Federal College Loan Program May Lure Parents into Debt Trap

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Keith Schweitzer and her husband didn’t want their two daughters 13 months apart to start an adult life saddled with college debt, so they borrowed most of the money themselves. Since 2005, the couple took out a new batch of federal loans every school year, eventually accumulating about $ 220,000 in debt.

Today they owe $ 500,000.

“Even though the cost of training seemed insane, I convinced myself that it would all make sense and pay off in the end,” said 65-year-old Schweitzer. “I was hoping that since my husband has a solid union job, we – should – be able to afford it.”

But as they borrowed more each year, their monthly payments began to climb until they hit $ 1,500. “We have tried repeatedly to revise interest rates or balances or payments, any part of them, many times,” she said. “It was repeated over and over again:“ No, thank you, refrain from patience or hardship with 8.5% per annum ”.

Schweiters took out Parent PLUS loans, which are signed by the federal government and have become popular with parents looking to take out loans to help pay for their children’s education. The researchers say that although the Swiss living in the New York suburbs are in more debt than most, many parents have turned to such loans as college tuition costs soared in the past year.

Parent PLUS loans now account for nearly a quarter of new federal student loans. And while they still represent only 6% of the $ 1.57 trillion of current federal student debt and may allow families with more limited funds to send their children to the college of their choice, they can be problematic because they allow families to borrow without accounting for their ability to repay.

It is also easier to accumulate heavier debts because the only limit for PLUS parent loans is the total cost of attendance minus any other assistance provided. They usually have higher interest rates than student loans and have fewer guarantees if the family’s financial situation deteriorates. To obtain it, only a basic credit check is required – the search for “adverse” events.

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

The Department of Education views these loans – like all student loans – as “social security policy instruments, not traditional debt obligations,” so they are not subject to traditional underwriting regulations, the spokesman said.

At the end of last year, 3.6 million loan recipients had nearly $ 101 billion in Parent PLUS loans, an increase of about 40% from $ 72.2 billion (inflation-adjusted) at the end of 2014. In particular, they can be risky for many black parents, experts say, take more of these loans in recent years, but tend to have less wealth.

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

A typical parent borrowed $ 24,416 in PLUS Credits, according to a Federal College Scorecard analysis of 2017-18 and 2018-19 alumni. But many borrow significantly more – although the year of the pandemic was an exception – especially at private colleges, which are much more expensive.

According to Adam Looney, professor of finance and executive director of the Institute of Economics and Quantitative Analysis. Marriner S. Ackles at the University of Utah, the interest on such loans can be unforgiving. According to him, if borrowers do not meet their obligations or consolidate their loans – or if they receive deferred or deferred payments, then the accrued interest is capitalized, which means that it is added to the main balance, which leads to an increase in payments. This is what happened to the Swiss creditors, which were consolidated repeatedly and for a long time.

“The situation is really spinning out of control for borrowers who face repeated economic or financial ups and downs, especially when they have high-interest loans such as PLUS loans,” Looney said.

“For a financially secure high-income parent who makes automatic payments,” he added, “the loans are working fine. But if something bad happens, it’s a disaster. “

Parent PLUS loans are also less secure than other student loans. If borrowers cannot afford to pay, they usually only have access to the most expensive income-based repayment plan, which requires borrowers to pay 20% of their discretionary income over 25 years; everything else is forgiven. Like other student debts, PLUS loans are not automatically repaid as a result of bankruptcy, but require a separate proceeding with stricter legal barriers. The consequences of default are serious: the government can confiscate tax refunds and increase wages and social security.

Although data on default rates for Parent PLUS loans are limited, they are much lower than for loans taken out by students, but still cause concern, researchers say student loans. To keep debt manageable, parents need to borrow no more than they earn in a year – for all children, according to Mark Kantrowitz, a financial aid expert.

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

Some higher education researchers say that limiting parental loans could help, but it should be in tandem with providing more grants and other assistance to low- and middle-income students so they don’t get closed or redirected to predatory loans elsewhere. … … They also say that institutions that encourage or even encourage parents to borrow should be held accountable for the results of the loans.

Currently, “there is no consequence if the parent fails to pay or fails to meet their obligations in the future,” said New America’s Fishman. “This is ‘free money’ for the institution.”

But limiting access to PLUS loans also has implications. For example, when the Obama administration tightened its credit check criteria in 2011, the number of loan refusals increased. Particularly hard hit are some institutions whose students rely heavily on loans, including historic colleges and universities for blacks. The response was quick – and after a few years the rules were relaxed.

The Schweitzers were living on a solid middle-class income when their eldest daughter entered New York University. They lived in a 900-square-foot home, drove used cars, and left on their first vacation 15 years after their honeymoon. William Schweitzer, 60, is a climate control engineer in large office buildings and is the primary breadwinner.

When the couple took out the federally-backed loans, Keith Schweitzer said they earned too much to receive aid that did not need to be paid back. But private college was not available without big loans, so they borrowed.

Their eldest daughter graduated with honors at the end of 2008, after three and a half years of schooling, for which her parents borrowed about $ 114,000. They took $ 107,000 for their youngest daughter, who graduated from Manhattanville College in 2010. Today, their daughters have additional debt, mostly for graduate school, but participate in income-driven repayment plans.

Aside from the loans, there were car repairs, dental services, and other unforeseen expenses that would have hit the couple’s budget. Their credit card balances grew while their daughters were in college. They eventually filed for bankruptcy in March 2010, shortly before their youngest daughter graduated and their debts were paid off in 2012. The following year, they began the foreclosure process and went on lease.

According to a July letter from their lending agency, today their standard monthly payment is around $ 5,000. The income-based plan will bring it down to about $ 2,200, according to the calculator, and it will be paid out when the Schweisers turn 85 or 90. After Keith Schweitzer stated that they could not afford to pay that much, they were allowed to postpone their loans again.

Keith Schweitzer said the “scolders” who say they took too much are right. “But what should I do now?”

This article originally appeared in New York Times

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