Natalie Lynch navigates student loans for her three kids at her home in Southwick, Mass., on Thursday, December 7, 2017 (Photo by Ellen Webber/NERCC).

Natalie Lynch borrowed $80,000 to send her three children to college – a debt she's unsure how to repay. (Ellen Webber for USN&WR)

For Natalie Lynch, sending three children to college has been a source of pride. But with it came a nasty price tag: To top off the financial aid and loans her kids received directly, she borrowed $80,000 in federal loans herself to pay for their schooling – debt she's now struggling to reimburse.

"I can't afford to pay this all back," says Lynch, who lives about two hours west of Boston. "I wish I could, but I can't."

At 48, Lynch may not look like your typical student loan borrower. She's a midcareer empty nester, not a wide-eyed millennial. But thanks largely to a federal program known as Parent PLUS, which lends money to cash-strapped parents of college-age kids, she's part of a growing cohort of older borrowers saddled with far more student debt than they can readily pay off.

[See: Dear Younger Me: 12 Financial Truths We Wish We Knew Earlier.]

As college costs have skyrocketed in recent years, student loan borrowers, in general, have aged: Consumers who are 60 and older now make up the fastest-growing segment of the student loan population, according to the Consumer Financial Protection Bureau. Their numbers quadrupled between 2005 and 2015, increasing from 700,000 to 2.8 million. And while some of this debt funds older Americans' later-in-life degrees, the CFPB says the majority of older borrowers' student loans are for a child's and/or grandchild's education.

Some parents may avoid student loans by tapping home equity, raiding retirement funds and emptying college savings accounts. But those, like Lynch, who won't or can't tap such assets increasingly cover their kids' college costs through a combination of federal Parent PLUS loans and private debt.

Troubling as the loans can be for some parents, for the universities the program is essentially free money – which they have every incentive to maximize. Parents receive the loans directly from the government, so even as college costs rise, these loans fill a gap that enables the schools to limit the financial aid they must offer from their own endowments. The universities get their money upfront – and suffer no losses if the loans aren't repaid. As a result, they have little reason to discourage parents from taking on excessive debt. Indeed, critics argue that in some cases, schools may be purposely downplaying the risks by packaging financial aid award letters in such a way that the Parent PLUS loans look more like gift aid than actual debt. (Intentionally confusing parents about the contents of their financial aid award package, however, is a violation of industry ethics, experts note.)

Moreover, while schools may be penalized by the Department of Education if too many of their undergraduates default on student loans, they aren't held to the same standards when parents fail to repay student debt. That gives the schools extra incentive to pad award letters with high-interest parental loans.

"We set up this financing system that sort of screws families, where a school admits a student and offers an abysmal aid package that [the family] cannot possibly afford, given their income," says Ben Miller, senior director for Postsecondary Education at the District of Columbia-based Center for American Progress. "And so you stick parents in this horrible situation of saying either, 'I am really sorry you cannot go to your dream school,' or 'Yeah, you can go there, and I will shoulder incredible debt to pay for it.'"

And unlike their college-bound children, who can look forward to income-boosting diplomas and 40-year careers, parents' income often falls as the loans come due, as they head into retirement, cut back on hours or deal with age-related illnesses.

Nevertheless, it's relatively easy for parents to get into budget-busting amounts of debt – much of it green-lighted by the Department of Education with little regard for their ability to repay. When parents take out a Parent PLUS loan from the Department of Education, no loan officer considers their income or other outstanding debt, or adjusts the loan amounts to meet an individual's debt tolerance. While dependent college students can typically take on no more than $5,500 to $7,500 in federal student loans, depending on their grade level, parents can borrow up to the full cost of attendance, minus any other aid. So, when student borrowing and other financial aid falls short of an institution's posted sticker price, which routinely happens at high-priced universities, parents are left using Parent PLUS as a loan-of-last-resort to cover the remaining costs.

To qualify for the loans, parents with a qualified dependent child enrolled at least half-time in college must simply show that they don't have an "adverse credit history" – a backward-looking measure that only means they have no egregious credit blemishes, such as bankruptcy or tax lien, within the previous five years.

The application is relatively simple – perhaps too simple, critics say. As part of the process of applying for federal student aid, parents can request a loan; it takes approximately 20 minutes through the Department of Education student loan portal, and the approved amount is tallied as part of the overall aid package offered. While they must also sign a Master Promissory Note, promising to repay the amount, some parents may not understand that they aren't required to take on all of the loans offered, or that their children don't have to help pay them back.

[See: 9 Scary Things Consumers Do With Their Money.]

To add to the confusion, parents don't know how much they'll eventually owe since they only borrow for one year at a time. The cost of attendance will likely rise while their child is seeking a degree, and their child's financial aid package may change from year to year. Unlike with student loans, Parent PLUS loans have no annual or lifetime borrowing limits, so taking on loans for four years – or more – of schooling can cause the debt to quickly rise.

