student loans. And if you do join your kid in borrowing for his education, make sure that come tax time both of you claim the student loan interest deduction of up to $2,500 per year if you’re eligible.