By Howard Rothman in New York
NEW YORK (MainStreet) -- When my daughters were nearing college age, my wife and I made a deal with them. We'll pay full freight for any undergraduate school you attend, we told them. You're responsible for all post-graduate expenses.
Despite their continuous run of scholarships and work-study jobs, our offer forced all of us to rely a lot more on student loans than we ever anticipated. And now, two bachelor's degrees and a doctorate in veterinary medicine later, the Rothman family's collective student loan debt is -- gulp! -- well into six figures.
We've all heard tales about the explosion in individual student loan debt, but not as much about the impact these loans are having on whole families. And while there's no clear data on family indebtedness, there are plenty of indications that parents like us are piling on loan obligations as fast as our children.
"There absolutely are more parents taking out loans today to help make up the gap between other financial assistance and the cost of college attendance," says student loan expert Heather Jarvis. "And it seems that delinquency rates are rising for these borrowers as well."
The overall problem is easy to understand: college costs are climbing, and incomes are not. The average total cost of enrollment at a four-year private school rose to more than $43,000 a year in 2012, according to the College Board, while the annual price of an in-state public education topped $22,000. Tuition alone shot up nearly 70% at many institutions over the past decade, and coupled with the hit that family income took during the recession, the total heft of loans skyrocketed.
"Student loan debt is the only kind of household debt that continued to rise during the Great Recession and has now the second-largest balance after mortgage debt," wrote Donghoon Lee, an economist at the Federal Reserve Bank of New York upon release of the group's recent report on the problem.
The total amount of student loans in the U.S. reached $1 trillion in 2012, according to that New York Fed study, triple what it was just eight years earlier. But it's not students alone taking on this debt: $149 billion, or 15% of the balance, is held by nearly 7 million Americans over age 50. And those over 60 are actually the fastest-growing age group for college debt, responsible for $43 billion in 2012 compared to $8 billion in 2005.
Debt specialist Jarvis, who herself graduated from Duke University School of Law owing $125,000 in student loans, said some of the debt incurred by older Americans is from their own educational endeavors. But a growing contingent comes from parents trying to help their children, often using U.S. Department of Education Parent PLUS loans. Almost one million families have these now, Jarvis notes, twice the number as in 2000. "Parents are also commonly co-signing for private loans and using other resources," Jarvis said.
Indebted students will be impacted for years as they strive to buy homes, open businesses and begin families. The average starting salary for 2012 graduates was $44,482, for example, while the average student left school with $26,500 in loan debt. But for many, the squeeze is even tighter: nearly 15% of last year's graduates owe $50,000 or more.
For parents, the debts might be lower, but the impact could be just as significant. Payments will become due as they're preparing for retirement and often as they're dealing with financial and other matters of their own parents. Cue the struggles of the "sandwich" generation.
Not surprisingly, default rates have risen with the proliferation of loans and the lingering effects of the recession. About 17% of all student borrowers are now more than 90 days delinquent, according to the New York Fed, compared to about 13% in 2008 and 10% in 2004. Borrowers aged 40 to 60 are better but hardly perfect, with delinquency rates between 9.4% and 12%.
Students with federal loans can get some relief through programs that allow them to reduce their monthly payments according to how much they earn. Borrowers who adhere to their payment arrangements can have their loans forgiven after 20 years, or after 10 years if they hold public service jobs.
Such relief for parents is virtually non-existent, although Jarvis says Parent PLUS debt can be combined into a Federal Direct Consolidation Loan. These aren't eligible for income-based repayment, but do provide some opportunities for income-contingent delays and offer protection in the event the borrower or student dies (private loans usually offer no such options).
With no sign of a more affordable college experience on the immediate horizon, here are four elements to consider before you find yourself in a repayment position you can't handle:
Knowing all that, does the Rothman family have any regrets? At present, no. But ask us again in another 10 years. We'll see how we feel then.
- While it might sound contrary to the traditional college-decision process, take a hard look at the cost of the schools you have in mind -- complete living and travel expenses if they're away from home, as well as tuition -- and weigh them against any job placement and/or earning potential stats they offer. If feasible, consider an in state or public school vs. an out-of-state or private institution.
- Once you've decided on the school, make sure to exhaust all other financing strategies -- scholarships, fellowships, work-study jobs -- before either the student or the parent hits the loan route.
- For those who aren't wealthy, a loan may still be necessary. Should you need one, Jarvis says loans offered by the Department of Education for both students and parents are usually better than private loans. She also cautions parents not to co-sign a private loan for their child, noting unforeseen problems down the road can be financially devastating for all parties.
- Develop a realistic long-term financial plan before you dive in. Determine how long everyone taking on loans will be paying for them, and learn what options may be available if anyone gets into trouble. Throughout it all, remember that most colleges never point our potential impacts of loan debt and actively encourage students and parents to do whatever is necessary to make their educational dreams come true. "Do your homework," Jarvis says, "because nobody's going to tell you that you're borrowing too much."