Middle Class Pain

Families Struggle to Afford College

Families Struggle to Afford College
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Part 1, on stagnating wages, is here. Part 2, on NAFTA, is here.

Michelle Henderson carries $130,000 in student debt, even though she’s never attended a single college class. The 49-year-old Illinois mother and design showroom manager footed the bulk of her daughter’s four years of college because “as a parent you want to make them happy -- you want to support their wishes, hopes, dreams.”

But four years after graduating from the University of Iowa, Henderson’s 26-year-old daughter is unemployed and unable to help her mom make the $900 monthly student loan payments. Instead of planning for her retirement, Henderson worries about making ends meet.

Henderson’s story is not uncommon.

As student debt in America has topped $1.2 trillion, surpassing even credit card debt, many U.S. families are finding that a college education isn’t affordable. Long considered a first-class ticket to upward mobility, a postsecondary education increasingly is out of reach for many middle-class Americans in the 21st century.

Cost of College Up Three-Fold

Over the last four decades, the cost of college has increased nearly three-fold, rising 5 to 6 percent above the rate of inflation. In 2015-16, average annual tuition and fees was $32,405 for a nonprofit private school and $9,410 for a public school.

Several factors are responsible for the surge, from higher administration and maintenance costs to fancy campus amenities, as well as the sharp increase in federal aid available to students, as identified by the Federal Reserve Bank of New York last year.

But state funding cuts are most often blamed for today’s higher college sticker price. Historically, federal funding for higher education dwarfed state spending. Those roles reversed during the Great Recession until state funding rose again to federal levels, but funding still sits below pre-recession levels. Families are shouldering an increasing portion of college costs. States are spending 4 percent more on higher education this year than last, but 45 states are still spending less per student than they did before the recession, according to the Center on Budget and Policy Priorities.

Unfortunately, as college costs have soared, the middle class has lost ground economically, driving up the need to borrow for college. And while increased government lending offers the middle class more access to opportunities, it can also create problems. Many middle-income families -- defined here by Pew Research Center as households making between $36,000 and $107,000 in 2014 for a three-person household – are deep in student debt, unable to fully realize the American Dream.

Roughly 70 percent of the Class of 2016 graduated with debt, averaging a record $37,172 per student, based on an analysis by student aid expert Mark Kantrowitz. But parents and older Americans are shouldering more of that debt, on top paying off the loans that many of them took out for their own educations decades ago.

In 2012, Americans over 40 were responsible for one-third of education debt, up from a quarter in 2004. The rise is in part attributed to borrowing for children’s education, longer repayment schedules, and returning to school after years in the workforce. Pew Charitable Trusts reports that Generation X, those 35-50 years old, carry about the same amount of student debt -- $20,000 – as Millennials, those 34 and younger.

Parent PLUS Loans

Federal student loans generally carry lower interest rates, with payments due only after the student graduates or falls below half-time status. Loans are available to students – Stafford loans -- as well as their parents – Parent PLUS loans.

Henderson is among 3.4 million parents who have taken out the Parent PLUS loan. As of the first quarter of 2016, Parent PLUS borrowers owed $71.1 billion, according to the U.S. Department of Education. Parent PLUS loans allow parents to borrow the entire difference between other grants and aid their child receives and the full cost of attendance, with no cumulative limit, and with no income requirement. If, for example, a university’s tuition and fees total $50,000 annually and the student receives $10,000 in financial aid – the parent can apply to borrow $40,000 that year under Parent PLUS, regardless of the parent’s salary.

Some student financial aid experts say college loan debt has exploded under Parent PLUS and fear borrowers are given access to huge lines of credit without regard to their ability to repay – not unlike the lending practices that drove the global housing crisis in 2008.

Rachel Fishman, a senior policy analyst with the Education Policy program at nonprofit think tank New America, has called for increased student lending limits to lessen reliance on Parent PLUS loans, as well as adding a minimum ability-to-repay metric for parents applying for the loan.

“American colleges have now gotten to a point where they are prohibitively expensive for the middle class,” Fishman said. “People are turning to Parent PLUS loans more and more and using them in ways they should not be used. It’s become predatory and puts the government in a really bad position. It shouldn’t be happening at all.”

Congress created the Parent PLUS loan program in 1980, largely to provide front-end liquidity to middle- and upper-middle income families for expensive private colleges, or the “NYUs of the world,” says Fishman. Congress removed all limits in 1992, but added a provision that excluded parents with an “adverse credit history.”

In 2011, the Education Department tightened the credit check requirement for Parent PLUS loans, dealing a huge blow to many low- and moderate-income students attending high-priced colleges on their their PLUS loans. Parents who were approved for the loan in 2011 were suddenly denied in 2012.

In an effort to reopen lines of credit for higher education, the department relaxed application prerequisites in 2014. The department doesn’t consider income or current debt load during the Parent PLUS application process.

The average Parent PLUS loan to middle-income families rose 28 percent from 1996 to 2012 to over $12,000, even as median household income fell from $53,345 to $52,605, according to the National Postsecondary Student Aid Study.

There was also a large shift in borrowing to Parent PLUS from private lenders between 2008 and 2012. Parent PLUS disbursements ballooned between the 2009-2010 and 2010-2011 academic years, while private lenders disbursed billions less from 2010 onward than in previous years.

In 2013, 17 percent of Parent PLUS loans among borrowers between 65 and 74 years old were in default, and 30 percent of this group also still owed money on their own student loans from decades earlier, according to the U.S. Government Accountability Office.

College Degree Increasingly Important

A thriving middle class has long been considered critical to economic growth. It serves as an incubator for entrepreneurship, a parapet against credit booms and busts, and a launch pad for social mobility, among other benefits. It has also become clearer than ever that students need a college degree for solid, middle-class jobs.

