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Parents Can Have Student Loan Problems Too Thumbnail

Parents Can Have Student Loan Problems Too

College Planning

Did you know that the US Department of Education allows parents of students to take out student loans of their own to help cover the costs of education? According to the Wall Street Journal over 3 million American parents currently take advantage of the Parent Plus loan program.

However, more than 300,000 of these people have gone more than a year without making a single payment on these loans. This delinquency is caused mainly by two factors: the credit requirements for these loans are very relaxed and the maximum loan amount is the entire cost of attendance for the child after any other financial aid is subtracted. Additionally, these loans come with relatively high fees and interest rates. According to the Department of Education,the upfront fees are over 4% and the ongoing interest rate is 6.31%.

With the average cost of a year at a private college approaching $65,000, a parent could hypothetically take out more than $250,000 worth of loans to send one child to a 4-year college if they do not receive a scholarship. Just the 4% origination fees on these loans would incur a $10,000 reduction in the amount disbursed to the schools, leaving the parent to make up the difference. After that, just to pay off the interest that accrues the parent would have to pay $15,000 per year. Including principal payments, that amount would be significantly higher, likely close to $30,000 per year, or $2,500 per month. 

While this scenario may seem like an outlier, it is perfectly possible for a parent having below-average credit to get a loan of this size. The main credit consideration the DoE uses is whether or not the parent has an adverse credit history. For the DoE, this is defined as having a 90-day delinquency on any debt or having experienced an adverse credit event, such as a bankruptcy, in the last 5 years. This is a very limited metric that does not adequately determine how likely the parent is to repay the money, and, in fact, the percentage of DoE loans that go to subprime borrowers is more than 30%, more than the percentage of mortgages that went to similar borrowers during the mortgage crisis! 

To read more analysis about the subprime student loan problem, visit the Wall Street Journal article ​here.​​​