Many parents of college-bound students are facing college tuition payments and student loan decisions in the coming months.  This year’s process will see significant changes due to the FAFSA delays, and some will see an increase in cost due to changes in the financial aid calculation.  A new dilemma for parents paying for college is that they are taking on student loans, which is impacting their retirement plans.  We are seeing this now that student loan repayment has restarted.

Under the current rules, parents can borrow funds up to the total cost of attendance with minimal loan underwriting.  As a result, people over 50 are the fastest-growing group of student loan borrowers.   As college costs continue rising, families need to borrow more money.  Many parents do not fully understand  the legal responsibility of the student loans borrowed.  Parents must realize that some of these loans are legally theirs and cannot be transferred to the student.  These loan decisions put them at risk.

This article is to help parents create a better funding and borrowing plan.  At PayForEd, we take a holistic approach to the college funding decision.  We see both the funding and repayment trends as they occur.  Now that repayment has started, we are seeing an alarming trend in parents carrying debt into retirement.  The only way to prevent the problem is to help families make better funding decisions.

Reasons for Parent PLUS Loan Increase Usage

Four major reasons exist for the growth in Parent PLUS loans, and it is starting to impact retirement planning.

• Increases in College Cost
• No increase in the student loan limits since 2008
• Parents having their children later in life
• No formal loan underwriting process for approval

For most parents, the college decision is highly emotional.  Access to funding is relatively easy, and under the federal loan program, there is minimal underwriting.  Another area for improvement is the need for customized answers to graduation.  The colleges only provide cost and financial aid one year at a time.

With a lack of transparency, increased complexity, and poor planning, more parents will need to carry student loans into retirement.  This problem was hidden for a few years due to COVID-19 and the 40-month national forbearance period.

Here is a student loan chart by age since 2017.  The trend is alarming.

Financial Advice is Limited

Most families depend on the college financial aid offices and the high school college guidance office for directions on financial aid.  These professionals are good resources but cannot provide a complete financial picture.  To properly plan how to fund a child’s education, you need to understand financial aid, college savings plans, educational tax strategies, student loan options, and student loan repayment plans.

As I said earlier, this is the most significant financial decision most parents make before retirement, and you make it on your own.  Unlike a mortgage, where a third party approves the loan after evaluating your income level, credit history, and ability to make the payment, they approve the loan, and you can purchase the house.  This detailed approval process does not exist if you use federal student loans.

The colleges also do not give you a projection of the total debt to graduation.  You have to calculate that number by yourself.  Imagine getting a mortgage without telling the bank how much money you need.  Also, with the increased complexities, the college financial aid office cannot provide any personal financial or tax advice.  This advice could be worth thousands of dollars annually if not done correctly.

Understand Parent PLUS Loans Structure

Most parents must also understand that the traditional dependent student can only qualify for $27,000 of student loans over the first four years in their name.  The remaining balance needs to be funded by savings or monthly cash flow.  If there is an additional shortfall, financing is required.  Depending on the loan selected, the parents will be directly or indirectly legally tied to those loans.

This funding dilemma is why so many families use Parent PLUS as an option.  It is the easiest.  Parents need to consider a few items before using this debt solution.

• It’s the parents’ loans.
• Limited repayment options
• Cannot be transferred to the student
• Limited borrowing cap to cost of attendance for each college
• Interest rate is set each year for all borrowers in May
• Can qualify for loan forgiveness
• Federal loans have a death and disability benefit

There are other options depending on your goals and situation.  Private student loans are a viable option.  The issue with private loans is that they have an underwriting process.  You must apply for a new separate loan each year and get approved.  The disadvantage is that the borrower’s debt-to-income ratio worsens over time, hence a higher interest rate.  The positive is that the parents can get off the loans if a good payment history is achieved after 36 – 40 months.  Private loans have zero to minimal fees in comparison to federal loans.

Understanding Your Timing

The biggest problem for families is not developing and estimating a college funding plan to educate all their children.   The college selection and funding process considers each child uniquely.  On the financial side, each child may have their own 529 plan or receive different scholarship amounts.  Having a customized funding and debt strategy is becoming more important due to the high cost.  Doing this using your entire family timeline and the resources can provide the best outcome.

We tend to focus on the oldest.  In reality, you should use the youngest since this will dictate when you can stop taking on debt, how close you will be to retirement, whether you qualify for loan forgiveness and your loan repayment options.  By having these answers, you can develop a better plan and avoid surprises in retirement.

New funding strategies give parents and grandparents more flexibility. Under the SECURE Act, 529 money can be used for student debt repayment, transferred to other children, and even to set up a Roth IRA.

Parents Paying for College New Dilemma Conclusion

As college costs continue to rise, parents paying for college need to better manage and plan on how they will manage the debt.  Colleges can only provide limited advice and won’t be there for you when you want to retire.  If the current system was so great, we would not have the $1.7 trillion in student loans and the government trying to find ways to forgive them.

The average US family has 2 children, and the average cost of college, including room and board, is about $150,000 over the first four years.   This makes the funding decision a $300,000 decision that we make on our own.   PayForEd and our listed advisors can help you develop a plan that minimizes the risk of carrying student loans into retirement and can gives you suitable options if you do have them in retirement.

Due to the lack of transparency and increased complexity, families have difficulty putting this all together.  What people need to realize is that a family’s debt structure will determine their repayment and forgiveness options.  This planning is often not done.