Overview

A college degree is widely considered the necessary foundation for an upwardly mobile career and ensuing lifestyle. But to pay the considerable tuition, dorm rental, meal plan and campus fees, students, parents, grandparents and even other relatives are applying for loans to help cover the full cost. Unfortunately, this has resulted in student loan debt becoming an increasingly onerous burden for people of all ages.

Graduating with this type of financial burden can seriously impede a young adult’s ability to save and invest money, which leaves less time to take advantage of the power of compound interest. For middleaged parents and retirees, tapping into investments or having to pay off large loans can threaten long-term financial security.

The financial burden is different for young borrowers than it is for older ones. A young adult who takes out a loan for college can reasonably expect to get a decent-paying job after attaining a degree, and over time pay that loan off. Therefore young borrowers can view taking out a loan as an investment that offers a high-yield return.

The same cannot be said for a parent or grandparent who takes on this same burden. Since they’re not the ones receiving the college degree, it doesn’t enhance their earnings potential and there’s no monetary return on their investment. The parents may hope the student will take care of their financial needs should they run out of their own money, but that’s not a good plan.

One thing to keep in mind in that a co-signer can be removed from a student loan once the primary borrower has a good credit score and demonstrates a satisfactory record of making payments, usually between one and three years.

Impact on Mom and Dad

In 1989, only 3.1% of parents age 50 and older took out student loans, and the average balance was $10,073. By 2016, those numbers had tripled: 9.6% of 50-plus households carried student loan debt that averaged $33,053.

About a third (32%) of this older demographic experiences at least some difficulty paying off federal parent PLUS loans, and nearly 30% are in default. It gets worse. In 2015, there were 870,000 people over age 65 with student loan debt, and 37% of them were in default.

Although student loan balances have grown across all age groups, older borrowers have seen the highest growth. In aggregate, the student loan balance of older borrowers increased 512% (inflation-adjusted) between 2004 and 2019, ballooning from $47.3 billion to $289.5 billion.

2017-18 Academic Year: Funding Sources

3 Tips For Managing Student Loan Debt

1. Research your options

Recognize that the student loan industry is big business. As soon as your child’s name gets on academic mailing lists, the marketing solicitations ensue. Don’t just take the first viable offer. Be aware there is a wide array of different types of loans and payoff plans, both for students and parents.For example, PLUS borrowers may qualify for an income-contingent repayment (ICR) plan or a public service loan forgiveness program.

Also be aware that while federal student and PLUS loans may reduce monthly payments based on income for eligible borrowers, the companies servicing student loans may not tell you this. In fact, they may focus their communication efforts on how long students can defer payments, since they make more money by allowing interest to accrue and increase the balance owed.

Research the full array of student loans and repayment plans at the government website studentaid.gov.

2. Avoid debt relief programs

Some companies advertise they can reduce or eliminate your student debt entirely for a fee. According to the Department of Education, these service vendors are often scammers. If you need help, contact an established nonprofit financial counseling group such as the National Foundation for Credit Counseling or the Institute of Student Loan Advisors

3. Be wary of consolidating

You may receive offers to consolidate your federal loans into a single private loan. Bear in mind a private loan may not feature the same benefits as the federal student loan program, such as income-based repayment plans and the option to discharge a student loan if the borrower suffers a total and permanent disability.

Final Thoughts

Figuring out how to apply for student loans offered as financial aid is a complex process. Figuring out how to pay off those loans is equally difficult. To help bridge the financial responsibility, many families split the cost between student and parent loans.

Unfortunately, the burden of student loan debt impedes the ability for young adults to save money to buy a home or for retirement. Furthermore, this slow road to adulthood means they may not be able to adequately save for their child’s education down the road, creating a perpetual cycle of student loan debt.

By the same token, if parents take on too much debt later in life, they can put their own financial security in peril and end up relying on their children. It takes forethought, research and sound planning to develop a college plan families can afford, so don’t hesitate to seek help from an experienced financial planner.