Parents Snared in $100 Billion College Debt Trap Risk Retirement

Terry Williams borrowed about $7,000 to earn a degree from Spelman College 38 years ago. For her youngest child, a sophomore at Belmont University in Nashville, she will take on almost $40,000 in parental loans.

Williams, a 59-year-old widow who runs a nonprofit that helps black families navigate private-school admissions, is watching her retirement savings dwindle as she pays college bills for her three children, Bloomberg Businessweek reports in its Feb. 6 issue.

“I’ll probably work until I fall dead at my keyboard,” the Decatur, Georgia, resident said in an interview.

It’s not just graduates who are staggering under the weight of educational loans. Parents, too, are borrowing record amounts to put their kids through college, jeopardizing their retirements. With the housing crisis, many families can no longer avail themselves of one popular option for financing university studies: taking out a second mortgage.

“A plunge in home prices has erased the equity that many homeowners had just a few years ago,” said Greg McBride, a senior financial analyst at Bankrate.com in North Palm Beach, Florida.

Federally backed educational loans to parents, at an estimated $100 billion, make up 10 percent of the $1 trillion in educational loans, according to data analyzed by Mark Kantrowitz, publisher of the website FinAid.org. The problem is more acute at some private schools, such as Colgate University, Trinity College and Sarah Lawrence College, which have smaller endowments and can’t offer the same financial aid as Harvard and Princeton universities.

Terry Williams will take on $40,000 in government loans to pay for college. Photograph: Kendrick Brinson/Bloomberg Businssweek Close

Terry Williams will take on $40,000 in government loans to pay for college. Photograph:... Read More

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Terry Williams will take on $40,000 in government loans to pay for college. Photograph: Kendrick Brinson/Bloomberg Businssweek

‘Robbing Their Future’

“Parents are facing an economic crisis because they are borrowing too much for college,” said Rick Darvis, executive director of the National Institute of Certified College Planners. “They’re sacrificing their current lifestyle and robbing their future retirement.”

Loans to parents have jumped 75 percent since the 2005-2006 academic year, according to Kantrowitz. That works out to an average of about $34,000 for those with loans. With interest, the figure rises to about $50,000 over a standard 10-year period. An estimated 17 percent of parents whose children graduated in 2010 took out loans, up from 5.6 percent in 1992- 1993, according to Kantrowitz’s estimates.

The rising levels of parental debt could ripple through the rest of the economy. By the time parents are in their 50s and 60s, they should be saving for retirement instead of taking on new liabilities, said Joseph S. Messinger, a certified college planner and president of Capstone Wealth Partners Ltd. in Columbus, Ohio. Servicing those loans becomes harder as parents stop working and their incomes decline.

‘A Lot of Money’

“A lot of money is going to the university and college systems,” Messinger said. “It’s shrinking people’s dollars to do other things.”

Most of the parental debt is in the form of Parent Loans for Undergraduate Students. PLUS loans, which are government- issued and carry a fixed interest rate of 7.9 percent, can be used to cover the entire cost of tuition, room and board, and other expenses -- minus any aid secured by the student. While parents must pass a credit check, no collateral is required. PLUS loans cannot be discharged in bankruptcy.

Marvin Weinberger, 58, a self-employed inventor of hand tools in Havertown, Pennsylvania, owes $105,509 in PLUS loans for his two children. Most of that has gone to cover the almost $49,000 a year in tuition, fees, and room and board for his daughter Ariela, a junior at Muhlenberg College, a small private institution in Allentown, Pennsylvania.

‘Looked Hard’

“We really looked hard at the possibility of taking her out of Muhlenberg,” said Weinberger. “It was such a good fit and made her feel so welcome -- academically and socially.”

His son David, a sophomore at Rochester Institute of Technology, is receiving some financial aid. Both Weinberger children took out federal loans of their own.

