Federal student loan repayments have been paused since the beginning of the COVID-19 pandemic, but as campuses across the country reopen for the fall semester, student loans have once again become a major talking point in Washington, D.C.
These discussions usually focus on younger borrowers who have taken out loans to finance their own degrees, but that leaves out a key demographic: parents who have borrowed to help pay for their child’s education.
First of all, how much student loan debt is held by older borrowers?
Nearly a quarter of all student loan debt, or $336 billion, is held by people over the age of 50.
Over the past decade, we’ve actually seen a decrease in the number of young college students who take out loans, but the same can’t be said for older borrowers. Borrowing under the “federal PLUS program,” which offers loans to the parents of students enrolled at undergraduate or graduate institutions, has increased by 16% since 2011.
Federal PLUS loans come with higher interest rates and less flexible repayment plans than loans taken out by students. The financial strain caused by these loans is especially hard on older borrowers because they’ve usually reached their peak lifetime earnings and have fewer years left in their working lives to repay their debt.
Additionally, many of the parents using the federal PLUS program are low-income borrowers: 58% according to the Newsweek reports. This increases the chances that they will default (or fail to make a scheduled payment) on their student loan debt.
This trend is even more prominent in for-profit schools, where the amount of low-income PLUS loan borrowers rises to 75%. At these schools, the default rate on PLUS loans can hit twice the national average while graduation rates are below the national average. Basically, some parents at these schools are taking on unmanageable debt to pay for a degree that their child is less likely to complete.
But why are parents borrowing more?
First and foremost, the Newsweek reports cite rising tuition costs as a major driver of parent borrowing. Over the past few decades, higher education has become less financially accessible to young Americans without the support of their parents.
Additionally, the federal PLUS program makes it easier for parents to take out loans without credit checks. Unlike traditional federal student loans which have a $5,500 to $7,500 limit per semester, parents are able to borrow as much money as they need through PLUS loans to cover the costs of college. This leaves parents vulnerable to much higher levels of debt than students.
Interestingly, the reports point to evidence that some schools are actively encouraging parents to take out federal PLUS loans. This occurs because schools lose federal funding if 30% of their students default on their loans for three consecutive years (or if 40% default in one year). However, there isn’t a similar federal disincentive if high numbers of parents default on their loans.
What are the racial disparities present among these parent borrowers?
Solutions proposed by policymakers often focus on limiting the amount of PLUS loans taken out per household. An example of this would be requiring stricter credit checks.
According to the Newsweek reports, such solutions would actually disadvantage Black borrowers because 60% of parents who qualify as low-income under the federal PLUS program are Black, versus 25% who are white. Thus, requiring stricter credit checks would make it disproportionately harder for Black parents to finance their child’s education.
Borrowers at historically Black colleges and universities (HBCUs) face even more challenges. HBCUs have relatively high PLUS loan default rates: “Of the 182 schools in the Newsweek database with a combined [default] rate that's at least twice the median, three in 10 percent were historically Black institutions,” says the report. This can be attributed to long-term institutional underfunding, as well as the high numbers of low-income borrowers at these schools.
So what are some possible solutions?
To reduce the direct strain of student loans on family members, policymakers have proposed allowing students to co-sign their parent’s loans so they can take over if needed. Another option is to broaden the repayment options available to parents so they have more flexibility.
Institutional changes have been suggested as well, including expanding the Pell Grant and other federal assistance programs for low-income families. And of course, reducing the overall cost of higher education would eliminate the need for many families to take out loans to begin with.
Regardless of what reforms may be on the horizon, both students and their families should weigh all the pros and cons before taking out student loans. When investing in their education, students and their parents should be mindful of how much they borrow, the value they’ll gain from their degree, and the impact that loans can have on their future.