From the October 2019 issue

Parent Loans for College Students Are Growing, Study Says

While parents should be focused on saving for retirement, many are taking out loans, including parent PLUS loans, to fund their students' college education.

Illustration by Jay Holladay

$15,558. That’s the cost of in-state undergraduate tuition at the University of Michigan for the 2019-20 school year. For out-of-state residents, that sticker price jumps to a whopping $51,200.

And each year, the cost of college tuition continues to rise. That doesn’t account for housing, books and other necessities. When the final total is tallied, it can cause some serious sticker shock for families.

To help lighten the load, more parents are absorbing the cost of their child’s college education. That’s according to a study by Student Loan Hero, an online resource offering tools and information to help students understand and pay off student loan debt, which found that students are taking out fewer loans to fund college while parents are taking on more. In fact, in the 2017-18 school year, parents borrowed $301 million more than they did back in 2012-13.

While many families are eager to help their students, taking out loans isn’t always the best move, says Tim Parros, founder of Parros College Planning in Ann Arbor.

“I think parents have the mindset of, ‘I just got done paying for my college loan and I don’t want my kid to go through that,'” Parros says.

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By paying for their child’s college education, parents can ensure their children don’t carry the same burden they did. But it comes at a big cost to moms and dads.

Parent PLUS loans

In order to fund their child’s college education, more parents are pulling federal parent PLUS loans, the Student Loan Hero study also found. However, these loans carry higher interest rates than direct student loans.

“You will all qualify for it,” Parros says. “You can get the full cost of attendance from this loan, that is minus any free aid that you are awarded. Remember that the Parent PLUS loan is around 7.08 percent. Every time they hand you money, there’s an origination fee, which is over 4 percent. Combined, it’s an over 11 percent loan.”

In addition, PLUS loans for parents do not have the same repayment plans as direct student loans. Interest begins to accrue once the funds are dispersed, too, while the federal government pays the interest on a subsidized student loan while the student is in school, six months after they leave school and during any deferment period.

College perspective

Cindy Hermsen, the director of financial aid at Oakland University, hasn’t witnessed these college loan shifts locally.

“When I take a look at our parent loans, it hasn’t changed much in the past three, four or five years,” Hermsen says. “Even as far as our student loan debt, that is another thing that we have seen go down over the last three to five years.” Three years ago, the average student loan debt for students in the graduating class was $27,600, and last year it was $24,600, she adds.

Schools are doing a better job of educating parents and students about funding college, which has impacted the way they borrow.

“There’s a lot of information out there about borrowing for a college education, so I think that both parents and students are being more careful about their borrowing,” she says.

Still, for some families, borrowing money for college is inevitable.

“Please borrow only what you need,” Hermsen says. “Do not over-borrow.”

Savings tips

“People spend more time planning their yearly vacation than they ever do for retirement or college,” Parros says. Invest more of that energy for saving for these needs, he adds. A little bit of planning can go a long way. “You just need to always have that college education in mind,” Hermsen says. “Be thinking about it and save as much as you can.”

For starters, Hermsen suggests opening a 529 college savings plan, such as the MESP or MET plans. Each plan works differently, so research the one that will be best for your family.

Limit spending, too, Parros adds. Eat at home, cut back on vacation expenses – whatever you can do to decrease spending helps.

Don’t dip into retirement funds, Hermsen says. Instead, look for scholarships. Both merit-based and need-based scholarships are perfect ways for students to collect additional funds for college.

There are many, many free scholarship searches out there, Hermsen points out, cautioning parents not to pay anyone for scholarship searching.

The College Board, Fastweb and the Community Foundation for Southeast Michigan are all great places to start your search.

And remember: “It’s never too late to start something,” Hermsen says.

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