Access to college has distinguished the middle class from the growing pool of low-income families, and those with at least some college are more able to stay in the middle class or move up, according to research from Georgetown’s Center on Education and the Workforce. Financially, those with college degrees make 60-80 percent more over their lifetimes than those with just a high school diploma.

In May, the unemployment rate for those with a bachelor’s degree or higher was 2.4 percent, compared with 5.1 percent for high school graduates with no college education and 7.1 percent for those who never completed high school.

Yet it’s also possible to fall out of the middle class after being born into it, said Andrew Kelly, a resident scholar in education policy studies and the director of the Center on Higher Education Reform at AEI. According to a Pew study, nearly 40 percent of kids born in the middle-income quintile who do not complete a college degree are downwardly mobile, landing in the first or second quintiles during adulthood. 

But Kelly agrees with Fishman that the federal financial aid programs intended to increase access to education are crushing some families.

“We are loading up a lot of middle- and lower-income parents, who may have only a decade or so of work life left, with large amounts of debt,” he said.

Kelly Leon, assistant press secretary for the Department of Education, acknowledged problems with the system. “We know that paying for college is a struggle for many families, that many students and parents feel they are being priced out of a college education by skyrocketing tuition,” Leon said. “PLUS loans were created by Congress, and they set the interest rates, fees and other terms, so there’s not much we can do without congressional action. We look forward to working with Congress at looking at the entire picture and changes that can be made to empower students and families to make optimal choices driven by value.”

“I’m Not Alone in This”

“I think if I lived 20 years after retirement, with the $900 monthly I have to pay toward the student loans, I wouldn’t actually be able to retire,” Henderson said. “People always talk about student debt. It’s not just the students that are struggling, it’s also the parents that have this exorbitant amount of debt. I’m not alone in this, I can’t be alone in this. There must be hundreds of thousands of people like me who are struggling because they’re trying to give their children a good education.”

Students from more moderate-income families feel similarly hobbled by the system. Justin Amann, 23, was raised by a single mother in in Bethlehem, Pa. who earned $55,000 a year as a nurse. During his four years at East Stroudsburg University of Pennsylvania, Amann was awarded more than $17,000 in federal grants and took out $29,000 in federal Stafford loans. His mother borrowed an additional $28,000 in Parent PLUS loans to cover the remaining costs.

“[The Parent PLUS program] often targets those middle-income families,” said Amann, now a master’s candidate in higher education administration at the University of Michigan. “The federal government didn’t put me in a category where I would’ve gotten a lot of money in grants, but I was in the category where I could take a lot of money in loans at a high rate.”

Families tend to take out PLUS loans because it’s all that they know. Amann’s mother took it because that’s what Stratford told her to do, Amann said. Henderson and her daughter did the same after the University of Iowa sent them an aid package. Colleges often load financial aid packages with Parent PLUS loan options that net annual costs to zero – and don’t point out that college officials often are simply assume the applicant will qualify for and get a PLUS loan, even before the application process, Fishman said. And families trust their schools.

“Some students might not need it,” she said. “It prevents decision-making that needs to occur about budgeting. Colleges make it incomprehensible.”

Henderson agreed the process is murky. “When you apply for a mortgage, people tell you, ‘This is what your payment is going to be when you apply for it,’” Henderson said. “I had no idea that my payment was going to be $1,600 [on the PLUS loan over 10 years.] None, whatsoever.” Henderson has since opted to spread those payments over 30 years, lowering the monthly amount to $900.

Parents want to help their kids, but “you wind up putting yourself in debt, and with the way this loan is structured right now, it’s almost like they’re taking advantage of your love for your kids. I’ll probably die before my loans are paid off.”

Henderson’s daughter, 26-year-old Jessica Madsen, was the first in her family to earn a college degree. Since graduation, Madsen has held two full-time jobs, each paying around $40,000 annually. But she was laid off seven months ago and moved back home to Wheaton, Ill. to live with Henderson. In addition to Henderson’s Parent PLUS loans, Madsen took out $20,000 in student loans herself.

That debt is catching up with Henderson, who also has a $1,650 monthly on mortgage payment. She drives an old car that requires constant repair, she doesn’t travel much, and she doesn’t contribute as much toward her retirement as she should. At an interest rate of nearly 8 percent, Henderson is facing more than $200,000 in interest payments over three decades on her $130,000 loan. At that rate, the Parent PLUS loan won’t be paid off until Henderson is over 80 years old.

“Her intent is to take over the loan,” Henderson said of her daughter. “It’s an awkward subject for us. I don’t want her to have this debt, but I don’t want to be paying on it forever. The concept was to go to a good school and get a good job and pay this stuff off. Instead, she’s been through two jobs and [at $40,000 a year] they’re barely enough to live on your own.”

Amann in Michigan is determined to pay his mother’s Parent PLUS loan himself because “it’s my responsibility,” he says. Repaying at a rate of over 7 percent, he could pay up to $42,000 in interest on his loan if he repays over 30 years.

Meanwhile, efforts to tighten the PLUS loan application process and credit checks face political challenges, said Kelly, because Americans believe that a college degree, much like home ownership, is a cornerstone of the American Dream.

School and government officials need to take a serious look at tightening qualifications for student loans and educating the public about the cost of loans, Amann said. The bottom line, he added, is that college must be made more affordable.

“The truth is, education should be the major ladder … to social mobility,” he said. “But it’s so expensive to achieve an education now, that it’s automatically an impediment to low- and middle- income families to move up.”

Emmeline Zhao is the editor of RealClearEducation.

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