NEW YORK (MainStreet)—With rising tuition costs and a weak economy, many parents are now saddled with dual student loans and facing a weak prospect of repaying them.
Some parents who took out student loans for their own education are still repaying them after 20 or more years and now have incurred additional significant student debt for their children to attend college.
Among the 2011-12 undergraduates who received financial aid, 5% had parents who took out federal Direct PLUS Loans, and among undergraduates whose parents took out federal Direct PLUS Loans, the average amount borrowed was $12,100, according to the Department of Education.
For graduate students who received financial aid, 10% had parents who took out federal Direct PLUS Loans, and the average amount borrowed from federal Direct PLUS Loans for graduate students was $18,600.
While there is no available data on parents who have accumulated debt for both themselves and their children, parents are now borrowing larger amounts for their children to attend college, said Shelly Repp, President of the National Council of Higher Education Loan Resources.
Some parents are still repaying their own education loans, because they had consolidated the loans or enrolled in an income-based payment program.
"We will see more parent borrowers who will have difficulty repaying loans," Repp said.
Since student loans are not forgiven in a bankruptcy, some borrowers are still making payments when they reach retirement age, Repp said.
Most parents anticipate their children will be able to take over the payments after they obtain a job, but high unemployment rates have made repayments more difficult.
"There are a number of parents who are taking out loans, and they don't understand the full ramifications going forward," she said. "Parents are going to be obligated to pay off this loan, and it may take decades."
According to Fidelity's 7th Annual College Savings Indicator study, 78% of parents agree that they don't want to burden their children with hefty student loans. Of those parents surveyed, 51% graduated with debt and 36% are still paying off their own student loan debt.
The Fidelity study also found that 70% of parents that graduated debt-free also feel their children should graduate debt-free, whereas parents that graduated with debt are split (49% vs. 51%) on the matter. Of those parents that are O.K. with having their children graduating with debt, parents that were debt-free report a lower acceptable amount of debt upon graduation of $29,700 compared to the $36,300 deemed acceptable by parents who graduated with debt.
The survey also showed that 35% of debt-free parents say they will pay for the total cost of college versus 19% of parents graduating with debt saying the same.
"Many parents understand first-hand how college loans can hinder their ability to save for other important financial goals like retirement and they don't want their children to face the same obstacle," said Keith Bernhardt, vice president of college planning at Fidelity Investments. "Dedicated savings accounts like 529 plans are growing in popularity because parents are realizing the importance of saving early and often. Parents with an effective college savings strategy for their children are better suited to pay off their own student loans and save more for retirement."
According to The College Board, the average annual cost of a four-year college in 2020 will be $46,368, a 38% increase compared to the current fees. While the majority of parents do not want to burden their children with significant student loan debt, 43% do not believe they will be able to secure a student loan to cover the full amount needed to pay their children's college bill. Many parents continue to take proactive measures, including: 54% expect their kids to take online courses for credit, 54% intend to ask their child to work part-time during school to help pay expenses, 50% will ask their kids to live at home and commute, 40% will encourage their child to attend a public school and 23% will encourage their child to graduate in fewer semesters.
Parents who already have their own student loans and are taking out additional debt could be overextending themselves, said Jeff Golding, who used to be president of Finansure, a former student loan lender, and is now CEO of WilliamPaid, a Chicago-based online rent processing company.
"It's a conundrum because it is an emotional decision tied to a financial one and many times the emotional part wins," he said. "People can't afford to save. The more debt they acquire, the more susceptible they are to paying higher interest rates, thus they end up digging a hole for themselves that they can't get out of. "
Many people elect to defer making payments on their student loans for a long as their lender will allow, said Jeremiah Heck, an Ohio consumer debt attorney.
"During that time, even with relatively low interest rates, the balances have compounded to a point that becomes far beyond what was borrowed for their education," Heck said. "No parent wants to tell their child they can't afford to help them with tuition loans, but in many cases it would be a better choice. The Baby Boomer generation will forego paying down loans and saving for their retirement because of their sense of obligation to their children. Ultimately down the road, everything has to get paid. The answer is most always: stop borrowing, stop deferring and start paying more.
In many cases, it is better for the student to take out the loans since their federal student loans are eligible for the income-based loan repayment after they graduate, but Parent PLUS loans are not eligible for this program, said Paul Kuzmickas, a bankruptcy attorney in Cleveland.
"Ultimately, paying for your child's student loans can have a serious and detrimental effect on your personal finances, especially when you should be focusing on retirement," he said. "By agreeing to co-sign a loan or borrow money for your child's education, you're agreeing that you can shoulder additional debt."
But overburdened co-signing parents unable to make payments will face the same difficulties in discharging student loans as if they were the primary borrowers, while PLUS borrowers may find themselves shouldering the total cost of a child's education.
And it's a vicious cycle.
"Frequently, these parents aren't only paying for their children's student loan debt, but also their own student loan debt, a mortgage, auto payments and credit card debt," Kuzmickas said.
--Written by Ellen Chang for MainStreet