Seniors reaching “The Golden Years” are often finding them to be more than a bit tarnished as they continue to pay down student loans they incurred either for themselves or for their children.
There’s a long-held belief that a college education is part and parcel of the American dream. But for many people these days, paying for that dream has become a nightmare.
Young people in pursuit of higher learning are literally mortgaging their futures with loans extending as long as 25 years. Older Americans forced to return to school to learn new professions as technology outdates—or the economy terminates—their current employment are, by necessity, also taking on debt. And then there are those seniors who cosigned their kids’ loans—and are now on the hook as their children, unable to find jobs that pay enough to meet the obligations, default on those very loans, leaving Mom and Dad stuck with debt that can’t be discharged.
According to the Government Accountability Office (GAO), student loan debt in the United States now surpasses $1.3 trillion. And the amount of student loan debt carried by Americans aged 65 to 74 has quadrupled in just the last five years, now topping a whopping $18.2 billion.
And the problem isn’t going away. Rather, it’s growing astray!
Out of control
Susan Gutierrez is director of financial aid at Sonoma State University in Rohnert Park, a post she’s held for 15 years. But she’s been in the financial aid business for some 26 years and remembers a time when student debt was much more controlled.
“When I first started, the maximum loan a student could get was $4,000 per year (through federal loan programs). And the maximum parents could take out was the same: $4,000. Over time, things changed so parents could borrow the difference between the estimated cost of [college] attendance and any other aid the student was getting. So now that means we’re processing PLUS [Federal Parent Loans for Undergraduate Students] loans that are as much as $20,000 per year,” Gutierrez explains.
In the end, “the desire to give students and parents more financial resources for education has led to cases where students [and their parents] are further in debt than they can afford,” she says.
One problem that often leads to over-extension is the “I want it now” syndrome that ignores implications for the future. When students apply for financial aid, “sometimes it’s hard for them to make the connection [to how they’ll pat it off], because it’s a future thing,” Gutierrez says. “It’s like they say to themselves, ‘I want this education now, and I know in the future I’m going to have to make these payments. But I’m sure things are going to work out.’ And then, sometimes, they don’t.”
While student loan debt is generally considered to be short- to mid-term debt, many students are finding it to be just the opposite, because the good-paying jobs they thought would be there upon graduation are nowhere to be found. This is leading more and more younger people to refinance their federal education loan debt into loans as long as 25 years, “just to get the payments more affordable,” Gutierrez says. “At that point, you can compare it to a [home] mortgage.”
But the problem isn’t just with traditional college-age students. The recent economic dip—plus the advance of technology—has forced many older people to go back to school to learn new skills.
“People in their later years are going back to college and taking on student debt to change their direction in life. This is great—except for the debt part,” says Montgomery Taylor, CPA, CFP, best-selling author and wealth manager in Santa Rosa.
Impacted not only by technology and the economy, some older people “maybe go through a divorce and decide to redefine their life, so they go back to college. They’re not your typical 20-year-old student,” he explains.
In “bad economic times,” going back to school “is perceived as a good thing to do,” Gutierrez says. Many people struggling now packed on student loan debt during The Great Recession. “They were hoping times would get better,” and invested in more education during a time when there weren’t many jobs available. “But that’s ended,” she says, “and now they have the education. But in many cases, the economy hasn’t improved enough to provide the job opportunities they expected.”
The default dilemma
Young or old, many students think they can take out loans, get a great education…and then walk away from the debt through default.
Taylor knows of someone who went back to school 15 years ago and racked up student loan debt to the tune of about $20,000 per year. She now owes upward of $200,000 and has made a conscious decision not to repay—something Taylor believes is morally wrong.
“Making promises [of repayment] and then just leaving the bank holding the bag,” isn’t his way of doing business, he says. And it’s an especially bad move if one’s parents have cosigned for the loan, which frequently happens when students apply for aid through private lenders versus the federal program.
At 18, many students don’t have income or credit history to get private loans themselves, so Mom or Dad (or both)—never thinking their kids would default on the loan—cosign on the dotted line and set themselves up for a big fall when the worst happens.
“I honestly think some people don’t seriously understand they’re taking on legal obligations—or truly understand what they’re getting into,” says Guitierrez. When parents are asked to cosign for a loan, “they need to look long and hard at that decision. Although it may be very difficult to say ‘No’ to a child or family member who wants to go to a specific school—even if the expectation is that you won’t be paying in the end—if you can’t afford it, you should say no. That said, I understand how emotional this can be."
