By Susan Tompor
Detroit Free Press
College debt is building and, increasingly, parents are on the hook.
Where do you turn when you’ve maxed out on federal student loans? Ask Mom and Dad to take out some parent loans, too.
The average cumulative federal student loan debt that parents borrow even exceeds what’s being taken on by students, according to new research.
On average, parents owed $32,596 for their cumulative loans taken out under the Federal Parent PLUS program at college graduation in 2015-16.
On average, college grads with bachelor’s degrees owed $29,669 in student loans in 2015-16, according to Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com.
To be sure, a much smaller percentage of parents borrow than students. About 69 percent of students took out student loans in 2015-16, compared with about 14.4 percent of parents, Kantrowitz said.
The high cost of college, and the inability of some families to save much money, has caused nearly half of college grads with student loans to take out the maximum amount of loans allowed under the federal student loan program.
“The parents are picking up the overflow when the student reaches the student loan limits,” Kantrowitz said.
In many cases, the student could even agree to repay the Parent PLUS loans.
“Some parents will have side agreements with the student where the student agrees to make the payments,” Kantrowitz said.
Not everyone who borrows, of course, is borrowing to the max.
One Dearborn, Mich., mother I talked with took out about $6,000 in loans about five years ago when her daughter began attending Central Michigan University.
The idea was to borrow some for the first year to pay part of the tuition, try to pay that off quickly and then build up savings to cover the cost of college in future years.
Her daughter worked during the summers, took a few odd jobs while she was at school in Mt. Pleasant, Mich., and she took out about $5,000 in student loans herself.
The mother repaid the loans; the daughter who graduated in 2017 still has a bit more to go.
For students who attend higher cost private colleges and out-of-state schools, the need to borrow can become even greater.
“They have to get the money from somewhere,” Kantrowitz said. “Debt may be the only option, especially if you’re going to a more expensive college.”
Parents take on more student loan debt for a variety of reasons. Some college students are attending some expensive, prestigious schools to study specific fields. Some parents saved far less than they needed for college, financial aid isn’t as easy to get as some families expect, and big scholarships are limited.
When student borrowing hits the limit, more parents start filling out the paperwork for private student loans or the federal Parent PLUS loans.
Parent borrowing on PLUS loans is up 19.2 percent from $27,352 in 2011-12. And it’s up 40 percent from $23,279 nearly 10 years ago, according to research by Kantrowitz.
Kantrowitz, who reviewed recently released federal government data, was a bit surprised to see student loan borrowing for undergrads basically flatline from around 2011 to 2016.
But it was less surprising when he realized that students were maxing out on the limits.
“Parent Plus borrowing is in some ways a pressure release valve,” Kantrowitz said.
Average cumulative debt at graduation for bachelor’s degree recipients increased by only 1 percent from 2011 to 2016. But that’s up 26.5 percent from $23,228 in 2007-08.
<strong>Here are points to consider for parents looking at a Parent PLUS loan:</strong>
<strong>-How much can I borrow?</strong>
The maximum limit for a Parent PLUS loan is the cost of attendance (determined by the school) minus any other financial aid received. So the PLUS loans can fill the gap for many costly schools if there is no other savings or parents aren’t able to cover some costs out of their current income.
The maximum that a dependent student can take out for a federal Stafford loan is $5,500 for a freshman with the amount going up to $6,500 in the second year and $7,500 in the third year and beyond.
The aggregate loan limit for students for Federal Direct Stafford Loans is $31,000 for dependent students. But to hit that maximum, students would need to borrow for a fifth year.
The limits are higher for independent students, which include students age 24 and older, veterans and students attending graduate and professional schools.
<strong>-What’s the rate?</strong>
Parents who borrow to help out their college-age children can expect to pay 7.6 percent, up from 7 percent, for the federal parent PLUS loans. The same rate applies to the Federal Grad PLUS loans. These are fixed rates for the life of the loan.
The new rates will apply to new federal loans made beginning July 1 through June 30, 2019.
The family should maximize the Federal Stafford loan borrowing before the PLUS loan because the Stafford loan has a lower interest rate, Kantrowitz said.
