In December 2020, College Scorecard added new data to its calculation of student loan debt – specifically, they began including Parent PLUS Loan data showing how much parents are borrowing on behalf of their kids.
The results were eye-opening.
“Typical families at dozens of institutions,” wrote the Wall Street Journal right after the figures became public, “are borrowing almost $100,000 to finance student education.”
Turns out, the oft-discussed $1.7 trillion in student debt has a hidden side, namely the towering amounts also paid by students' parents.
Average student loan debt may hover around $30,000 per borrower, but that’s because federal student loan caps only allow them to borrow that much. Those figures grossly underestimate the actual amount of college debt out there because parents are covering the difference, either by co-signing a private loan or borrowing a PLUS Loan on their own.
And the problem with PLUS loans is that it’s very easy for people to get in over their heads. PLUS Loans require a credit check, but one more basic than that of any substantial loan in the private market. With no significant negatives in their five-year credit history, a borrower can use a PLUS Loan to pay for up to the entire cost of college. Having no credit history is OK. Worse, having little-to-no income is fine. There is no cap and no debt-to-income ratio check. A parent could make $30,000 per year and be approved for $300,000 in PLUS Loans—an amount they could likely never pay back.
Because the costs of college have risen much faster than income levels, more parents are taking on more debt. According to a study by Trellis, 3.2 million parents in 2014 had debt totaling $65.1 billion for student loans for their children. In 2019, that number increased to $96 billion for 3.6 million parents.
These loans are even contributing to DEI issues, as more than a third of Parent PLUS loans borrowers from Black families have household incomes of less than $30,000 per year compared to 12% of white borrowers. And here is the worst part— this debt can almost never be cancelled, even if the parents declare bankruptcy.
What does this all mean for employers? It’s important to understand how much education debt incurred on behalf of dependents impacts the entire family, including and especially your employees. The money going to repaying these loans can’t go into saving for retirement. Employees may even have to delay retirement because they can’t afford it. Then there’s the mental load of carrying all the debt and worrying about how they will repay it. It means loan support – how to responsibly borrow, manage, and pay back – could be as valuable to retirement as your 401k.
A number of employers have helped to alleviate these challenges by providing our education loan counseling services. Through this assistance, we’ve helped employees understand their repayment options and develop a plan for repayment. More importantly, our experts get involved before employees borrow more than they can afford by working with them to explore the long-term impact of these loans, sharing information about other ways in which they might fund their student’s education, and pushing them to include financial safeties when their students are applying to college in the first place.