If a parent does decide to cosign, he or she should make sure payments will be affordable if the child defaults, Gutierrez says. Federal student loans have discharge provisions for several situations, including death of the student and/or death of the parent borrower.
Private loans are another matter. “Banks and financial institutions expect to make money off the loans they’re approving, and they won’t make much money if they’re discharging them,” Gutierrez says.
Since the downturn in the economy, more than 90 percent of private student loans now have cosigners, according to the Consumer Financial Protection Bureau. This is up from 67 percent in 2008, before the financial collapse began.
When taking out a private education loan for a child, parents should read the cosigner release clauses very carefully. While it seems unfair, some companies do charge penalties for loans repaid in advance of the initial terms, and several won’t release the cosigner if the borrower postpones payment through an approved deferment, leaving the parent on the hook for the entire life of the loan.
The best defense
When it comes to paying for your child’s college education, the best defense is a good offense. In other words, try to avoid loans as much as possible by planning in advance and saving money for that purpose.
Lindsey Strange, senior vice president and retail regional director for Umpqua Bank in the North Bay and Western California, notes that, “on a broad scale, we realize as a society that really good jobs are dependent on a good education. We have to do a better job of planning in advance and encouraging parents to save for their kids’ education.”
Strange notes that, when she meets with many parents, “they haven’t educated themselves on the cost of an education. The costs are skyrocketing,” she says. Over the last 40 years, the average cost of a college education at a private, nonprofit college has increased from $10,783 per year (adjusted for 2013 dollars) to $30,094 in 2014.
Strange is a big proponent of 529 Plans, savings accounts that don’t tax donors (who can be parents, grandparents, friends or whomever) on the account’s earnings when the funds are taken out to pay for college expenses of the named beneficiary. The donors own the accounts and maintain control/designate beneficiaries. Each state has its own 529 Plan and they do differ, so investors should check the rules before starting the accounts.
The 529 Plans are available through investment houses or direct from each state (California has the 529 ScholarShare program). Strange has two daughters, ages 6 and 8, and she started saving for their college educations with 529 Plans that she established while on her maternity leaves.
“My parents grew up with the expectation that I’d attend college wherever I wanted and they’d figure out a way to pay for it,” she says. She settled on UC Davis and, “They paid for it all.” After a few years of college, she decided to “take a hiatus” and go to work. When she decided to return to college to finish her degree, she turned to her parents for help, “and they said, ‘Nope, you’re done.’ In retrospect, I didn’t realize how lucky I was to have them paying.”
So Strange took out student loans, got education payments from her employer and finished her degree at another college. She paid off her loans, but also learned a valuable lesson.
“I realized the value of the opportunity I was given, and I want to provide that same opportunity to my children. As a young parent, I think I’m doing a good job saving [for their educations], but with college costs soaring, “I’m not sure what it’s going to look like in another 12 years.”
How much is enough?
How much should parents set aside? That’s the big question.
“It depends on the school and how the child pursues education. If you take the junior college route first, you can save some money,” Strange says.
In addition to setting aside the funds, Strange says parents should talk with their children about college and the importance of an education at a very young age. “They should understand opportunities that a good college education provides [better jobs, higher pay] and why third grade math is very important and why we’re talking about your report cards.”
Saving for college shouldn’t strap parents (many of whom are already paying off their own education loans). So starting early, as Strange has done, means monthly payments into the savings accounts are smaller and more manageable.
By encouraging saving up-front, Strange believes there will be great impact for future seniors. Right now, “seniors are having issues with repayments [of loans] for kids and grandkids. If you look long-term, by being proactive now and saving [instead of depending on loans in the future], we can mitigate that.”
But she admits it’s not always easy, because the whole process “can be so daunting.”
As stated earlier, the cost of a college education over the past few decades has soared, which, in turn, has led to increased indebtedness. But what is fueling the cost of an education?
While researching this article, I stumbled upon a very interesting observation from Ronan Keenan, a Boston investment analyst who often writes for the World Policy Institute, The Atlantic and the Global Policy Journal.
In an article that appeared in The Atlantic (April 2014), Ronan says the ability of colleges to raise costs has been facilitated by “a sharp increase in federal student aid.”
Ronan notes that colleges have been able spend more because of a “flawed student loan system that enables unwieldy inefficiencies. Today’s loan model was built with good intentions, tracing its roots back to Lyndon Johnson’s Great Society ambitions, but it wasn’t designed for extended periods of stagnant wage growth and a widening gap in pay scales.”
