After sending his son to Philadelphia’s Drexel University, Barrett Binder was left with more than $80,000 in federal Parent PLUS loans. Today, after years of accruing interest, the amount has ballooned to more than $94,000, Binder says.
Binder, 78, has limited income (made up of Social Security, rental income and some investment income) and doesn’t have the cash on hand to repay his debt. “I’ve tried many different avenues [for debt relief],” says Binder, who is now pursuing income-driven repayment. Until he gets on an affordable plan, Binder’s in a difficult situation – if he fails to repay his debt, he could see a portion of his Social Security or future tax refunds garnished.
Binder’s situation isn’t unique. Consumers over age 60 are the fastest-growing segment of the student loan market, with the number of older Americans who hold student loan debt quadrupling over the past decade, according to a report from the Consumer Financial Protection Bureau, or CFPB. While some of those loans are borrowed to finance their own educations, a sizable portion are taken to fund a child’s or grandchild’s college degree, according to the CFPB. In fact, 3.5 million parent borrowers owe $77.5 billion in Parent PLUS debt, according to the latest statistics from the U.S. Department of Education.
Some parents may choose to co-sign on private student loans or borrow money in other ways, including leveraging their home’s equity, in order to make tuition payments. According to the CFPB, 57 percent of student loan co-signers are age 55 and older.
But buyer beware: Borrowing for your child’s education comes with a unique set of risks. After all, you’re much closer to retirement than Junior is, and you won’t be the one graduating with – and getting a pay bump from – a college diploma. “Unlike their younger counterparts, who generally are expected to experience income growth over their lives, older consumers typically experience a decrease in income as they age,” the CFPB notes.
It’s your kid’s education, but you’re still legally responsible for those loans. Don’t assume you can pawn off your debt on your kids once they’ve graduated. If you borrow or co-sign on a loan to finance you son’s or daughter’s college degree, you are legally responsible for repaying that loan, experts say.
“People think that when their kids graduate and get a job, that they’ll be able to help them pay [their debt],” says Katharine Ruby, director of college finance for College Coach, which advises students on the college admissions and finance process.
Yes, there are options for transferring a federal loan through refinancing or securing a co-signer release, but they’re difficult to get, require that your child has solid credit and a high income – and most importantly – they necessitate the full cooperation of your child. If your offspring doesn’t want to help you repay your debt – or doesn’t have the financial strength to qualify for refinancing or a co-signer release – then you’re out of luck.
You don’t have the same repayment options. You might have read about federal student loan forgiveness programs and income-based repayment. Here’s the bad news: Parent PLUS loans don’t qualify for the majority of those debt-relief programs. With a few exceptions, those programs are earmarked for students, not their overleveraged parents.
The good news is this: Income-contingent repayment, which Parent PLUS borrowers can qualify for if they consolidate their loan or loans into a direct consolidation loan, is an option for reducing monthly payments on qualified parent loans. This repayment plan limits loan payments to 20 percent of discretionary income for up to 25 years. “That can be a lifesaver,” says Adam S. Minsky, a Boston-based attorney specializing in student loan debt.
Public Service Loan Forgiveness, which limits the repayment term for eligible borrowers, is also available to parents, experts say. But some parents think that if their child works in the public sector, their parent loans will be eligible for early forgiveness. That’s not the case, Ruby says. It’s the parent who needs to work in the public sector to have his or her loans forgiven more quickly.
Do the math. The numbers don’t lie: If you can’t afford to pay for a college, then you shouldn’t pay to send your kid there. Financial fit matters as much as social and academic fit, experts say. “I think that people need to get out of the mentality that your kid should go to the best school according to rankings,” Minsky says.
If your child is putting pressure on you to pay for a college degree that you simply can’t afford, you simply have to say “no.” It’s a difficult conversation, but over borrowing for your kid’s education could put imperil your retirement and leave you financially hobbled in your golden years. A better option is to have your child take on whatever federal loans he qualifies for since he has more repayment options and decades to work before he retires. Of course, selecting a university that doesn’t require massive, risky borrowing is an even better idea, which is why applying to a robust range of colleges is wise.
After all, the pitfalls of runaway borrowing can harm both your financial life and your child’s, experts say. “Is it worth borrowing so much that your retirement is in danger? Is it good for your kids that you can’t support yourself with these loans?” Ruby asks. “It is a family decision, [but] you’re talking with an 18-year-old who doesn’t understand the ramifications of what you’re going to borrow.”