Muhlenberg never tells “a family they have to take a PLUS loan in order to come to Muhlenberg,” Chris Hooker-Haring, dean of admission and financial aid, said in an e-mail. “We simply inform families about what we can provide.” The final decision is left to the family, he said.

Many of the schools with high levels of parent loans rely more on tuition and fees than on endowments. At Trinity College in Hartford, Connecticut, where annual tuition and fees are $55,450, parents who took out federal loans borrowed an average of $27,000 in the last academic year, according to the school. At Sarah Lawrence in Bronxville, New York, where the annual cost of attending is $58,716, it was about $20,000.

Tuition Increases

Tuition and fees for private, nonprofit, four-year colleges have increased to an average of $28,500 for the 2011-2012 academic year, up from an inflation-adjusted $16,276 two decades ago, according to the New York-based College Board, a nonprofit group whose members include universities.

The trend shows no sign of abating. On Jan. 28, Princeton University in Princeton, New Jersey, announced that tuition and fees for the coming school year will rise 4.5 percent -- the school’s biggest increase in six years. Days earlier, the board of trustees at Cornell University in Ithaca, New York, approved a 4.4 percent cost increase for undergraduates in its four colleges not supported by New York state.

“Colleges will keep doing this as long as the loans are available and as long as people keep applying,” said Laura J. Clark, director of college counseling at Fieldston, a private high school in New York. “If there’s a drop-off in the number of applications in the middle-income group, that’s when colleges may moderate prices or come up with new strategies for helping people pay.”

Obama’s Plan

President Barack Obama last week proposed linking federal aid to a college’s ability to control tuition costs. The plan calls for increasing campus-based aid only for schools that limit tuition cost increases and penalizing those that don’t.

The way parents are paying for college has changed over the past two decades. As recently as 10 years ago, financing college through a second mortgage was more easily accomplished because homeowners had equity from which to borrow, said Bankrate.com’s McBride.

Pamela Lauzau, 63, put three children through Boston College and took a $400,000 second mortgage on her house in Alexandria, Virginia, to do so, which funded about two-thirds of the cost. The family didn’t receive financial aid.

With her husband unable to work because he has dementia, she took a job as a school bus driver for the health insurance and sells real estate. Her youngest child graduated in May.

Second Mortgage

“I don’t see a time when I’m not going to work,” Lauzau said.

This month, Lauzau expects to close on the sale of her house. She won’t realize a profit because of the second mortgage.

“Our advice to families is to know what you’re getting yourself in for,” Robert Lay, Boston College’s dean of enrollment management, said in an interview. “You have a level of sacrifice that’s going to be required to send your son or daughter or to a private, expensive university like Boston College.”

He said families will see a return on their investment. The school’s estimated cost for this academic year is $57,000.

Parents aren’t facing the financial reality about their ability to pay off these loans when they have a smaller income stream, Capstone’s Messinger said. They are relying solely on faith that they’ll be able to pay the money back, he said.

‘Too Easy’

PLUS loans, in particular, are “too easy” to get, he said.

Terry Williams, the Spelman graduate, said her own parents didn’t borrow any money to send her to the school, a private, historically black women’s college in Atlanta.

She took out parent loans because Belmont University was a good fit for her son, Kramer, and he could be near his sister at Vanderbilt University. Belmont, a private Christian college, costs $34,000 per year. Her son has already borrowed about $14,000 in federally backed loans.

“We understand and greatly appreciate the sacrifices families make in order to send their children to Belmont,” David Mee, associate provost and dean of enrollment, said in an e-mail. He said the university is “committed” to controlling costs.

Williams said she didn’t anticipate how expensive a college education would be.

“I’m definitely hoping that the sacrifice is still worth it,” she said.

To contact the reporter on this story: Janet Lorin in New York jlorin@bloomberg.net.

To contact the editors responsible for this story: Lisa Wolfson at lwolfson@bloomberg.net; Bradford Wieners at bwieners@bloomberg.net

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