Tuition, on Layaway
by Daniel Luzer
ProPublica reports that some of the greatest causalities of the student loan crisis may be parents. In particular, the federal Parent PLUS program, which allows parents to take out loans to cover tuition and living expenses at a fixed 7.9 percent interest rate, can be pretty financially damaging for the parents of many college students. According to a piece by Marian Wang, Beckie Supiano and Andrea Fuller:
Unlike other federal student loans, Plus loans don’t have a set cap on borrowing. Parents can take out as much as they need to cover the gap between other financial aid and the full cost of attendance. Colleges, eager to boost enrollment and help families find financing, often steer parents toward the loans, recommending that they take out thousands of dollars with no consideration to whether they can afford it.
And, while the U.S. Department of Education doesn’t track data on repayment rates for Parent PLUS loans, an independent analysis indicated something here isn’t going so well. As the ProPublica article puts it,
Among Parent Plus borrowers in the bottom 10th of income, monthly payments made up 38 percent of their monthly income, on average.
One in five Parent Plus borrowers took out a loan for a student who received a federal Pell Grant — need-based aid that typically corresponds to a household income of $50,000 or less.
To qualify for the program, parents need only submit a credit check. Parent PLUS doesn’t, apparently, even check for income. Yea, there’s no way that could be a problem, right?
This program, while designed to help families pay for the growing cost of college, is proving really burdensome for many parents. Because such loans are essentially unlimited credit lines, with no consideration of income, parents sending their children to expensive colleges may not realize how burdensome this debt will become. Colleges, according to the article, often include Parent PLUS loans in their financial aid letters, making it look as if they’re giving the students money, rather than just pointing to families to more debt.
What’s particularly disturbing about this one is that it actually makes no economic sense for parents to take out big loans for college. While perhaps it’s useful for students to go into debt to pay for college (that whole “college tuition is an investment in your future” argument)—because they make more money once they graduate—there’s no financial benefit for parents to take on more debt. Having a child graduate from a pricey college results in no additional income for parents. None at all.
This is a symtom, rather than the cause, of the problem, which is that college has become too expensive and more and more of it is being financed by debt , but still, it’s a pretty frightening symptom.