The skyrocketing cost of college, rising faster than family incomes, combined with easy access to federal debt, has resulted in an overall increase in student loans taken out by parents: Between the 2001-2002 and 2016-2017 school years, the average size of Parent PLUS loans increased by 44 percent, according to data from the College Board. On average, parental borrowers now take on nearly $15,880 per year in Parent PLUS loans, which can swell to a principal amount of more than $60,000 by graduation (assuming a child finishes within four years). Nor does that debt come cheap: Loans taken in the 2017-2018 academic year are repaid at an above-market 7 percent interest rate, plus with a 4.3 percent loan origination fee.

That can ensnare even parents who, like Lynch and her husband, aren't financial newbies. In addition to his job at Dyno Nobel, an explosives manufacturer, Lynch's husband operates a sports bar, and he once worked as a mortgage broker. She works with her husband at the bar and teaches her three children about the importance of good credit, paying bills on time and responsible credit card use. Her children tapped financial aid and have found well-paying jobs, with one working as a nurse, another as an engineer and the youngest as a diesel mechanic.

But as she and her husband struggled to finance three college degrees, Lynch relied on quick and easy access to parent loans, despite the fact that they couldn't repay them. A bout of unemployment and her husband's on-the-job injury, which meant he was no longer earning a full salary, put them further in the hole. Lynch says she was thinking more about guiding her children through college than about how they'd repay the debt when it came due. "You're worried about them getting involved in school and doing all their school stuff, and this is like thrown at you, like, 'Oh you have to do a loan,'" she says. "And you don't know any better. It's really difficult to try to navigate what's going on."

[See: 11 Expenses Destroying Your Budget.]

Supporters of Parent PLUS loans argue that they serve an important function, making higher education attainable for low- and middle-income families who otherwise cannot pay tuition and living expenses. They extend better borrower protections, such as death and disability discharge, which private lenders aren't required to offer. Plus, the post-graduation default rate for parents, at just 5.1 percent in 2010, the latest year available, is better than that for student defaults, which was nearly 15 percent for the same year, according to the DOE.

Yet at its worst, the Parent PLUS program is predatory lending, critics argue. The government charges high interest rates and bloated loan origination fees that low-income borrowers, who cannot tap home equity or successfully borrow on the private market, have no choice but to accept if they want their children to attend certain colleges and universities.

Plus, even though the government is indulgent when doling out money, it offers parents little wiggle room when they can't repay. While students can take advantage of a slew of income-driven repayment programs to manage burdensome loans, those programs are largely closed to parents. Those who cannot afford their loan bills can easily tumble into default, triggering the garnishment of their Social Security checks, tax refunds and wages.

And this is no idle threat. Nearly 41,000 parent PLUS loan borrowers had checks garnished in 2015, according to the Government Accountability Office.

"[The Parent PLUS program] wasn't purposefully created to be like a predatory lending program," says Rachel Fishman, deputy director for research with the Education Policy program at New America, a District of Columbia-based think tank. "But for low-income families, it has become that. And the government can't do anything about that without legislative change."

Lynch had initially deferred repayment until after her kids graduated, in hopes that they would help pay down the debt she took on for their educations. But they have their own student debt and lives to finance. Now, she's working to get on an affordable repayment plan.

"It was a means to an end," she says. "I mean – I was looking at it – I couldn't afford to pay for my kids' college, and I looked at it like, 'What is the alternative?'"

Editor’s Note: This story was produced in partnership with the McGraw Center for Business Journalism at the City University of New York Graduate School of Journalism. It is the first in a series of stories exploring the high cost and financial impact of federal student loan borrowing among the parents of college undergraduates.


10 Need-to-Know Facts About Parent PLUS Loans

Parent PLUS loans can cover payment gaps.

A father helping his teenage son with his homework

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Parent PLUS loans are undergraduate student loans that help families pay for college costs not covered by other financial aid, such as direct student loans, scholarships or grants. In fact, around 4 percent of families take out a Parent PLUS loan to cover the cost of attendance, according to Sallie Mae's "How America Pays for College 2017."

This particular loan is also different than other federal student loans. Here are 10 facts that parents should know about PLUS loans before signing the dotted line.

1. You must fill out the FAFSA to qualify.

1. You must fill out the FAFSA to qualify.

Free Application for Federal Student Aid (FAFSA)

(Designer491/Getty Images)

To take out a PLUS loan, parents must fill out the Free Application for Federal Student Aid, commonly called the FAFSA.

The amount that a family qualifies for will be included in the student's financial aid award letter.

2. PLUS loans have no annual limits.

2. PLUS loans have no annual limits.

(Getty Images)

Unlike with the federal Stafford loan for undergraduates, there are no annual limits with the Parent PLUS loan.

The maximum amount parents can borrow for each college-enrolled student is the total cost of attendance minus any financial assistance that has been awarded. With this loan, parents can borrow for all the remaining costs once they have exhausted other types of financial aid.

