College costs and PLUS loans

15.12.20 11:00 AM Comment(s)

From the Clipboard - College costs and PLUS loans

Not a surprise. And thanks Captain Obvious!

In the category of “not a surprise” and “thanks Captain Obvious”, both NBC and Wall St. Journal have come out with articles recently talking about the amount of student debt, and in particular the amount of PLUS loan debt; loans that parents can borrow to help pay for college.

In particular, both of these articles discuss the amount of debt being borrowed by parents is increasing and preventing parents from retiring, or retiring when they want to. And carrying debt into retirement. If people are unable to pay, wages are being garnished and it is possible to have your Social Security check garnished due to non-payment.

Before we dig into what these articles mean, let's talk a little about what a PLUS loan is. I mentioned previously that it is a loan by the parents to pay for their student’s college expenses. Unlike loans from a bank, there's really no credit check. No concern about credit score and no concern around debt to income. Parents can borrow as much as they need per year, all the way up to the full sticker price. That means if your kid is going to a college that's $80,000 a year, you can borrow $80,000, less any aid received, even if you are at a minimum wage part-time job. There may be good reasons why you may want to do borrow using a PLUS, but not to that extreme.

Why are large PLUS loan balances not a surprise? The WSJ article mentioned Spelman College, a HBCU in Atlanta, GA, as being the school that has the highest amount of parent loan debt. That should not have been a surprise. Spelman is around $55,000 a year sticker but they give out relatively little merit scholarship money. For last year's freshman class, they only gave merit scholarships to the top 11% of the freshman class, which means 89% of last year's freshman class did not get a merit scholarship. They could have gotten other financial aid or need-based aid based on information that fill out on the FAFSA. 

Further, Spelman doesn't give out of a lot of need-based aid. On average, Spelman met 36% of financial need, or the difference between the sticker price and Expected Family Contribution (EFC). As an example, Spelman's cost of attendance is $55k. Let’s further suppose that your EFC is $20k. They would take the $55k cost and subtract the $20k EFC, leaving $35k as financial need eligibility. Spelman met just over one-third of that number, or roughly $12k. 

In this hypothetical scenario, a parent would actually pay the EFC of $20k and the portion of financial aid the portion of the need that Spelman didn't cover, or roughly $23k. This means that a family would need to pay roughly $43k.

The point of these articles is that families did not save (or save enough) and could only send their student to college by using the PLUS loan or other loans. Why it's not surprising is that information about need met and scholarships is publicly available information. Parents should know in advance about expected costs. If you’re car shopping, you don’t sit down at the Ferrari dealership and start filling out the paperwork to buy a Ferrari. And only then figure out you can't afford it. You probably should have found out well before you stepped into that dealership.

Unfortunately, this is exactly how the process works with many families. The paperwork is otherwise known as the Common App and the FAFSA. Colleges then share acceptances, aid and then the price. The more parents can do in advance, the more educated they can be about the real cost. The better they are educated about the real cost, the better they can make better financial decisions. Better financial decisions, hopefully, will mean that in the future, families won’t have to take on huge amounts of debt. Families won’t have to rely on any potential government forgiveness or free college programs for their student.

The college with the second most parent debt is Ringling College of Art in Sarasota, FL. The school with the third most parent debt is Berkelee College of Music in Boston MA.

Parents often leave cost considerations to the end of the search or application process. Is it any wonder, then, why there is a huge - and growing - amount of PLUS loan debt?

It doesn’t have to be this way.