As of July 1, the fixed interest rate on federal student loans increased to 5.045 percent, up from 4.45 percent for undergraduate Stafford loans.
The rate goes up to 6.595 percent, up from 6 percent for Stafford loans for graduate school.
<strong>-What if you have a great credit history?</strong>
Some lenders may offer a more competitive rate on private student loans offered to parents who have a credit score of 780 or higher, Kantrowitz said.
College students might get offers for private student loans sent directly to them, but the odds of a student being approved for a private loan on his or her own are slim. Most students need a cosigner.
A private student loan might have an effective rate that’s 1.5 percent lower than a Parent PLUS loan for top-flight borrowers. That’s because a loan fee of around 4.25 percent is charged and deducted from the PLUS loan amount when it is first disbursed. Over a 10-year loan, the fee would translate into an extra 1 percentage point on the rate, Kantrowitz said.
You need to shop around for rates, and keep in mind your credit score. Remember, rates on private student loans are wide-ranging, again, depending on creditworthiness.
For example, PNC’s undergraduate Solution Loan offers two options. There’s a variable rate, which ranges from 5.23 percent to 11.23 percent and a fixed rate from 6.29 percent to 12.29 percent. Attractive rates at the low end go to borrowers with the best credit history. There is no application or origination fee and a 0.5 percent discount is offered with automated payments from any savings or checking account.
<strong>-Is a home equity loan a better deal?</strong>
To be sure, the federal PLUS loans aren’t the only ways that parents can borrow money for college.
Many parents have used a home equity line of credit to deal with college bills. Home equity lines of credit have variable rates and can run in the 5 percent to 7 percent range _ reflecting a prime rate at 5 percent. Rates lower than that tend to be introductory rates in effect for a limited period of time.
Better rates are available for those with credit scores above 740 and homeowners who have lower loan balances on their homes.
But as the Federal Reserve continues to push up interest rates, the prime rate will go up, and rates on home equity loans will adjust higher, too.
In the past, the housing crisis shut down some borrowing on home equity loans as home values fell in much of the country. Lenders looked harder at credit histories and property appraisals. But now, many home values have risen considerably.
Yet there is another point to consider: The Tax Cuts and Jobs Act of 2017 ended some income tax deductions for home equity lines of credit.
Interest on home equity loans will no longer be deductible beginning in 2018, if the loan was used on things like paying for college tuition, taking a vacation or buying a new car.
The interest on that home equity loan would still be deductible if the money goes toward building, acquiring or substantially improving the home.
If parents don’t get a tax break any longer, tapping into home equity would become a less attractive way to pay for college.
“Between rising interest rates and the loss of tax deductibility, home equity lines aren’t the low cost source of capital they had been,” said Greg McBride, chief financial analyst for Bankrate.com.
Even so, rising home prices are increasing, and parents could borrow against the house or refinance to take cash out of the home, too.
“Would-be borrowers often look at home equity as ‘found’ money when access to cash is needed,” McBride said.
<strong>-Does every parent qualify?</strong>
The good news is a parent can get the federal PLUS loan even with a lower credit score. But you need to expect a credit check.
A PLUS loan will be rejected if a parent has an adverse credit history. Under the regulations, someone could be denied a Parent PLUS loan if he or she has a current delinquency of 90 or more days on total outstanding balances of greater than $2,085.
Other adverse events include a bankruptcy discharge, wage garnishment, tax lien or foreclosure during the five previous years.
There are various ways to still apply, such as getting someone other than the student to agree to repay the loan if the borrower does not repay it. And there are ways to appeal regarding extenuating circumstances.
Another thought: If a parent is denied, a dependent undergrad would become eligible for higher Stafford loan limits.
More students are taking advantage of the extra limits, according to Kantrowitz.
About 7.4 percent of students benefited from the higher limits after their parents were denied PLUS loans in 2015-16. That’s up from 5.8 percent in 2011-12 and 3.3 percent in 2007-08.
<em>ABOUT THE WRITER
Susan Tompor is the personal finance columnist for the Detroit Free Press. </em>