That moment at the end of your senior year, when the caps are thrown in the air is such a moment of pride. With flowers and gifts, your family is there to celebrate this reward of hours spent studying for your SATs, ACTs and AP tests.
Then the grad party is over, and it is time to deal with college admissions. Armed with your dream acceptance letter, there are majors to choose and deadlines to beat. Then comes the sticker shocker; how are you going to pay for all of it?
Chances are that your parents do not have a college fund like you always thought they did. And if they have, majorities have less than $10,000 socked up. Non-profit private colleges now charge a minimum of $46,950 for fees, room and tuition and these costs are skyrocketing by the day.
Many parents at this point will jump in to save the day. Their dream is to see you have a brighter future than they have had. Parents know this future can be built on the bedrock of solid tertiary education. So, some will tap on home equity and raid their retirement funds. But if your parents do not have such assets, they will go into private debt or get a federal Parent Plus loan.
The outcome of these decisions has a very bleak outlook for your parents. While a student can get a student loan, a parent on the verge of retirement has no chances of getting a retirement loan.
So most parents getting into debt to finance their children's education are most probably going to be a financial burden to them in the future. Unfortunately, research shows that Millennials have slim chances of out-earning their hard-working parents, so taking on that debt yourself might be an impossible task.
Why do parents get into debt for their children's education?
- Thanks to student loans, Millennials are now beginning their adult lives with a negative average net worth. With an average student loan ranging from $37,172 in 2016, it is understandable that most parents hate the notion of letting their kids start their life out of debt.
- Kids who finance their college education definitely have to work through their college lives. Most parents would rather have their kids more focused on better GPAs than finances.
- If you have to work to fund your education chances are that college life is not really going to be the best time of your life. You will probably miss out not only on your social life but some classes too. Your parents might get into debt just to cushion you from the harsh realities of working through college.
- Your parents might still be paying off their own student loans. This makes them very committed to ensuring that you stay off the lifelong financial burden unfortunately by taking on more debt themselves.
- A simple survey shows that 28% of all parents have nothing saved for a college kitty. These parents will end up taking a loan because they have to, at the rush of getting kids into college. They haven't found ways to save money as they should have.
- Most parents have never heard of a 529 plan. These tuition plans are usually sponsored by educational institutions, states or their agencies to encourage a culture of saving for future educational costs.
Top reasons parents are struggling to pay off student loans
Parent PLUS loans
In the 80s, the Parent Plus loan had caps on borrowing, but come 1993, most of those limits were lifted. Now your parents are eligible to up to your college's cost of attendance. Most parents get a pleasant surprise on the realization that the stringent credit check rules that apply to other financing purchase options do not apply for Parent Plus. They can actually borrow more than they can afford to pay.
And without large dings on their credit, your parent can get a loan approval of up to tens of thousands of debt. You can see where this is going. With no caps on borrowing and a continual increase in tuition fee charges, parents have dug themselves into a tight spot. This situation has thoroughly worsened the loan repayment outcomes with up to 3.4 million parents now owing up to $87 billion in Parent PLUS loans. This is a hefty 6% of all outstanding student federal loans.
This outcome should not come as a surprise though. These loans have a substantial 7.6% interest rate and a 4.248% origination fee. Now, a student who borrows a federal student loan has many borrower protections that a parent cannot enjoy. This means that on default, your parent's wages and their social security benefits will be garnished. Their tax refunds could be confiscated too.
The major problem with Parent Plus loans is that a parent cannot easily transfer the responsibility of payment to their child. They could transfer them personally or through rare student loan consolidations, but this means losing all relief options and federal protection as well. The loan could lose its public service debt forgiveness opportunity and other lower payment options.
They are part of the sandwich generation
Want to know if your parents are part of the sandwich generation? Are they not only supporting you, but also taking care of their parents?
Americans today owe over $13.15 trillion in debt. A majority of American adults are debtors, with 80.95 of all baby boomers, a group already in retirement, in debt. The Gen Xers have 79.9% of their population in debt, and 81.5% of all Millennials too have found their way into the debt trap.
With little left to save after meeting all their responsibilities, parents who are willing to sacrifice and take on loans for their children are doing so with their own unpaid loans. Over the last 25 years, the average student loan borrowing amount has tripled from $5,200 in the 90s to $16,100 in 2014 and is still rising.
Entrenched in debt, taking care of their offspring, servicing their loans and taking of their parents in debt has become a tall order for most parents. Most of them are on alternate repayment plans which means that they are paying off their own loans just as their own children are enrolling into college. This has created a sandwich generation that has is slowly aging and is set to become dependent too on their children.
How to Make Parent PLUS Loan Repayment Work?
The Parent PLUS loan has options that can be of help to parent borrowers. There are extended repayment options, graduated repayment as well as consolidation options. Under the income contingent repayment option, for example, a parent can have any remaining balance after 25 years on the plan forgiven. For parents on public service jobs, they can have the forgiveness option in ten years.
Parents should also assist their children to find affordable institutions or tuition-free colleges that will keep them off the debt. If there are no scholarships or other financial grants, children can start off from affordable community colleges and transit gently to four-year colleges without straining their parent's finances.
Finally, as steep as it has become to squirrel some savings aside, this virtue can be cultivated with good financial discipline. Start off when kids are young so that you will not have to suffer financial peril in the future.