3. You need adequate credit history.

3. You need adequate credit history.

Hispanic teenager holding credit cards and money

(JGI/Jamie Grill/Getty Images)

"Parent PLUS loans are available to everyone with the exception if you have an adverse credit history. So as long as you're in good financial standing and you've been a responsible borrower, you'll qualify," says Zack Friedman, founder and CEO of Make Lemonade, personal finance marketplace with comparison tools.

Parents with credit problems may use an endorser or may document their extenuating circumstances, according to the Department of Education. While proof of income is required to be approved for a private loan, such proof isn't necessary to receive a PLUS loan.

4. Parent PLUS loans aren't easily forgiven.

4. Parent PLUS loans aren't easily forgiven.

Portrait of mother and father with teenage daughter on sofa

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Parent PLUS loan borrowers can only have their loan forgiven if they pursue a direct loan consolidation, another Department of Education program, and enroll in the income contingent-repayment plan, known as an ICR.

That's the only loan forgiveness strategy for Parent PLUS loan borrowers, Friedman says. "You do the payment over a longer period of time and eventually have them forgiven if there's a balance at the end."

5. You can't transfer Parent PLUS loans.

5. You can't transfer Parent PLUS loans.

Parents should not rule out a 529 college savings plan based on their state of residence.

(Daniel Laflor/iStockphoto)

Parents can't transfer the balance of a PLUS loan to a student through the federal student loan program. For those borrowers interested in shifting the balance to their dependent, student loan experts say one strategy is to refinance these loans with a private lender.

Through this process, parents can refinance the balance under the student's name. But that process, experts say, is also contingent on the student's credit history.

6. Interest rates are fixed.

6. Interest rates are fixed.

Interest rates

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Interest rates on PLUS loans are now market-based, so they will fluctuate from year to year. But once parents borrow the loan, Friedman says: "It's important to know it's a fixed rate and will never change through the duration of the loan."

The rate for a Parent PLUS loan is set on or after July 1 each year. Currently, the fixed rate for parent PLUS loans is 7 percent – that's higher than on any other type of federal loan. For example, Perkins loans carry a 5 percent interest rate, and other direct loans are at 4.45 percent.

7. Expect a disbursement fee.

7. Expect a disbursement fee.

Caucasian couple paying bills online together

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With these loans, parents must pay a 4.26 percent fee that comes through the federal government upon disbursement. Along with the fee, parents must start making monthly payments 60 days after the loan is disbursed.

"When a Parent PLUS loan is taken out at disbursement, they have to start paying. They can apply for deferment, but the terms are they have to immediately start paying it back," says Melissa Sotudeh, a wealth advisor at Halpern Financial Inc.

8. Forbearance is an option.

8. Forbearance is an option.

Mini graduation cap mortar board on cash

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Similar to direct student loans, Parent PLUS loans have a couple federal protections, such as forbearance and deferment.

Parent PLUS borrowers who experience financial hardship can apply for forbearance, which allows them to skip a few payments. However, interest will still accrue during forbearance, so borrowers will owe a lot more once they start repaying again.

9. Some PLUS loans can be discharged.

9. Some PLUS loans can be discharged.

Accounting

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Federal loans offer free insurance, so there are certain circumstances when the loan can be canceled. “If God forbid the student dies, the loan is discharged. If the parent is disabled, the loan can be discharged as well,” Sotudeh says.

Student loan experts say discharge through bankruptcy is much more challenging. Most bankruptcy courts won't cancel the loan unless the borrower’s situation is extremely dire.

10. You can cancel after disbursement.

10. You can cancel after disbursement.

Read letters from your new loan servicer for payment instructions, even if you established automatic withdrawal with your old servicer.

(Getty Stock)

Before the loan money is disbursed, borrowers may cancel all or part of the loan at any time by notifying the school.

If the loan is already disbursed, they can still cancel all or reduce the size of the loan within a certain time frame. Student loan experts say if borrowers plan to return all or part of a loan, they should contact their student's financial aid office for specific instructions.

Find more ways to pay for college.

Find more ways to pay for college.

With a little research, you may be able to find scholarships for college.

(sjlocke/iStockphoto)

The search to tackle college costs shouldn't end here.

Follow U.S. News Education on Facebook and Twitter to join the conversation, and stay informed about the latest tips and advice on paying for college.


Tags: personal finance, personal budgets, debt, interest rates, financial literacy, money, student loans, financial aid


Susannah Snider is the Personal Finance editor at U.S. News. Since 2010, she has reported on a wide range of personal finance topics, from consumer travel to college financial aid, student loans and employment. Snider previously worked as a staff writer at Kiplinger's Personal Finance magazine and holds a master's degree in journalism from the University of Southern California. She has appeared as a personal finance expert on television, radio and in print, including on "Fox & Friends," "The Tavis Smiley Show" and Fox Business News. You can follow her on Twitter or email her at ssnider@usnews.com.

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