Beware the Big Bad Loan

Parents love their kids. Kids work hard at academics or artistic achievement, and apply to schools that have been filling their mailboxes with “We Want You” letters. February-April, we get calls of desperation about how families can afford such schools… and that they are somehow “going to make it happen.” After all, they can borrow from a government program called the PLUS, and defer the payments. The PLUS lending criteria is a credit report…and that is it! No regard to existing debt ratio, income, or asset value…OR ability to pay back. Is it any wonder the bubble will burst?

Their student will surely have that great job to be able to help pay back the loan.

Fast forward 4-7 years later. A typical scenario is that if the student has graduated, 85% of them move back home because they can’t find a job to support them AND support their debt service. And the parents are on the hook for the PLUS loan. It is not uncommon to have 100k of debt… and no means to pay it back. It is also not uncommon to have the student take more than 6 years to graduate from a 4-year college. 

PLUS loan disbursements have increased 145% since 2000. Looking back on historical data, college tuition remained in check until the government decided to loan whatever amount of money the family needed to pay for college. In the case of NYU, that could be 65K per year. At a 7.9% interest rate…Now colleges had carte blanche to charge what they wanted….because the government would subsidize it on the backs of desperate and unknowing parents. You then saw colleges bragging on student unions with water parks, climbing walls, all kinds of gourmet cuisine. Maid service and laundry service have become quite common. 

Being a capitalist…I am all for making a buck off what the market is willing to bear… and if college kids have the money for beer, why not have them pay to have their rooms cleaned, or have 4 years of a Disneyland type of experience?… But the point is, the kids don’t have the money. Much like what has happened to our public sector, with lack of accountability and morality, these students are enabled to go into life after high school on the future retirement of their parents. Out of obligation or indoctrination, many parents in this area go into massive PLUS loan debt.

We will be starting a Dave Ramsey Financial Foundations series for High School families. It will cover things like what to do when your roommate moves out, sticking you with the utilities and lease. How much emergency fund should a student have? What about working for money in college? We have been doing Financial Peace programs in the summer for adults, and have seen so many lives changed…and freedom from captivity. We want to see the same for the students. 

For a report on the 10 Mistakes, and a link to the most effective EFC Calculator we have found, go to our website—GetCollegeFunding.org. Also sign up for one of our free local or WEBinars. If you would like us to speak in your local high school, shoot us an e-mail at support@getcollegefunding.org.