When Planning for College, Don’t Gloss Over Parent Debt

Guest post from Sabrina Manville, Co-founder and COO of Edmit When talking about student debt, many people cite the average student loan burden of bachelor’s degree graduates these days, which is around $30,000. But this number omits an important reality: the fact that many parents are taking on more of the financial burden to pay for their children’s college. And increasingly, this burden is in the form of additional debt.  Until recently, it was hard to see what parent debt looked like at different universities. Now, the government has made data on federal college loans for parents—called Parent PLUS Loans—readily available on its College Scorecard site. Here’s what those numbers tell us, and why they should be a part of your college financial research. What are Parent PLUS Loans? Unlike student loans, which have annual and lifetime caps, the only limit on Parent PLUS Loans is that you must use them for educational expenses, meaning parents can borrow up to the full cost of a student’s education (less other financial aid) if they so choose. Parent PLUS Loans are funded by the government, but are different in key ways from other forms of financial aid. First, they are loans, meaning they need to be paid back, unlike grants and scholarships. Their repayment terms are also closer to market rate loans than programs like the Subsidized Direct Loan for students—a program that can justifiably be called “financial aid” due to its unusually favorable terms. In addition, Parent PLUS Loans do consider a borrower’s credit history, unlike federal student loans. Approval is generally easier than that of private loans, but is not automatic—even if the student meets all of the eligibility requirements for other forms of federal aid. Federal loan interest rates are currently the lowest they’ve been in some time for new borrowers, but, historically, PLUS Loan rates have been material—averaging over 7%. Parent PLUS loans have higher interest rates than student loans and also include an origination fee of over 4%, which can add significantly to the repayment burden. What the data tell us  There is $101 billion in outstanding Parent PLUS loans today, and the use of PLUS loans has grown faster than the use of student loans in recent years. One recent study from Trellis Research found that Parent PLUS loans account for about a quarter of total federal loans for undergraduate education. A 2018 Brookings Institute study found that there are also many more “large-balance” parent borrowers than there used to be. 8.8% of parent borrowers entering loan repayment in 2014 had balances over $100k, as compared to 0.4% in 2000. And, perhaps unsurprisingly, the Trellis study and others have shown that parents are having more trouble repaying their PLUS loans also (though parents are still less likely to default on education loans than students). In crunching the most recent numbers, the Chronicle of Higher Education found that median parent debt is over $50,000 at nearly 130 institutions. The highest debt level is at Spelman College, a historically black women’s college in Georgia, where parent debt averages $112,000. Other colleges with high PLUS debt include art schools (at the Art Institute of Chicago, parent borrowers average debt of over $75,000), small private institutions, and even public universities—particularly those, such as University of Alabama ($55,000 average parent debt), where there are significant numbers of out-of-state students, according to a New York Times analysis. Robert Kelchen, an education researcher and professor at Seton Hall University, found other trends in the new data. Parent loans are higher at more selective colleges, likely because they are more expensive and federal aid for students has a cap. Schools with a higher price tag require families to dig deeper from different sources of funds—a common one being PLUS Loans. Unlike private loans, which typically require a review of the borrower’s debt-to-income ratio as part of the loan application process, PLUS loans can be borrowed by lower-income parents or higher-income parents. The Wall Street Journal published a table showing parent debt from low-income recipients as compared to all recipients. Where to find the data Visit the College Scorecard and search for colleges. Click on the Financial Aid & Debt section of the college page and select Parent PLUS Loans in the dropdown. You’ll see a percentage range representing the share of undergraduate students at that college whose parents borrowed PLUS loans, as well as the median amount borrowed by those parents and an estimated monthly payment. One particularly useful feature is the Compare functionality, found in the top right corner of the screen. Comparing similar colleges to one another, you may find some striking differences in PLUS debt levels. What does it mean for you? Use Parent PLUS loan data as part of your college financial research. Like other metrics such as “percent need met” or “average net price,” the parent loan data can indicate how generous a college may be with financial aid. Colleges with higher PLUS Loan numbers may be offering students lower amounts of other financial aid, meaning parents have resorted to debt to make up the difference. Note, however, that average numbers, as a rule, do not necessarily indicate how generous a college will be—or not be—with your particular child. Don’t mistake Parent PLUS loans for other types of aid when comparing costs. Some colleges include Parent PLUS loans on their financial aid letters—a practice that can be deceptive. Make sure you understand how much the college will cost you before loans, or not including loans. Then, make the decision about how you will cover those costs—whether with savings, cash flow, debt (student or parent), or some combination of the above. If you do borrow, ensure you understand what you’re signing up for. Use a loan calculator to (the Department of Education has one here, as does Edmit) to understand your expected monthly payments. Put those in the context of your household’s financial plan. Can you afford projected PLUS payments and also ensure you’re covering your other needs—including, ideally, saving for retirement? A particular concern with parent debt, as opposed to student debt, is that parents of college students are often approaching retirement age, and, of course, do not actually benefit from the income boost that a college education tends to provide—that goes to the student alone. Parents should heed the cautionary tales of other parents who’ve over-borrowed Parent PLUS Loans, stay clear-eyed throughout the college search and financing processes, and ensure the college their child ultimately enrolls in is a good financial fit—for the whole family. Sabrina Manville and Nick Ducoff are the co-founders of Edmit, which helps families make great financial decisions about college. This post was excerpted from their upcoming book, Better Off After College: A Guide to Paying for College Without Too Much Debt. To learn more and sign up for early access, visit https://www.edmit.me/betteroffbook.