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Buyer Beware

The rising cost of college and the huge debt that students and their families incur is often in the news.  Sometimes when I see the amount a student has borrowed I wonder why anyone would approve these loans to the family. In my blog post of May 17, I said this about a story I read in the NY Times: “Whatever you may think about borrowing money to pay for college and if that is a good investment in one’s future, you have to wonder how a lender could allow a student and her family to borrow $120,000 for college.”

I just read an interesting article, “The Parent Loan Trap” in The Chronicle of Higher Education that gives some insight into how this happens. This article describes how a young woman went to a private university, NYU, and “even after adding up scholarships, grants, and the max she could take out in federal student loans, the private university—among nation’s costliest—still seemed out of reach.” To help her daughter achieve this goal, the mother also took out federal Parent Plus Loan for $17,000.  The article said that the mother’s yearly income was about $25,000 a year. The daughter only spent two years at NYU—the financial burden was too much and she completed her degree at Hunter College, a public college in New York. The $17,000 the mother borrowed now has a balance of $33,000 with fees and interest.

“How can someone who makes $25,000 a year qualify for a loan of $17,000?” you may well ask. The article gives us the answer. “The loans are both remarkably easy to get and nearly impossible to get out from under for families who’ve overreached. When a parent applies for a PLUS loan, the government checks credit history, but it doesn’t assess whether the borrower has the ability to repay the loan. It doesn’t check income. It doesn’t check employment status. It doesn’t check how much other debt—like a mortgage or other student loans—the borrower is already on the hook for.”

PLUS loans, like all student loans, are all-but-impossible to discharge in bankruptcy. If a borrower is in default, the government can seize tax refunds and garnish wages or Social Security.”

Caveat emptor—Buyer Beware.  Before you take out huge loans for your child’s education, even if the child promises to pay back the loan herself as this young lady did, make sure you fully understand what the repayment terms are and how much this will cost you each month.

Janet Rosier