Understanding the Student Loan Crisis

If you have done any reading or research in the news in recent years, you have seen stories revolving around the student loan crisis. Maybe even within your own family or friends, someone you know is experiencing this growing issue. The cost of college has been exceeding inflation for some time now and is becoming what appears to be out of reach for many families. Not to mention, while the cost of college is rapidly increasing, average graduation rates are consecutively decreasing. This is lengthening the time spent in school, which will cost families more.

With this in mind, student loans are becoming relevant for more families every year. If your family is in this position where loans are going to be necessary, you need to make a plan for them. One of the worst mistakes families can make is jumping into certain student loans without going through the research and analyzing their capacity to take loans. There are numerous loans, but a few of the common loans are student Stafford Loans, private loans, and Parent PLUS loans.

The student Stafford Loans are the lowest interest loan that can be obtained and is purely in the student’s name. Every student is able to borrow $5,500 in their freshman year, $6,500 in the sophomore year, and $7,500 in their junior and senior years. Depending on the need-based aid a family receives, this could be subsidized, which means the interest is covered while the student is in school, or unsubsidized, which means the interest accumulates while in school. As mentioned, this is solely in the student's name. Families can use this as a starting point for a lower interest loan and to give students some skin in the game.

Private loans can have a wide variety of setups, but in most cases, it will be the parent cosigning for the student. The guardrails on these loans are largely set by the institution providing them. With the Parent PLUS loan interest rates becoming quite high, a lot of families who need additional funds are going this route instead.

The Parent PLUS loan is the government administered loan in the parent’s name. With recent legislation, this now has a lifetime limit of $65 thousand per student. These are credit based, but if a parent qualifies, they can borrow a significant amount. The minimal guardrails on these loans combined with the high interest rates make the Parent PLUS and private loans capable of becoming dangerous.

Following the Parent PLUS loan, we need to establish the most significant component of the student loan crisis. While there are certainly students out there that are buried in debt, the vast majority of the student loan crisis is actually with the parents. There are numerous parents who borrow more than they are capable of paying before their retirement, challenging them financially. In fact, over 150,000 retirees are currently receiving reduced Social Security benefits due to still owing payments on student loans. This stands to remind families that helping students afford college is a gift. It should not come at the expense of the parents’ retirement.

Loans need to be always approached with extreme caution. While they are necessary for some college plans, they have the capacity to break a financial plan if they are not used wisely. It is always crucial for a family to analyze their financial situation and capacity to borrow before obligating to student loans. Analyzing your plan to pay these off before retirement and approaching these wisely will prevent your family from becoming part of the growing loan crisis trend.

A+ College Planning is always here to help advise on student loan options.