In Ronan’s mind, too many people who really aren’t prepared for college are being admitted. They end up having to take remedial courses, which, in turn, extends their graduation dates and increases their debts.
He believes lending institutions are too lax in giving loans, because they know taxpayers will support 100 percent of the defaulted loans, which leads them to not be more discerning about borrowers’ fields of study. “The expected income for a humanities student is not the same as an engineer,” he notes.
Ronan says both colleges and employers should embrace “three-year bachelors degrees. The traditional four years is an arbitrary number that just extends the time in education.” He also suggests colleges can reduce costs by offering more online learning.
“But they’ll only do this if the government limits the ability of students to pay the prevailing high tuition costs. The current model has inflated spending beyond the nation’s means, with colleges reaping the rewards while the government takes all the risks and graduates drown in debt,” he writes.
It’s a lesson we all need to take to heart.
Ways to Lessen Student Loan Pain
Do you have student loan debt? Are you struggling to pay it back on a limited income? Here are the experts’ suggestions to ease the pain:
Budget prudently. Essentials come first (housing, food, health care, transportation). Next, look at liabilities. There are two tiers—debts with severe consequences for not paying (your student loan bill fits in here) and credit cards. Pay these. If you’re good, then you can cover noncritical expenses like travel, gifts and that new dress or sport coat.
Ask for help, especially if you secured the loan to help pay for your children’s education. If they have decent income, see if they can help pay down the loans from which they benefited.
Liquidate! Look around and see if there’s anything of value that you can sell—artwork, jewelry, collections and such. For the good stuff, contact a local dealer or an auction house. Otherwise, consider listing items on eBay, Craigslist or hold a garage sale.
Check into other repayment options. Extend the loan if you can. A 10-year loan extended to 20 or 25 years can cut payments dramatically. Contact your lender directly.
Garnishments can be your friend. Seriously. If you end up going into default (270 to 360 days behind on payments), the government can garnish your wages, Social Security payments or income tax refunds. They are limited, however. What you end up paying through garnishments may be less than what you’d pay with an alternative repayment plan. Not exactly the best way to do it, but it is a viable option.
Watch your retirement savings. It can’t be touched until the cash is deposited into your bank account. Then you might face a lawsuit from your lender to recover funds. So keep your retirement money in retirement.
Chapter 13 bankruptcy. Student loan debt can sometimes be included in a court-supervised repayment plan. If you still owe a student loan balance at the end of the repayment plan and paying it off would cause severe hardship, there’ve been cases where the debt has been successfully discharged. (Note: This doesn’t always work, so don’t count on it.)
Chapter 7 bankruptcy. Usually, student loan debt is hard to discharge, but some have succeeded. If you can’t maintain a minimal standard of living and it looks like you won’t be able to for the extended future, you might get a pass—but usually only if you’ve made a good faith effort to repay your student loan debt prior to filing bankruptcy.
Are you sick? Disabled? If so, you may not have to repay your student loans, whether or not you file bankruptcy. If your doctor certifies you’re totally and permanently disabled, you receive either SSDI or SSI, or you’re a veteran who’s unemployable due to a service-related condition, you might qualify for forgiveness. Unemployable veterans can even, in some circumstances, qualify for a refund of student loan payments they’ve already made.
Stay away from home equity. Using home equity loans is big time “risky business.” If you can’t repay, you could face foreclosure. Home equity loans also don’t offer affordable, flexible payment plans that federal and some private loans have. Financial experts really wave the caution flag if you’re thinking of dipping into home equity!
• Nationwide as of 2013, 70 percent of graduating seniors from four-year colleges had student loans, with the average outstanding debt being $28,400.
• In California, 55 percent of 2013 graduating college seniors had student loans, with an average outstanding debt of $20,340. California ranks 36th in the nation in the percentage of students with loans and 49th in average student loan debt.
• Outstanding federal student loan debt rose from slightly more than $400 billion in 2005 to more than $1 trillion in 2013.
• Total outstanding student debt for those 65 and older grew at a much faster pace—from about $2.8 billion in 2005 to $18.2 billion in 2013.
• More than 80 percent of the student loan debt held by those 65 and older was for their own education not their children’s.
• In 2013, about $150 million from Social Security payments for about 155,000 people was used as offsets for federal student loan debt. About 36,000 of the 155,000 people affected were 65 and older.
• In 2002, about 31,000 people had Social Security payments offset for federal student loan debt, and about 6,000 of those were 65 or older.
Sources: The Institute for College Access & Success, Oakland, CA, and the U.S. Government Accountability Office, Washington, D.C.
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