Sunday, August 19, 2018

Should I Borrow for Junior's College Education?

Given what I’ve written in this space about the growing problem of student loan debt (see the most recent post by clicking here), is it any surprise that the fastest growing age-demographic to be affected by the crisis is…people over age 60?
 
You read that correctly.  The Consumer Financial Protection Bureau (CFPB) reported that statistic recently.  Even more disconcerting: nearly 40% of student loan borrowers over age 65 are in default on those loans.
 
This is most often not a matter of grandparents going back to college in their golden years to fulfill a life dream, although about one-third of indebted seniors fit that profile.  No, it is more often seniors co-signing for student loans or taking out loans in their own name (e.g. PLUS loans) for children or grandchildren and getting blindsided when the balances creep up, they don’t read the fine print, or the child/grandchild fails to pay his share or assist at all in paying back the money, and the seniors are left with tens of thousands of dollars to pay back just when their income is likely to be falling due to retirement.
 
What parent/grandparent worthy of the name doesn’t want to help his offspring?  I endorse and applaud that natural human tendency to support our own.  But should we as seniors assume an unsustainable financial burden in the process?  Sacrifice is commendable; but it should not mean foregoing basic necessities or plunging oneself into poverty-level living to fund a loved one’s education.  The average student loan debt balance for older Americans is $40,096.  If they default on it, their Social Security benefits—so often the only reliable income a retiree has—can be garnished, further deepening the financial pit. 
 
So what can a loving parent/grandparent do when confronted with a request to loan money or co-sign a student’s loan?  Let me offer these suggestions.
 
  • Plan and know your financial situation in retirement.  This means making an honest assessment of your likely income and expenses in your golden years.  Don’t make a wild guess; run some numbers; think through what expenses will increase and which will decrease, and what new expenses will pop up; get an estimate from the Social Security Administration as to what you may expect in benefits; enlist the aid of a financial planner to see what annual income your retirement savings will generate, or simply take about 3% to 4% of your balance and use that as your annual income stream from that source.  Unless you know your full financial picture (as far as it can be knowable) you cannot know if you can afford to loan, give, or borrow money to a student in the family.
 
  • Once you know your financial picture, do not loan or borrow more than you can afford to lose.  Outwardly, treat money you loan as though you expect it to be repaid—even set up a payment plan and insist it be followed—and that if you co-sign a loan make it clear you don’t want to be making the payments in your old age.   Just assume from the start that you will not be repaid or that you will be responsible for paying the loan.  If it turns out otherwise, take a vacation with the money.
 
  • Sit down with the student to assess his choice of college, his financial picture, and his expectations.  And share some of the facts and ideas in the previous post I cited above.  He needs to have skin in the game.  This is also an opportunity to judge how serious he is about the whole educational endeavor.  Do not assume that an irresponsible teenager will suddenly become a responsible young adult by attending college.  Do not throw money down that pit.
 
  • If you are in a position to help financially, make the assistance contingent on some agreed-upon performance measures.  Good grades, holding a part-time job, getting a summer job, no extravagant spring-break trips….there’s a lot of latitude here.
 

I wish you and your student the best.

 Until next time,

 Roger

 “It is a dangerous thing to guarantee payment for someone’s debts.  Don’t do it!” Proverbs 11:15 CEV

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